Chinese Management Studies

Resource constraints, innovation capability and corporate financial fraud in

entrepreneurial firms
Wenwen An, Yuehua Xu, Jianqi Zhang,
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Wenwen An, Yuehua Xu, Jianqi Zhang, (2018) "Resource constraints, innovation capability
and corporate financial fraud in entrepreneurial firms", Chinese Management Studies, https://
doi.org/10.1108/CMS-02-2017-0024
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Resource
Resource constraints, innovation constraints
capability and corporate financial
fraud in entrepreneurial firms
Wenwen An
School of Management, Tianjin University of Technology, Tianjin, China, and
Yuehua Xu and Jianqi Zhang
Lingnan (University) College, Sun Yat-Sen University, Guangzhou, China
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Abstract
Purpose – Previous studies have produced inconsistent findings regarding the effects of resource
constraints on corporate illegal behavior. This study aims to explore how entrepreneurial firms can overcome
the difficulties generated by resource constraints.
Design/methodology/approach – Drawing on insights from general strain theory and focusing on
listed entrepreneurial firms, this study proposes that failure to obtain enough resources through listing
generates strain in the managers of listed entrepreneurial firms, driving them to resort to corporate financial
fraud as a solution. Nevertheless, such relationships between resource constraints and the likelihood of
corporate financial fraud can be weakened by innovation capability, because innovation capability can
generate more confidence in their managers and relieve their strains, thereby dissuading them from engaging
in corporate financial fraud.
Findings – According to our empirical results, both financial and human resource constraints are positively
related to the likelihood of corporate financial fraud in listed entrepreneurial firms, but such effects can be
mitigated by innovation capability.
Practical implications – This study provides practical implications for both regulators and managers by
indicating that although entrepreneurial firms with resource constraints are more likely to commit financial
fraud, innovation capability could be a strategic approach to enhance managers’ confidence and relieve the strain.
Originality/value – Our study contributes to the literature by enriching our understanding of the
consequences of resource constraints in entrepreneurial firms and highlighting the strategic importance of
innovation capability in mitigating such effects.
Keywords Innovation capability, Corporate financial fraud, Listed entrepreneurial firm,
Resource constraint
Paper type Research paper

Introduction
Resource constraints are a liability in that they leave firms with few strategic choices and
high uncertainty (Baucus and Near, 1991; Chakravarthy, 1982). This is especially true for
entrepreneurial firms as they usually face various resource constraints (Baker and Nelson,
2005; Bilal et al., 2016; Lin and Lasserre, 2015). To obtain more resources and build
competitive advantages, some entrepreneurial firms turn to the stock market, but they are
not always able to obtain enough resources through listing. The failure to obtain resources
can have significant negative consequences for the entrepreneurial firms and their

