Balancing power and performance: The role of managerial rent in competitive advantage

Abstract

We study whether managerial power enhances the firm’s competitive advantage (excess asset return). We find a positive impact of managerial power on excess asset return and management compensation, consistent with the managerial rent model. However, excess asset return (long-term performance) and management compensation increase at a decreasing rate with an increase in managerial power. We derive a novel measure of managerial power. Managerial power is positively associated with the firm’s shadow options and firm-specific risk. The managerial rent model strengthens managerial power theory in that managerial power enables managers to extract a share of the firm surplus, which in turn motivates managers to generate a firm surplus, suggesting a positive relationship between managerial power and firm performance. The excess asset return generated is shared between the shareholders and managers, resulting in an above-normal pay for management. However, we find that high managerial power reduces the positive impact of management compensation on the firm performance.