Abstract
Most firms will experience a decline in their development process. The contraction in demand and the impact of COVID-19 have exacerbated a firm's performance. Under the dilemma of resources reduction and recovery, the declining firm pays more attention to the efficient utilization of the diminishing innovation resources. Based on upper echelon theory and principal-agent theory, this study investigates the impacts of top management team (TMT) tenure heterogeneity and ownership concentration on innovation efficiency. The sample consists of 534 firm observations after PSM nearest-neighbour matching, sourced from A-share listed manufacturing firms in Shanghai and Shenzhen from 2015 to 2019. Innovation efficiency of declining firms is measured using the Malmquist Index method. The fixed-effects (FE) model, PSM-DID model, and stepwise regression are employed to test our hypotheses. The main findings conclude that TMT tenure heterogeneity improves innovation efficiency, and the effect in declining firms is stronger compared to normal firm. Moreover, the concentrated ownership structure inhibits this positive effect because of the excessive tight control over TMT, and this inhibitory effect is stronger in declining firms than normal firms. The robustness checks of alternative variables and alternative regression model, and the addressing of endogenous problem, further support these findings. Efficiency improvement is crucial for the recovery of declining firm. The introduction of an efficiency perspective bridges the gaps in the existing literature. This study contributes to the literature on upper echelon theory and principal-agent theory by integrating them into the context of declining firms. The continuous interaction between the replacement TMT members and ownership restructuring shapes the dynamic capability of declining firms, contributing to the dynamic capability literature. The findings also provide practical guidelines for declining firms, such as replacing top management members and diluting equity, to achieve recovery. It is noted that an excessive focus on efficiency can also lead to neglecting thorough strategic change.