Chinese Management Studies

This work was supported by the National Natural Science Foundation of China (No. 71302100 and © Emerald Publishing Limited
1750-614X
No. 71572204), and the Key Research Project of Guangdong Province (No. 2016WZDXM001). DOI 10.1108/CMS-02-2017-0024
 CMS managers (Damanpour, 1991; Dougherty, 1992; Paeleman and Vanacker, 2015) and may
even affect their ability to obtain resources in the future (Wu et al., 2016). In this situation,
the managers of those entrepreneurial firms may resort to fraudulent behavior to mitigate
the negative consequences (Finney and Lesieur, 1982; Vaughan, 1983). Thus, how best to
overcome the difficulties generated by resource constraints becomes a critical question for
managers of entrepreneurial firms.
Previous studies have largely focused on how resource constraints influence firm
outcomes (e.g. innovation, performance and survival) or how firms can overcome the
negative outcomes (Rao and Drazin, 2002; Damanpour, 1991; Dougherty, 1992; Paeleman
and Vanacker, 2015). Several studies (Baucus and Near, 1991; Finney and Lesieur, 1982;
Vaughan, 1983) have examined the direct effect of resource constraints on firms’ fraudulent
behavior. Although these several studies have argued that resource constraints propel firms
to engage in risk-taking (Situmeang et al., 2016) and even illegal behavior, their empirical
findings have been inconsistent (Baucus and Near, 1991; Mishina et al., 2010). Moreover,
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these studies have mainly focused on the effects of financial resource while largely
neglecting other types of resource (George et al., 2005). It remains unclear whether different
resource constraints will result in illegal behavior in entrepreneur firms, as well as the
boundary conditions. This study attempts to address these important questions. In
particular, by drawing on insights from general strain theory (GST), we focus on the
constraints of two most prominent and extensively studied resources in the literature, i.e.
financial and human resources (Cooper et al., 1994; Chandler and Hanks, 1994; Brush and
Chaganti, 1999; Mishina et al., 2004; Wang et al., 2016; Vanacker et al., 2017).
The effects of resource constraints on firm behavior can be explained by GST (Agnew,
1992), which posits that social actors often resort to illegitimate behavior when they fail to
achieve their goals through legitimate means (Agnew, 1992). Several studies (Agnew et al.,
2009; Agnew and White, 1992; Vaughan, 1999; Zhang et al., 2008) have provided evidence
that the strains generated by the gaps between various goals and actual achievements can
lead to illegal behavior in both individuals and organizations. Drawing on GST and focusing
on listed entrepreneurial firms, we argue that because such firms go public to obtain more
resources, failure to do so successfully after being listed would generate strain in their
managers, driving them to engage in illegal behavior (Agnew, 1992). One typical type of
corporate illegal behavior is corporate financial fraud, which is defined as mangers’
intentional misrepresentation of the information in the firm’s financial statements
(Apostolou et al., 2000). As such, we propose that both financial and human resource
constraints in listed entrepreneurial firms are positively related to the likelihood of corporate
financial fraud. Moreover, innovation capability could help listed entrepreneurial firms to
mitigate the strain by generating more confidence in their managers (Zhou et al., 2005),
which may dissuade them from engaging in corporate financial fraud. Thus, we propose
that innovation capability can weaken the positive relationships between resource
constraints and the likelihood of corporate financial fraud in listed entrepreneurial firms.
We test the above-mentioned relationships in the empirical context of listed
entrepreneurial firms in China, because China as an emerging economy features institutional
voids (Peng, 2003) and Chinese entrepreneurial firms face great resource constraints (Tan and
Peng, 2003). This study attempts to make several contributions to both the literature and the
practice. First, it contributes to the literature on resource constraints in two ways. It draws on
insights from the perspective of GST, which departs from past studies that mainly consider
the resource-based view when examining resource constraints (Rao and Drazin, 2002). Thus,
it helps understand more about the underlying mechanisms of the impacts of resource
constraints. Besides, our finding of the moderating effects of innovation capability also
 enriches the studies about the complementarity between firm resources and capabilities, Resource
which has implications for studies on the relationships between them. Second, it also constraints
contributes to the corporate governance literature by refining the boundary conditions of the
relationship between resource constraints and corporate illegal behavior. Although a few
studies in the corporate governance literature have identified resource constraint as the
determinant of corporate illegal behavior, such as corporate financial fraud, this study
highlights the role of innovation capability in alleviating the effect of resource constraints. To
some extent, it also addresses the inconsistent findings in previous studies (Baucus and Near,
1991; Mishina et al., 2010). In a similar vein, it also enriches our knowledge about possible
solutions to the various types of strain experienced in firms. Finally, it provides practical
implications for both regulators and managers. It indicates that firms’ innovation capability,
which could be a strategic approach to enhance managers’ confidence and relieve the strain
generated by resource constraint, helps them refrain from illegal behavior. As such, firms
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should always be encouraged to develop innovation capabilities.

Theoretical framework and hypotheses

Resource constraints and the impacts
Firms are endowed with different amount of resources (Dolmans et al., 2014). The level of
organizational resource availability forms a continuum, ranging from scarcity to excess.
The former is usually being depicted as resource constraint, while the later as resource
slack. Nevertheless, the review of the literature reveals extensive focus on slack but
relatively limited attention to resource constraints.
Studies of resource constraints have examined its negative effect on performance. The
findings suggest that a lack of resources could limit firms’ choices as they cannot afford the
necessary activities, such as experimentation, which would inhibit or hinder firm growth and
lower the probability or even affect firm survival (Becchetti and Trovato, 2002; Musso and
Schiavo, 2008; Voss et al., 2008). More recently, entrepreneurship literature suggests that
resource constraints could affect entrepreneurial decision-making (Chiles et al., 2007) and
following behaviors (D’Aunno and Sutton, 1992). For example, entrepreneurs could deal with
resource constraints through bricolage, which is making do with resource at hand (Baker and
Nelson, 2005). However, only a handful of studies have examined the effects of resource
constraints on firms’ fraudulent behavior, and they have yielded inconsistent findings. For
example, Baucus and Near (1991) proposed that firms with fewer slacks (i.e. more resource
constraint) would engage in illegal activities, but their empirical tests focusing on financial
resources found no significant effect. The findings of Mishina et al. (2010), although as control
variables, illustrated that in general, firms with fewer resources are more likely to pursue
illegal activities, but resources of different status have different effects on illegal activities.
These inconsistent findings may be caused by the fact that these studies sampled from large
public firms in which resource constraints are not a fatal problem. As such, an examination
of resource constraints in entrepreneurial firms may yield different results.
Compared to the large, mature firms, entrepreneurial firms are more likely to face resource
adversity (Baker and Nelson, 2005). Most entrepreneurial firms suffer from severe resource
constraints in the processes of opportunity-seeking and development, which could threaten
their survival and growth (Paeleman and Vanacker, 2015; Senyard et al., 2014). However,
only recently, scholars have begun to examine the consequences of resource constraints in
entrepreneurial firms (Bradley et al., 2011a, 2011b; Patzelt et al., 2008; Vanacker et al., 2013).
As such, we have limited knowledge of the effects that resource constraints have on the
behavior of entrepreneurial firms or how such firms can overcome those constraints. To fill
 CMS these research gaps, this study examines the relationship between resource constraints and
corporate financial fraud in listed entrepreneurial firms that go public to obtain resources.

