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Understanding the Relationship between Founder-CEOs and Firm Performance

37 Pages Posted: 19 Nov 2003 Last revised: 23 Jul 2012

Renee B. Adams

University of New South Wales, Department of Banking and Finance; ECGI; FIRN; ABFER

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Daniel Ferreira

London School of Economics - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Date Written: February 2008

Abstract

We use instrumental variables methods to disentangle the effect of founder-CEOs on performance from the effect of performance on founder-CEO status. Our instruments for founder-CEO status are the proportion of the firm's founders that are dead and the number of people who founded the company. We find strong evidence that founder-CEO status is endogenous in performance regressions and that good performance makes it less likely that the founder retains the CEO title. After factoring out the effect of performance on founder-CEO status, we identify a positive causal effect of founder-CEOs on firm performance that is quantitatively larger than the effect estimated through standard OLS regressions. We also find that founder-CEOs are more likely to relinquish the CEO post after periods of either unusually low or unusually high operational performances. All in all, the results in this paper are consistent with a largely positive view of founder control in large US corporations.

Keywords: founders, family firms, founder-CEO succession

JEL Classification: G32, G34

Suggested Citation

Adams, Renee B. and Almeida, Heitor and Ferreira, Daniel, Understanding the Relationship between Founder-CEOs and Firm Performance (February 2008). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=470145 or http://dx.doi.org/10.2139/ssrn.470145

Renée B. Adams

University of New South Wales, Department of Banking and Finance ( email )

Sydney, NSW 2052
Australia
+61(2)93854280 (Phone)

ECGI

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

FIRN

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

ABFER

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Heitor Almeida (Contact Author)

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)

HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Daniel Ferreira

London School of Economics - Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
(+44) 20 7955 7544 (Phone)

HOME PAGE: http://personal.lse.ac.uk/FERREIRD/

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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