How does management innovation matter for performance: Efficiency or legitimacy?

Purpose Despite increased research attention to management innovation, the literature offers conflicting explanations of how it affects firm performance. The rational perspective emphasises the role of management innovation for organisational routine updating. The fashion perspective views management innovation as a symbolic activity to foster legitimacy. The purpose of this study is to integrate the two perspectives and explore both the mediating effects of organisational efficiency and business legitimacy and the moderating effect of CEO shareholding. Design/methodology/approach Based on empirical data from 238 Chinese firms, this study conducts stepwise regression to test the hypotheses. Findings This study finds that management innovation positively affects both organisational efficiency and business legitimacy and then firm performance. However, the promotion effect of organisational efficiency is stronger than that of business legitimacy on firm performance. The results further indicate that CEO shareholding strengthens the effect of management innovation on organisational efficiency but weakens it for business legitimacy. Originality/value This study presents a complete explanation of the effect of management innovation on firm performance by exploring the mediating effect of both organisational efficiency and business legitimacy. Further, it compares the effects of organisational efficiency and business legitimacy on firm performance. Finally, it resolves the conflict between the rational and fashion perspectives by involving the moderating effect of CEO shareholding.