Resource constraints and corporate financial fraud from a general strain perspective
Agnew’s (1992) GST offers us new insights in explaining the relationship between resource
constraints and corporate financial fraud. GST provides a detailed explanation of the
relations between strain and illegal behavior. The basic logic of GST is that strain triggers
negative emotions, which in turn drive the response or coping behavior, including illegal
behavior (Agnew et al., 2002). Strains can arise from different sources, for example, the
failure to achieve desired goals, the loss of positively valued stimuli and the presentation of
negative stimuli. To relieve such strains, social actors may resort to illegal behavior. After
the introduction of GST, numerous studies have used it to test the relations between various
types of strains and illegal behaviors under different contexts and mostly found positive
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associations (Agnew and White, 1992; Paternoster and Mazerolle, 1994).

Drawing on the insights from GST, we propose that managers in listed entrepreneurial
firms face great strain when their firms fail to obtain enough resources after being listed,
and that the strain drives them to engage in financial fraud. Specifically, we focus on
constraints of two typical types of resources: financial resource and human resource.
Although other types of resources could also be influential, financial and human resources
are extensively studied in the literature (Cooper et al., 1994; Chandler and Hanks, 1994;
Brush and Chaganti, 1999; Mishina et al., 2004; Wang et al., 2013; Vanacker et al., 2017) and
are the most essential to entrepreneurial firms’ survival and growth (Cooper et al., 1994).
Financial resource constraints. Financial resource refers to the liquid assets available to
an organization, such as cash on hand (Kraatz and Zajac, 2001, which could be easily
redeployed to varied uses (Wiseman and Bromiley, 1996; Voss et al., 2008). Through
adapting the definition given by Bourgeois (1981) and Cheng and Kesner (1997) and Hoegl
et al. (2008), we define a firm’s financial resource constraint as the lack of financial resources
for the operation or development of the firm. Financial resources are important for firms to
achieve their growth objectives (Sexton and Bowman-Upton, 1991). This is particularly true
for entrepreneurial firms. In the uncertain environments that entrepreneurial firms
commonly face (McMullen and Shepherd, 2006), resource constraints limit their access to the
inputs needed for firm development (Scopelliti et al., 2014) while restricting their ability to
pursue various initiatives (McGrath, 2001). Given that it is relatively easy to convert
financial resources into other resources (Dollinger, 1999), the former can facilitate the pursuit
of various strategies and opportunities (Cooper et al., 1994; Wiklund and Shepherd, 2003).
Thus, access to financial resources is a key determinant of entrepreneurial firms’ success
and competitiveness (Song et al., 2008; Fonseka et al., 2014).
Entrepreneurial firms often lack the financial resources necessary for growth (Baker and
Nelson, 2005), and some try to solve this problem through listing. For example, in China, the
Growth Enterprise Market is a new stock market that was established in 2010. This market
aims at providing entrepreneurial firms with opportunities to obtain financial resources
from outside investors. However, not all listed entrepreneurial firms can successfully
achieve their goal of obtaining enough financial resources. The gap between the goal and
reality generates tremendous strain and pressure for the managers of such firms. The fear of
failure and the pressure to gain stakeholders’ trust and confidence can drive managers to
resort to financial fraud (Agnew, 1992) in an attempt to cover-up the worsening situation
and obtain resources from stakeholders, including investors. As such, we propose our first
hypothesis:
 H1. Financial resource constraints are positively related to the likelihood of corporate Resource
financial fraud in entrepreneurial firms. constraints
Human resource constraints. Human resource represents the knowledge, skills and abilities
inherent in individuals of an organization (Wright and Hammer, 1994; Mishina et al., 2004).
Consistent with financial constraints, we regard human resource constraint as the lack of
human resources for the operation or development of the firm. Managerial capacity, which
involves internal reorganization and opportunity exploitation capabilities (Covin and Slevin,
1997), is important for the growth of entrepreneurial firms (Sexton and Bowman-Upton,
1991). Managers are the embodiment of the organizational skills and knowledge that
represent firm-specific human resources (Penrose, 1980). Human resources can enhance the
performance of entrepreneurial firms by increasing the chances that managers will make
correct decisions and take appropriate actions (Boone et al., 1996). Nevertheless, within these
studies, the lack of human resources and its impact on the possible outcomes is not clearly
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addressed (Siepel et al., 2017).

