Testing the partial mediating effect of informal economy on the relationship between Regulatory Focus Theory and firm performance

Abstract

Managers in the dynamic environment of emerging markets have a choice to either conduct some economic activities in the informal economy or not. This choice is governed by their ability to take risks. One of the established theories that help explain why some individuals are risk takers while others are risk averse is the regulatory focus theory (RFT). Prior research have studied the relationships between RFT and firm performance, RFT and the use of informal economy, and the use of informal economy and firm performance. In this paper, I bundle all previous findings and theorize that the use of informal economy partially mediates the relationship between RFT and firm performance. That is, I fill a gap in the literature by studying the effect of personal and environmental factors together on firm performance in the dynamic environments of emerging markets. Using a sample of 362 Lebanese managers, I found support for my theorizing. In particular, I found that the use of informal economy partially mediates the positive relationship between promotion focus mindset and firm performance, and the negative relationship between prevention focus mindset and firm performance.