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Understanding the Relationship between Founder-CEOs and Firm Performance

Authors: Adams, Renée B.
Almeida, Heitor
Ferreira, Daniel
Issue Date: 8-Nov-2003
Series/Report no.: FIN-03-036
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.
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