Human resources can be in two forms, namely, general and specific ones represented
educational level (Becker, 1975; Wiklund and Shepherd, 2003). Different from the specific
human resource, which refers to the ability of conducting a specific job, general human
resource refers to years of education or years of work experience (Rauch and Frese, 2000).
Previous studies consistently found that general human resource in the form of more
educated managers or founders of entrepreneurial firms is positively related to the growth of
entrepreneurial firms (Sapienza and Grimm, 1997; Storey, 1994). However, human resources
may not be easily obtained through recruitment from the market (Barney, 1986). Compared
with large firms that have established internal labor markets (Welbourne and Andrews,
1996), entrepreneurial firms often lack the attractiveness for acquiring talent and thus may
not be able to obtain the human resources necessary for their development. When
entrepreneurial firms cannot attract highly educated managers from the market after being
listed, strain is generated in the managers of these firms (Agnew, 1992; Storey, 1994) who
may lack the skills, knowledge and confidence to pursue and sustain the firms’ competitive
advantage. In this situation, they might resort to financial fraud to improve the appearance
of their financial status and thereby attract talent. Based on the above arguments, we
propose that:
H2. Human resource constraints are positively related to the likelihood of corporate
financial fraud in entrepreneurial firms.

The moderating effects of innovation capability

Although strains often cause illegal behaviors, it is not inevitable (Paternoster and
Mazerolle, 1994). One important development of GST is that possible conditional factors
may exist to affect their relations. That is, strain does not always result in illegal behaviors
because, sometimes, the stress and negative affective states could be alleviated or effectively
managed (Paternoster and Mazerolle, 1994). Empirical studies have confirmed that not all
people respond to strain with crime (Broidy and Agnew, 1997; Broidy, 2001). In particular,
some internal factors (e.g. intelligence) may affect the relations between strain and crime.
Innovation capability, which refers to the ability to pool, link and transform resources and
knowledge to create a new solution that is different from the existing ones (Chandy and
Tellis, 1998; Menguc et al., 2014), represents very important capability for the development
of an organization. As such, we focus on innovation capability as the boundary condition for
the effects of resource constraints.
 CMS We expect innovation capability to weaken the effects of resource constraints by
generating more confidence in the managers (Zhou et al., 2005). Although financial and
human resource constraints can generate strain that propels the managers of listed
entrepreneurial firms to engage in financial fraud, the strain can be relieved if the
entrepreneurial firms can find better ways to manage their limited resources and even
develop new advantage (Becerra, 2008; Merton, 1938). We propose that innovation
capability can function as a strain reliever and encourage managers to solve difficulties in
novel ways while refraining from corporate financial fraud. There are two reasons for it.
First, innovation capability illustrates managers’ competence in overcoming difficulties,
including resource constraints. It signals their ability to effectively manage the limited
resources through better deployment of the resources (Chandy and Tellis, 2000). By
displaying managers’ capability in spite of the difficulties, it also generates confidence in the
managers and encourages them to overcome short-term problems while seeking long-term
development (Zhou et al., 2005). This then relieves the strain generated by resource
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constraints. To some extent, it enables the entrepreneurial firms to explore new investments
and technological opportunities that are important for long-term competitiveness (Becerra,
2008). In this situation, entrepreneurial firms are less likely to conduct financial fraud for a
solution of resource constraints.
Second, innovation capability can also enhance stakeholders’ confidence of the firm, which
in turn helps relieve the strain generated by resource constraints. Innovation capability is often
salient and visible for both managers and stakeholders, which enhances the chance that
stakeholders will notice it and thus gain confidence in the firms’ future performance (Griliches,
1981; Hall et al., 2005). This, in turn, relieves the strain on the managers generated by various
resource constraints and encourages them to overcome the difficulties in innovative and legal
ways. In this situation, the managers of the entrepreneurial firms are less likely to resort to
corporate financial fraud. Based on the above arguments, we propose that:
H3a. Innovation capability weakens the positive relationship between financial resource
constraints and the likelihood of corporate financial fraud in entrepreneurial firms.
H3b. Innovation capability weakens the positive relationship between human resource
constraints and the likelihood of corporate financial fraud in entrepreneurial firms.

