The Effects of CEO Founder Status and Stock Ownership on Entrepreneurial Orientation in Small Firms

Abstract

This paper studies how governance drives entrepreneurial orientation (EO) in small firms. We argue that founder status and ownership create powerful personal incentives for small firm CEOs to engage in behaviors that influence EO. Integrating stewardship theory and the principal‐principal branch of agency theory, we test our hypotheses on a sample of 339 Swedish firms, and find that CEO founder status is significantly and positively associated with EO, while CEO stock ownership significantly but negatively predicts EO. We additionally test two boundary conditions that show that the founder‐CEO's prior managerial experience in start‐up firms positively moderates the founder‐EO relationship, while contrary to expectations, CEO ownership diversification has no effect on the negative association between ownership and EO. Thus, our study adopts a corporate governance perspective to explain how variations in EO across small firms are driven by the goals and motivations of its leader. Our research also shows that in small, private firms the balance of power is tipped in favor of the CEO rather than the board of directors. Finally, we underline the importance of adopting alternative theoretical lens like stewardship and principal‐principal agency, given that traditional principal‐agent problems are largely mitigated in the small firm context.

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“…This would relate intrinsic motivation to the concept of entrepreneurial orientation (Lumpkin and Dess 1996). Some recent research on founder CEOs finds that intrinsic motivation is associated with higher entrepreneurial orientation (Deb and Wiklund 2017).…”

Corporate governance in entrepreneurial firms: a systematic review and research agenda

“…An early study by Daily and Dalton (1992) fails to find significant relationship between CEO duality and firm performance; however, later studies show that CEO duality negatively affects corporate entrepreneurship (Zahra et al 2000) and strengthens the positive association between TMT diversity and BSI (Knockaert et al 2015). CEO founder status is positively associated with entrepreneurship orientation (Deb and Wiklund 2017). Owner-managers may lead to low horizontal agency costs (Colombo et al 2014), but some agency problems ignored by Jensen and Meckling (1976) exist in privately owned, owner-managed firm (Schulze et al 2001).…”

“…Bell et al (2014) describe how CEO stock options predict high IPO valuations under certain context conditions. CEO founder status is positively associated with entrepreneurial orientation (EO), yet CEO ownership negatively predicts EO (Deb and Wiklund 2017). Two characteristics of closely held firms, CEO ownership and TMT ownership, lead to less strategic change (Brunninge et al 2007).…”

“…CEO locus of control positively affects firm performance in terms of growth (Davidsson 1991) and profitability (Boone et al 1996). Entrepreneurial orientation (Wiklund et al 2009) and strategic planning (Berry 1998), as well as entrepreneur style (Sadler-Smith et al 2003), drive firm growth and are affected by CEO characteristics such as ownership and founder status (Deb and Wiklund 2017) and directors (such as non-family directors) (Calabrò et al 2017). Managerial ethical orientation can be directed by policymakers to influence small firms' ethics (Spence and Rutherfoord 2001).…”

A Conceptual Model of Knowledge Management Practices and Internationalization of SMEs

“…This leader, who is the cornerstone of his company, is characterized by a set of specificities influencing the management style and strategic direction of his enterprise (Deb and Wiklund, 2017): This is the case of his antecedents or even of his psychological characteristics (Richbell, Watts, & Wardle, 2006, Grandclaude and Nobre, 2013).…”