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

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  • Mishra, Chandra S.

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.

Suggested Citation

  • Mishra, Chandra S., 2025. "Balancing power and performance: The role of managerial rent in competitive advantage," International Review of Law and Economics, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:irlaec:v:82:y:2025:i:c:s0144818825000146
    DOI: 10.1016/j.irle.2025.106258
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