Methodology
Sample and data
We took our sample from the listed entrepreneurial firms in China to test our hypotheses.
China has been one of the leading and increasingly influential emerging economies and is
currently attracting a lot of attention of academics, practitioners and policymakers
(Cumming et al., 2016). With institutional voids in emerging economies, fraud has been one of
the most popular research topics related to China (Chen et al., 2016; Firth et al., 2016; Stuart
and Wang, 2016; Cumming et al., 2015; Sun et al., 2016). By following past studies on
corporate financial fraud (Arthaud-Day et al., 2006; Yiu et al., 2014), we adopted a matched
sample research design based on the following procedures. First, we examined all instances
of corporate financial fraud (93 cases) of listed entrepreneurial firms in the Growth Enterprise
Market from 2011 to 2014, which were released and published by the China Securities
Regulatory Committee (CSRC). Second, we matched each fraud case with three non-fraud
cases based on three criteria: year, firm size in terms of total assets (within 630 per cent) and
industry type according to CSRC industry classification standard. Finally, after deleting
cases with missing values, we had 300 cases in our sample. We tested the equivalence of the
 fraud and non-fraud firms in terms of employee number and sales growth and found no Resource
statistically significant difference between the two groups of cases in any of these constraints
dimensions.

Variables and measures

Dependent variable. By following previous studies (Kang, 2008; Yiu et al., 2014), we used a
binary variable to capture the observing firm’s fraud commitment. Firms with financial
fraud commitments were assigned a value of 1 and those without were assigned a value of 0.
Independent variables. All of the independent and control variables were lagged by one
year to rule out reverse causality, that is, the dependent variable was from 2011 to 2014 (t),
whereas all the independent and control variables were from 2010 to 2013 (t
1).
Financial resource can be measured by the amount of cash flow (Seifert et al., 2004). In
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this study, we measured financial resource constraints by the reversed amount of cash flow
(in RMB 100m). Top managers represent the main human resources for entrepreneurial
firms, and thus, their education level is a good representation of the firms’ human resources
level (Sapienza and Grimm, 1997; Storey, 1994; Wiklund and Shepherd, 2003). As such, we
operationalized human resource constraints as the reversed mean of the education level of
top managers. Following past studies (Ahuja and Katila, 2001), innovation capability in this
study was measured as the number of patents the entrepreneurial firm applied for during
the whole year.
Control variables. We included several control variables in our tests. First, it was argued
that the age of executives can influence their decision-making and engaging in risk-taking
behavior (Wiersema and Bantel, 1992; Goll and Rasheed, 2005). As such, we controlled for
the influence of top management team (TMT) age on corporate financial fraud, which is a
type of risk-taking behavior. TMT age was measured as the mean age of top managers.
Fraud before was a dummy variable indicating whether the entrepreneurial firm was
involved in any similar fraud cases in the previous year.
Second, following past studies (Beasley, 1996; Chen et al., 2006; O’Connor et al., 2006),
we controlled for several corporate governance variables. CEO duality (CEO: chief executive
officer) was a dummy variable with a value of 1 if the CEO and board chair positions were
held by the same person. Independent director ratio was measured as the ratio between the
number of independent directors and that of all the directors. Manager ownership and
foreign ownership were operationalized as the percentage of ownership held by managers
and by foreign organizations, respectively. Foreign auditor was a dummy variable
indicating whether the entrepreneurial firm used foreign auditor(s).
Third, some organizational variables that may affect firm fraudulent behavior were also
controlled (Arthaud-Day et al., 2006; Beasley, 1996), including the entrepreneurial firms’ total
asset, employee number, years since being listed and financial performance in terms of
Tobin’s Q.
Finally, we controlled for several environmental variables. The performance of the
industry was controlled in terms of industry-averaged return on assets (ROA). The supply of
human resources in the environment may also influence firms’ fraudulent behavior (Staw
and Szwajkowski, 1975). As such, we controlled for regional human resource supply, which
was measured as the number of graduated college/university students in the region where
the entrepreneurial firm’s head office was located. To control for the unknown variables
related to time and industry, we also controlled year and industry dummies.
 CMS Results
Table I presents the summary statistics and correlation matrix for all of the variables. All of
the correlations were below 0.4, which indicates no multicollinearity problems. We checked
the variance inflation factors (VIFs) to further investigate the multicollinearity problem. The
individual VIFs ranged from 1.05 to 1.61, and the mean VIF was 1.18. Given that all the VIFs
were far below the commonly accepted value of 10 (Cohen et al., 2003), multicollinearity was
unlikely to be a big problem in our study.
Table II reports the results of the conditional logistic regression. Model 2 shows that the
coefficient of financial resource constraints was positive and statistically significant (p =
0.018). Similarly, in Model 3, the coefficient of human resource constraints was also positive
and statistically significant (p = 0.043). The results remained consistent in Models 4-6, which
provides support for H1 and H2, which stated that entrepreneurial firms are more likely to
engage in financial fraud when they are constrained by financial or human resources,
respectively.
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In Models 4 and 5, we added innovation capability and its interactions with financial and
human resource constraints, respectively. The coefficients of the two interaction terms were
negative and statistically significant (p = 0.028; p = 0.025). These results remained
consistent in Model 6, the full model. They provide strong support for H3a and H3b, which
proposed a negative moderation effect of innovation capability on the relationship between
two types of resource constraints and the likelihood of corporate financial fraud.

