Are entrepreneurs special?
Research Paper Title:
“Are entrepreneurs special? Evidence from board appointments”
Authors:
Olubunmi Faleye (Northeastern University)
Wilson Kung (University of New South Wales)
Jerry Parwada (University of New South Wales)
Gloria Tian (University of Lethbridge)
Background:
Do entrepreneurs possess attributes and experiences that are valuable even at firms not founded by them? Drawing on the resource-based view of the firm, the authors study this question by evaluating the effect of entrepreneurs who serve as outside directors of other firms.
Methodology:
Sample: Directors of S&P 1500 firms in the intersection of various databases, including Boardex, used to identify directors with entrepreneurial experience
Sample Size: 14,518 firm-year observations for 2151 unique firms over 2000-2009
Analytical Approach: Multivariate regressions; instrumental variable analysis
Hypothesis:
Hypothesis 1: Entrepreneur directors are associated with higher firm value. [Supported]
Hypothesis 2: The relationship between firm value and entrepreneur directors is stronger among smaller firms. [Supported]
Hypothesis 3a: Entrepreneur directors are associated with higher R&D investments. [Supported]
Hypothesis 3b: Entrepreneur directors have a larger effect on firm value in R&D-intensive industries. [Supported]
Hypothesis 4a: Entrepreneur directors are associated with higher sales growth rates. [Supported]
Hypothesis 4b: Entrepreneur directors have a larger effect on firm value in competitive industries. [Supported]
Hypothesis 5a: Smaller firms are more likely to appoint entrepreneur directors. [Supported]
Hypothesis 5b: The appointment of an entrepreneur director is more likely when the firm's founder serves on its board of directors. [Supported]
Hypothesis 5c: The appointment of an entrepreneur director is more likely when other entrepreneurs currently serve on the board of directors. [Supported]
Results:
1. We find that the stock market reacts positively to appointments of outside entrepreneur directors and that firms with these directors have higher long-term value as measured by Tobin's q.
2. Entrepreneur directors are also associated with increased R&D investment and higher sales growth, and their effect on firm value is larger among firms in R&D-intensive and competitive industries.
Conclusion:
Entrepreneur directors play important roles that enhance board effectiveness in value creation. Thus, the impact of entrepreneurs is not limited to the firms they found. Rather, their attributes, skills, and experiences allow them to facilitate better value creation at other firms where they influence corporate policies. While this suggests that firms should strive when possible to appoint directors with an entrepreneurial background, our results also indicate that one size does not fit all. The value of entrepreneur directors depends on firm and industry attributes. Smaller firms and those in R&D intensive or competitive industries experience larger benefits from entrepreneur directors. For other firms, these directors have no discernible effect on firm value.