Blocked But Not Tackled: Who Founds New Firms When Rivals Dissolve?
| DOI | http://doi.org/10.1002/smj.2653 |
| Author | Seth Carnahan |
| Date | 01 November 2017 |
| Published date | 01 November 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 2189–2212 (2017)
Published online EarlyView 5 May 2017 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2653
Received 6 December 2015;Final revision received13 February 2017
Blocked But Not Tackled: Who Founds New Firms
When Rivals Dissolve?
Seth Carnahan*
Strategy Group, Ross School of Business, University of Michigan, Ann Arbor,
Michigan
Research summary: This article examines the roleof c ompetitiveshocks in creating opportunities
for new rm foundings. I argue that the sudden dissolution of rival rms may release resources
that create opportunities for rm formation, particularly among employees facing impediments
to capturing value in their current organizations. Analyzing microdata from the legal services
industry, I use unexpected deaths of solo-practicing attorneys as quasi-exogenous sources of
rival dissolution. Results indicate that these shocks increase the odds of founding by about 30%,
with stronger effects among attorneys with weaker social connections or higher competition for
promotion. The article thus highlights the role that founders play in reallocatingdissolved rivals’
resources while demonstratingthat founding may be an important outlet for “blocked” employees
to capture value from opportunities.
Managerial summary: This article nds that the shutdown and dissolution of a rival organization
may spur employees to found new rms. As a consequence, managers may nd it valuable to pay
attention to employees’ turnover intentions following the dissolution of a rival. Findings suggest
that employees who are having trouble advancing in the rm may be the most likely to found a
new organization when a rival dissolves, so managersmay want to focus retention efforts on these
individuals. Tothe extent that managers wish to capture customers, employees, and other resources
that were formerly attached to a dissolved rival, managers may wish to be aware that they could
be in competition with their own employees for these resources and opportunities. Copyright ©
2017 John Wiley & Sons, Ltd.
Introduction
Researchers who study “spin-out” organizations
underscore that individuals often leave their current
employment to found new rms, in part to exploit
new opportunities (Gambardella, Ganco, & Hon-
oré, 2014). Two stylized ndings emerge from this
work. First, unexploited (technological) opportuni-
ties generated within the original employer “push”
employees into new venture creation (e.g., Agarwal,
Echambadi, Franco, & Sarkar, 2004; Cassiman &
Ueda, 2006; Klepper & Thompson, 2010). Second,
Keywords: competition; entrepreneurship; dissolution;
value appropriation; human capital
*Correspondence to: Seth Carnahan, 701 Tappan St., Ann Arbor,
MI 48109. E-mail: scarnaha@umich.edu
Copyright © 2017 John Wiley & Sons, Ltd.
individuals at the high end of the talent distribution
disproportionately pursue these opportunities
(Campbell, Ganco, Franco, & Agarwal, 2012;
Elfenbein, Hamilton, & Zenger, 2010; Groysberg,
Nanda, & Prats, 2009; though see also Astebro,
Chen, & Thompson, 2011). However,relatively less
attention has been paid to (a) whether opportunities
arising in the external environment may also propel
spinout formation, and (b) which employees might
experience a greater “pull” from these outside
opportunities. One such opportunity is the dissolu-
tion of a rival rm. Researchers emphasize that the
dissolution of a rival rm— by unlocking poten-
tially valuable resources, including employees,
clients, and physical assets— may benet incum-
bent rms, allowing them to expand and increase
protability (e.g., Hoetker & Agarwal, 2007;
2190 S. Carnahan
Knott & Posen, 2005). Do these events also create
opportunities for individuals to found new rms? If
so, which individuals pursue these opportunities?
Answering these questions will help illuminate the
extent to which rival dissolutions sow the seeds of
new organizations, while also providing theoretical
microfoundations that link rival dissolutions to
employees’ decisions to found new rms.