Robustness check
The results are robust to a variety of sensitivities. First, we used the reversed cash/sales
ratio as an alternative measure for the financial resource constraints. The results were
consistent with our hypotheses. Both financial resource constraint and human resource
constraint were positive and statistically and significantly influenced firm’s commitment to
fraud ( b = 0.665, p = 0.013; b = 1.500, p = 0.004). Innovation capability negatively
moderated the relationship between both types of constraints and the likelihood of corporate
financial fraud ( b =
0.037, p = 0.079; b =
0.065, p = 0.010). Second, we also ran a Probit
regression rather than a conditional logistic regression as an alternate method to test our
hypotheses. The results confirmed most of our hypotheses. Both financial resource
constraint and human resource constraint were positively related to firm’s commitment to
fraud ( b = 0.037, p = 0.003; b = 0.397, p = 0.099). The moderation effect of innovation
capability on the relationship between financial resource constraint and the likelihood of
corporate financial fraud was significantly negative ( b =
0.022, p = 0.018). However, the
moderation effect of innovation capability on the relationship between human resource
constraints was negative but remained insignificant ( b =
0.013, p = 0.186). Third, we
excluded from the sample the firms with fraud commitment in the year before the observing
year, and the findings were consistent with the hypotheses in our main tests.

Discussion
This study uses GST (Agnew, 1992) and a sample of 300 listed entrepreneurial firms from
China to explore how resource constraints affect listed entrepreneurial firms’ fraudulent
behavior and how such firms can mitigate the fraud consequences of resource constraints
through innovation capability. Entrepreneurial firms that suffer from resource constraints
often seek to obtain more resources through listing. However, they could still be resource-
constrained as they may not always be able to obtain enough resources that they need. As
failure to obtain resources can have significantly negative consequences, we propose that
the gaps between their resource goals and achievements generate strain in their managers,
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Variables Mean SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1 Fraud 0.25 0.43

2 Financial resource constraint 0.88 1.44 0.05
3 Human resource constraint 1.77 0.48 0.07
0.03
4 Innovation capability 13.28 30.25 0.00 0.07
0.11
5 TMT age 43.89 3.37
0.04 0.03 0.18
0.10
6 Fraud before 0.03 0.16 0.29 0.01 0.01
0.01
0.02
7 CEO duality 0.50 0.50 0.09
0.10 0.08 0.08
0.01
0.06
8 Independent director ratio 0.38 0.05
0.04 0.07
0.05 0.00
0.01
0.01
0.11
9 Manager ownership 0.39 0.23 0.03
0.03 0.07
0.14
0.17
0.07
0.09 0.11
10 Foreign ownership 0.03 0.10
0.03 0.04 0.01 0.08 0.06 0.03 0.18 0.02
0.19
11 Foreign auditor 0.01 0.07
0.05 0.12 0.12
0.03 0.06
0.01 0.08
0.04 0.06 0.28
12 Total asset 10.87 7.19
0.02 0.36
0.15 0.26 0.02 0.14 0.04
0.10
0.36 0.04 0.05
13 Employee number 858.97 918.65
0.05 0.24
0.02 0.03
0.15 0.08
0.05 0.06
0.07 0.02 0.01 0.28
14 Years since being listed 4.32 1.01
0.08
0.01
0.10 0.03 0.09 0.00 0.06
0.09
0.12
0.13
0.04 0.18 0.09
15 Tobin’s Q 2.69 1.20
0.10
0.12
0.06
0.01
0.12
0.11
0.02 0.09 0.03
0.04
0.03
0.03
0.04 0.04
16 Industry-averaged ROA 0.06 0.07
0.04
0.01 0.05 0.12
0.02 0.03 0.08 0.14 0.01
0.04
0.02
0.02
0.01 0.01
0.01
17 Regional human resource supply 28.65 12.34 0.06 0.01 0.13 0.06
0.14
0.03 0.03
0.02 0.11
0.02
0.01
0.13 0.01
0.11
0.16
0.06

Note: N = 300

Descriptive statistics
Resource
constraints

and correlations
Table I.
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CMS

Table II.

regression results
Conditional logistic
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
p- p- p- p- p- p-
Independent variables Coefficients values Coefficients values Coefficients values Coefficients values Coefficients values Coefficients values

