The Founder Premium Revisited

Abstract

Much research finds evidence of a “founder premium” – i.e., that founder leadership is positively associated with both the valuations and stock performance of public firms. However, this empirical finding is puzzling as it appears mismatched with management theory suggesting that leadership styles and capabilities must change as a firm evolves and becomes more complex. Motivated by this disconnect, we re-examine the founder premium in public firms. We find that a valuation premium is associated with founder leadership at IPO, but that it quickly disappears as these firms underperform on the secondary market. Our findings also indicate that the premium associated with having a founder-CEO declines more rapidly relative to the premium associated with having a founder in a non-CEO position. Together, our results provide needed boundary conditions for the founder premium and offer a stronger theory/data fit by underscoring how managerial capabilities must be updated as firms grow and develop.

JEL Classification: Founders, Firm performance, Initial public offerings, CEO turnover, Endogeneity