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 Þrm 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. This implies that the direct effect of founder-CEOs on firm performance cannot be estimated correctly without accounting for the endogeneity of founder-CEO status. Perhaps surprisingly, we find 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 Þrm performance.