Financial resource constraint 0.037 (0.016) 0.018 0.074 (0.022) 0.001 0.082 (0.030) 0.006
Human resource constraint 0.939 (0.464) 0.043 1.341 (0.507) 0.008 1.511 (0.527) 0.004
Innovation capability 0.028 (0.011) 0.017 0.056 (0.027) 0.038 0.108 (0.037) 0.004
Innovation capability 
0.004 (0.002) 0.028
0.005 (0.002) 0.046
financial resource constraint
Innovation capability 
0.053 (0.024) 0.025
0.070 (0.026) 0.007
human resource constraint
Control variables
TMT age
0.013 (0.048) 0.785
0.020 (0.050) 0.682
0.043 (0.057) 0.455
0.004 (0.051) 0.942
0.060 (0.059) 0.314
0.036 (0.063) 0.571
Fraud before 49.925 (6,772) 0.994 48.833 (6,097) 0.994 35.118 (4307) 0.993 48.684 (5,919) 0.993 35.620 (4,394) 0.994 35.534 (4,619) 0.994
CEO duality 0.854 (0.384) 0.026 1.014 (0.411) 0.014 1.167 (0.438) 0.008 1.015 (0.427) 0.017 1.267 (0.463) 0.006 1.301 (0.489) 0.008
Independent director ratio 4.110 (3.635) 0.258 3.607 (3.755) 0.337 4.042 (3.941) 0.305 2.549 (3.975) 0.521 4.465 (4.187) 0.286 0.924 (4.626) 0.842
Manager ownership
1.096 (0.900) 0.223
1.380 (0.915) 0.132
1.503 (1.045) 0.150
1.651 (0.989) 0.095
1.847 (1.086) 0.089
2.726 (1.250) 0.029
Foreign ownership
0.092 (1.980) 0.963
1.163 (2.095) 0.579 1.384 (2.962) 0.640
0.811 (2.186) 0.710 1.055 (3.104) 0.734 1.574 (3.300) 0.634
Foreign auditor
17.573 (13,009) 0.999
19.632 (14,790) 0.999
17.486 (9,506) 0.999
26.289 (202,996) 1.000
19.383 (10,641) 0.999
35.647 (4,720,456) 1.000
Total asset
3.045 (2.662) 0.253
4.047þ (2.246) 0.095
3.698 (3.058) 0.227
2.032 (2.991) 0.497
3.692 (3.421) 0.280
2.301 (3.941) 0.559
Employee number
0.282 (0.297) 0.314
0.574 (0.381) 0.132
0.431 (0.376) 0.251
0.512 (0.414) 0.216
0.350 (0.377) 0.353
0.511 (0.454) 0.260
Years since being listed
0.086 (0.197) 0.661
0.144 (0.207) 0.486
0.159 (0.209) 0.448
0.153 (0.214) 0.475
0.154 (0.225) 0.496
0.205 (0.243) 0.398
Tobin’s Q
0.263 (0.202) 0.192
0.219 (0.200) 0.273
0.253 (0.234) 0.278
0.177 (0.224) 0.430
0.342 (0.235) 0.146
0.247 (0.241) 0.305
Industry-averaged ROA
4.235 (3.830) 0.269
4.938 (4.245) 0.245
4.394 (3.343) 0.189
4.359 (4.062) 0.283
3.281 (3.751) 0.382
2.092 (4.017) 0.603
Regional human resource 0.024 (0.015) 0.104 0.022 (0.015) 0.140 0.020 (0.017) 0.221 0.030 (0.016) 0.060 0.017 (0.017) 0.315 0.026 (0.019) 0.176
supply
Industry dummies Included Included Included Included Included Included
Year dummies Included Included Included Included Included Included
Log likelihood
72.72
69.584
60.185
65.675
57.161
52.401
LR x 2 (d.f.) 91.41 (51) 0.000 97.68 (52) 0.000 91.11 (54) 0.001 105.50 (51) 0.000 97.16 (56) 0.001 106.68 (55) 0.000
Pseudo-R2 0.386 0.412 0.431 0.445 0.459 0.504

Notes: N = 300; Standard errors are in parentheses

 prompting them to commit financial fraud. We focus on two specific resource constraints, Resource
namely, financial constraint and human resource constraint. Our results show that both constraints
financial and human resource constraints are positively related to listed entrepreneurial
firms’ likelihood of committing financial fraud. It indicates that the gaps in resource
obtainment after being listed drive the managers of entrepreneurial firms to commit fraud.
The results are consistent with past findings that the strain resulting from achievement
gaps can lead to illegal behavior (Zhang et al., 2008).
Moreover, this study also explores how listed entrepreneurial firms can overcome the
difficulties generated by resource constraints. Our results demonstrate the weakening
moderating effects of innovation capability on the relationships between resource
constraints and corporate financial fraud in listed entrepreneurial firms. This suggests that
innovation capability can relieve the strain experienced by managers of listed
entrepreneurial firms by building confidence in managers who overcome the difficulties of
resource constraints (Zhou et al., 2005).
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Contributions and implications

