Understanding the Relationship between Founder-CEOs and Firm Performance

Abstract

While previous empirical literature has examined the effect of founder-CEOs on firm performance, 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 find strong evidence that founder-CEO status is endogenous in performance regressions. After instrumenting for founder-CEO status, we identify a positive causal effect of founder-CEOs on firm performance which is quantitatively larger than the effect estimated through standard OLS regressions. Contrary to the common perception that founder-CEOs will retain their titles following good performance, we show 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. We provide several potential explanations for this new finding.