FIN-03-036 |
NYU Stern School of Business |
November 2003
Renée B. Adams, Heitor Almeida and Daniel Ferreira
ABSTRACT
While previous empirical literature has examined the effect of founder-CEOs on firm perfor-
mance, it has largely ignored the effect of firm performance on founder-CEO status. In this
paper, we use instrumental variables methods to better understand the relationship between
founder-CEOs and performance. Using the proportion of the firm’s founders that are dead
and the number of people who founded the company as instruments for founder-CEO status,
we Þnd strong evidence that founder-CEO status is endogenous in performance regressions.
This implies that the direct effect of founder-CEOs on firm performance cannot be esti-
mated correctly without accounting for the endogeneity of founder-CEO status. Perhaps
surprisingly, we Þnd that performance is negatively related to the likelihood that founders
retain the CEO title. This result appears to be driven primarily by founder departures after
periods of good performance, rather than by an entrenchment effect that allows founders to
remain as CEOs following poor performance. After factoring out the effect of performance
on founder-CEO status, we find a residual positive correlation between founder-CEO status
and firm performance. This finding suggests that there is a positive causal link from
founder-CEOs to firm performance.
Renée B. Adams
Institution: Stockholm School of Economics
Email: renee.adams@hhs.se
Heitor Almeida
Institution: School of Banking and Finance, The University of New South Wales, Sydney, NSW, 2052
Institution: Professor of Finance, Leonard N. Stern School of Business, New York University
Telephone: 212-998-0279
Fax: 212-995-4233
Email: halmeida@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~halmeida
Daniel Ferreira
Institution: SITE and FGV
Email: daniel.ferreira@hhs.se
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