This study makes several contributions. It contributes to the literature on resource
constraints in several ways. First, prior studies have mainly considered the resource-based
view when examining resource constraints (Rao and Drazin, 2002; Mishina et al., 2004).
They argue that resource constraints could limit firms’ choices, which negatively affect the
outcomes. Our theoretical model draws on a different perspective (GST) and focuses on
listed entrepreneurial firms which are less studied to reframe resource constraints as a
source of strains for executives, thus enriching our understanding of the underlying
mechanisms for which resource constraints take effect.
Second, departing from past studies that mainly focused on how resource constraints
affect firm innovation outcome or financial performance (Gibbert et al., 2014; Hewitt-
Dundas, 2006), this study adds to the relatively scant research on how resource constraints
affect corporate illegal behavior. Thus, it enriches our understanding of the consequences of
resource constraints. The findings also confirm van Weele et al.’s (2017) argument that
entrepreneurs are primarily short-term oriented through prioritizing activities that yield
immediate rewards.
Third, compared with financial resource that has been extensively investigated, human
resource has been less vigorously examined in existing researches (George et al., 2005). By
considering both financial and human resource constraints as antecedents, this research
adds to the knowledge about how various resource constraints affect firm behavior.
Moreover, our study also enriches the understanding of the boundary conditions of resource
constraints in entrepreneurial firms through investigating the moderating effects of
innovation capability.
It also contributes to the corporate governance literature in general, and corporate
wrongdoing in particular, by revealing a weakening moderating effect of innovation
capability. Although the literature of corporate governance proposed that the lack of
resources could lead to illegal activities, the empirical results were either non-significant
(Baucus and Near, 1991) or depend on resource status (Mishina et al., 2010). This study
resolves the inconsistent findings of the effects of resource constraints in previous studies
by arguing that the effects of resource constraints depend on firm’s innovation capability. It
also indicates that the development of inner capability can be an effective way to check for
corporate illegal behavior.
Our work has implications for practitioners. First of all, our results suggest that both
financial resource constraint and human resource constraint have significantly positive
 CMS effects on corporate financial fraud. The findings not only remind firm managers and
directors of the negative consequences of the failure to obtain resources but also suggest
that regulators should pay attention to the behavior of firms that lack adequate resources.
Second, this study also reveals that a firm’s innovation capability is an important factor in
mitigating the effects of resource constraints on financial fraud. This suggests that although
resource constraints are a prevalent problem in entrepreneurial firms, they can overcome the
difficulties and mitigate the negative outcomes through innovation capability. Regulators
should encourage firms to develop inner innovation capabilities.

Limitations and future direction

First of all, this study focuses on financial and human resource constraints, which are the
most prominent types of resource constraints in entrepreneurial firms (Scopelliti et al., 2014;
Rao and Drazin, 2002). However, what’s worth noticing is that other types of resources such
as operational resource, customer relational resource and technological resource are also
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important for firm’s development (Voss et al., 2008; Debruyne et al., 2010). Future studies can
investigate the effects of other types of resource constraints.
Second, we use TMT education as an indicator of human resource, which captures the tacit
knowledge that is embedded in human resource and thus is a well-established measure in
previous studies. However, prior studies also suggested other ways to measure human resource,
for example, the number of employees (Voss et al., 2008), the number of employees relative to
sales (Mishina et al., 2004), prior work experiences, industry experiences or business background
(Brush and Chaganti, 1999). Future studies can combine different measurements of human
resource to have a comprehensive understanding of the effects of human resource constraints.
Third, although we only examine the moderating effects of innovation capability, which is
internal to an organization, examining the moderating effects of other internal and external
factors would further enrich our understanding of the boundary conditions of resource
constraints. For example, according to North (1990), the development of formal and informal
institutions may also influence the behavioral choices of firms that face resource constraints.
Fourth, we use entrepreneurial firms in China as the research context, which is adequate
for testing the effects of resource constraints. However, scholars can test the proposed
theoretical model in different empirical contexts such as in other emerging economies or in
developed economies. Comparing the effects of resource constraints in entrepreneurial firms
before and after being listed may also generate additional insights.

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About the authors

Wenwen An is an Assistant Professor at the School of Management, Tianjin University of
Technology. Her research focuses on entrepreneurship and bricolage.
Yuehua Xu* is an Assistant Professor of management at the Lingnan College, Sun Yat-Sen
University. Her research interests include organizational misconduct and corporate turnaround.
Yuehua Xu is the corresponding author and can be contacted at: xuyueh@mail.sysu.edu.cn
Jianqi Zhang is a Professor at the Lingnan college, Sun Yat-sen University. His research interests
are focused on bricolage, entrepreneurship and business model innovation.

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