Are Founder CEOs Effective Innovators?

• DOI: http://doi.org/10.1111/ajfs.12217
• Date: 01 June 2018
• Published date: 01 June 2018
• Author: Jonghwan (Simon) Kim,KwangJoo (KJ) Koo

Are Founder CEOs Effective Innovators?*

Jonghwan (Simon) Kim

Alliance Manchester Business School, University of Manchester, United Kingdom

KwangJoo (KJ) Koo**

Black School of Business, Pennsylvania State University, United States

Received 11 July 2017; Accepted 19 December 2017

Abstract

This paper investigates the effectiveness of founder CEOs on firm innovation. We exam-

ine our research question using the number of patent citations as a proxy for firm inno-

vation and a novel dataset of founder CEOs in S&P 1,500 firms over a 15-year period

from 1994 to 2008. Our main results show that a founder CEO is associated with an

increase in citations, suggesting that founder CEOs are more effective in stimulating inno-

vation compared to professional CEOs. Overall, these findings support the argument that

a founder CEO plays an important role in facilitating firm innovation through more

risk-taking.

Keywords Founder CEOs; Professional CEOs; Innovation; Performance

JEL Classification: L25, L26, M21, O32

1 Introduction

The effectiveness of founder CEOs, including those at Apple, Google, and Amazon,

on developing and shaping corporate policies has been studied extensively in the

academic literature (Anderson and Reeb, 2003; Nelson, 2003; Villalonga and Amit,

2006).

1

In practice, the significance of this research is substantial, as founder CEOs

account for 12–13% of CEOs at public firms (Villalonga and Amit, 2006; Fahlen-

brach, 2009). While founder CEOs are typically portrayed as highly motivated

inventors who significantly impact company outcomes (Wasserman, 2006), it

*The authors wish to thank two anonymous referees and Special Issue Editor Xuan Tian for

their valuable comments. We also thank Michael Paz for his helpful suggestions and com-

ments. Any errors are the authors’ own.

**Corresponding author: Black School of Business, Pennsylvania State University–Erie, 5101

Jordan Road, Erie, PA, 16563, United States. Tel: 1-814-898-6437, Fax: 1-814-898-6223,

email: kuk244@psu.edu

1

Founder CEOs are founding members of the firm, but professional CEOs joined firms after

their founding (Villalonga and Amit, 2006).

Asia-Pacific Journal of Financial Studies (2018) 47, 426–448 doi:10.1111/ajfs.12217

426 ©2018 Korean Securities Association

remains unclear whether there is a distinct difference between founder CEOs and

professional CEOs in terms of long-term company innovation.

2

Despite having

demonstrated their ability to be technologically innovative by founding firms, there

are at least two reasons why founder CEOs may not be effective innovators com-

pared with professional CEOs. First, the managerial skills needed at the beginning

stage of a company may not necessarily coincide with the skills needed to lead

established firms in ways that spur innovation. (Jayaraman et al., 2000). Second,

founder CEOs might be reluctant to adopt practices that standardize company

management, as these practices reduce both the founder’s influence (Rajan , 2012)

and the private benefits of control over such influence (Bandiera et al., 2013). This

study addresses this gap in the literature by examining the impact of founder CEOs

on long-term firm-innovation outcomes.

Innovation is essential to the survival and evolution of firms in today’s highly

competitive environment. For instance, innovations help differentiate products and

services in consumers’ minds. Innovative products and services are also a critical

factor in turning one-time purchasers into brand-loyal customers. This implies that

the success and ultimate survival of companies are dependent on their ability to

meet demands for high-quality innovative output (Hannan and Freeman, 1989). To

spur innovation, CEOs play a critical role (Mumford and Licuanan, 2004; Elenkov

and Manev, 2005) by influencing company decision-making on resource allocation

and by encouraging innovation (Schein, 1992; Yukl, 2002).

We advance two competing hypotheses that potentially can explain founder

CEOs’ impact on innovation. First, entrepreneurship theory suggests that founder

CEOs are better innovators than professional CEOs (Shane and Venkataraman,

2000). This theory posits that founder CEOs have a stronger motivation to pursue

long-term growth compared with their professional counterparts (Miller et al.,

2011) and are likely to be risk-takers (Fahlenbrach, 2009). Thus, founder CEOs—

entrepreneurs by nature—are willing to take significant risks by exploring new busi-

ness opportunities by developing novel products and services (Hirshleifer et al.,

2012). Conversely, corporate life-cycle theory argues that founder CEOs lack man-

agerial abilities, which limits their innovation potential (Wasserman, 2012). It is

assumed that founder CEOs eventually transfer company management to profes-

sional CEOs with better managerial skills as firms grow (Jain and Tabak, 2008).

These arguments imply that firms with professional CEOs are likely to take more

strategic risks and generate more and better innovation compared with firms run

by founder CEOs because of the high strategic risk involved in innovation-based

projects.

3

2

There are technological innovations and administrative innovations (Damanpour and Evan,

1984). We focus on technological innovation with the empirical proxy of citations and patent

counts.

3

The non-strategic exploration of innovation may potentially be very harmful since it requires

the dedication of excessive resources by firms (Levinthal and March, 1993).

Founder CEOs and Innovation

©2018 Korean Securities Association 427