Innovations and Ambidextrous Transition: Mitigating Earnings Management and Firm Risk in China

Intrigued by recent earning management scandals of Chinese public firms, we investigate the relationships between innovations, earnings management, and firm risk in China. Drawing on innovation literature and Teece's profiting from innovation (PFI) framework, we distinguish value-capturing (i.e., appropriability) of exploitation from exploration in China's institutional environment. Furthermore, extending the perspectives on exploitation-exploration to a dynamic balancing view, we introduce the ambidextrous transition concept to encapsulate the dynamic process of simultaneously and strategically deploying and switching between exploitation and exploration. By analyzing 2430 Chinese public firms and 10 122 firm-year observations between 2007 and 2017, we find that an exploitation-dominant strategy (as opposed to an exploration-dominant one) is associated with a lower level of earnings management in China and that ambidextrous transition mitigates potential firm risk to shareholders. These findings offer valuable insights for managerial decisions concerning innovation strategies in China and other emerging economies with similar institutional contexts.