In this article, I posit that existing rms will
not completely absorb the opportunities presented
by rival rm dissolution— rival rm dissolution
may also spur rm founding. In addition, I argue
that individuals who are relatively “stuck” in their
jobs will be more likely to found a new rm
following a rival’s dissolution. I argue that “stuck”
individuals face barriers to capturing value (i.e.,
compensation or promotion) in their current rms,
which reduce the opportunity cost of continued
engagement with their current employer. These
strictures may include a lack of social ties to
powerful members of the rm (e.g., Blyler & Coff,
2003) or a lack of promotion opportunities (e.g.,
Kacperczyk & Marx, 2016; Sørensen & Sharkey,
2014). Individuals facing these barriers may have
a higher willingness to pay for a dissolved rival’s
resources or they may be willing to serve a dissolved
rival’s clients at lower prices, as compared to other
players in the industry. Some of the supply-side
resources and customers of the dissolved rm may
ow to these founders, helping to spur their creation
of new rms.
Testing the above ideas poses signicant empir-
ical challenges. Dissolutions are often driven by
processes (e.g., changes in technology, weakness
in industry demand) that also drive foundings (e.g.,
Agarwal & Gort, 1996; Hannan & Freeman, 1977),
creating important concerns about omitted variable
bias. Furthermore, reverse causality is likely to be
an issue, since foundings might cause dissolutions
(e.g., Phillips, 2002). Overcoming these challenges
requires the detection of a dissolution that occurs
for quasi-random reasons. Using microdata from
the American legal services industry, I am able to
identify 61 such shocks, by stringently focusing
on solo-practicing attorneys who die from heart
attacks, accidents, and other sudden causes (e.g.,
Azoulay, Graff Zivin, & Wang, 2010; Johnson,
Magee, Nagarajan, & Newman, 1985; Oettl, 2012).
These solo practitioners lack attorney colleagues,
so their deaths effectively dissolve their rms, cre-
ating opportunities for other attorneys to purchase
their client les, to hire their employees, to acquire
their ofce locations, or to obtain their resources in
a more indirect manner, such as by securing newly
available clients. While some of these opportunities
are likely captured by attorneys that stay within
existing rms, I focus on whether these opportu-
nities also spur the founding of new organizations,
and by whom. While the resources released by these
deaths are not, by themselves, likely enough to jus-
tify the founding of a new rm, they might provide
a boost that, at the margin, makes the formation of
a rm worthwhile for certain individuals.
I nd that surviving attorneys who formerly com-
peted with these deceased solo practitioners are
about 30% more likely than average to found a new
organization in the year following the death. Consis-
tent with my theoretical expectation, I nd that these
foundings are concentrated among attorneys that
face barriers to value capture within their current
organizations: these include attorneys who share
law school afliations with fewer partners in their
practice area and attorneys who face more compe-
tition for promotion.
Additional analyses help link the deceased rms
and the newly founded rms. For example, I nd
that rms founded in the wake of a rival solo practi-
tioner’s death survivelonger than others, suggesting
that a rival’s dissolution allows for the creation of
more robust startups, likely due to the acquisition
of resources released by the deceased rm. In
addition, while I am unable to measure transfers
of clients or non-attorney employees due to lack
of data, I document that 13 of the newly founded
rms use the former location or contact information
of a deceased rm, which provides some direct
evidence connecting the resources of the deceased
rms to those of the newly founded rms. I also
explore important alternative explanations for
the results, such as mortality salience, conicts
of client interests, and “inheritance” of clients
by friends of the deceased attorneys. Expanding
beyond the well-identied but relatively rare
instances of sudden deaths, I also examine whether
unexpected disbarments of rival solo attorneys lead
to foundings, and I nd similar results. Finally, I
discuss how this specialized setting and research
design may generalize by providing anecdotal
accounts of similar outcomes in other industries.
The article makes several contributions. The
entrepreneurship literature in strategy focuses on
the characteristics of individuals and their cur-
rent employers when describing why new rms
emerge (e.g., Anton & Yao, 1995; Cassiman &
Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2189–2212 (2017)
DOI: 10.1002/smj
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