Founder-CEO firms in Australia (2007-2021): performance and voluntary successions
Creators: name: Ferraro, Salvatore
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 350299
subject: Banking, finance and investment not elsewhere classified

description: In recent decades, there has been a renaissance of founder companies in the United States, particularly in the technology sector. The empirical finance and law literature shows that family or founder-controlled firms represent the most common organisational form globally (Aminadav &amp; Papaioannou 2020). Founder-CEO status is commonly used in the empirical finance literature as a proxy for managerial entrenchment to the extent that founder-CEOs exercise undue influence or power over the board of directors (Adams, Almeida &amp; Ferreira 2005). Founder-CEO status is utilised to test stewardship theory on the basis that founders develop a psychological attachment to their firm (Lee, Yoon &amp; Boivie 2020), which confers the willingness to prioritise organisational goals above their personal goals (Dawson, Paeglis &amp; Basu 2018).

We are motivated to study the attributes of founder-CEO firms in the Australian context due to their widespread incidence; over 15% of ASX-listed firms continue to be run by their founders, which is comparable to the United States. The common incidence of founder-led stocks in Australia appears to be inconsistent with the legal origins theory of corporate control (La Porta et al. 1998), which predicts that ownership concentration represents a substitute for the strength of investor protection.

Two dimensions of founder-CEO firms are the subject of this study: CEO turnover-performance sensitivity and the causal effect on corporate performance. Regarding the first dimension, many studies on CEO turnover focus on the responsiveness of involuntary succession to firm performance (Jenter &amp; Lewellen 2021). This reflects the tendency for scholars to use forced CEO turnover-performance sensitivity to evaluate the efficacy of a board’s monitoring role and its function in facilitating CEO succession, one of its key functions (Adams, Hermalin &amp; Weisbach 2010).

There is less known about the sensitivity of voluntary founder-CEO successions to corporate performance. The first research question of this thesis is: does poor firm performance contribute to founder-CEO voluntary succession decisions? We estimate an empirical model of founder-CEO voluntary turnover-sensitivity designed to undertake a two-horse race between two theories of voluntary succession. The entrenchment hypothesis predicts that conditional on poor performance, founders do not step down from the CEO role, while stewardship theory predicts that they do.

Based on a hand-collected data set free of survivor bias of ASX-listed founder-CEO firms in the fifteen years from 2007 to 2021, the results from panel data regressions and a Cox proportional hazards model support neither the entrenchment nor stewardship theories. Thus, founder-CEO voluntary succession is not conditional on poor firm performance.

The second research question is: What is the causal effect of founder-CEO status on corporate performance? The empirical literature demonstrates that founder-controlled firms earn high risk-adjusted stock returns (Fahlenbrach 2009a), have high measures of accounting and market-based performance (Villalonga &amp; Amit 2006) and exhibit low board independence (Adams, Hermalin &amp; Weisbach 2010). We find that founder-CEO firms are associated with superior performance compared to companies run by professionally hired CEOs. The application of instrumental variables analysis and propensity score matching analysis suggests that this finding does not reflect selection bias associated with the endogeneity of founder-CEO status. Consequently, the evidence points to a positive causal effect of founder-CEO status on firm performance.

This thesis contributes to developing the literature on founder-CEO firms and CEO succession. We develop a novel conceptual framework for testing whether entrenchment or stewardship manifests in founders choosing to remain in office or step away from the CEO role conditional on poor performance. The modelling of founder-CEO voluntary turnover-performance sheds light on potential transmission channels of stewardship or managerial entrenchment.
Moreover, this thesis contributes to the development of the limited literature on the causal effect of founder-CEO firms in the Australian context and the treatment of selection bias, implying that founder-CEO status is positively related to firm performance (Tucker 2010). Two dimensions of selection bias differ primarily in terms of timing. In the context of this study, the first type of selection bias is pertinent to listed firms only and is addressed by our application of instrumental variables analysis. The second type is relevant to privately owned firms, which captures the notion that poor performance encourages founder-CEOs of privately run firms to relinquish the CEO role. Only the most skilled founders would retain the CEO role in private firms, thus confounding the researcher’s ability to infer causation from the founder-CEO status on corporate performance. We develop a novel link between the relative size and activity of venture capital in Australia and the United States, and the prevalence of this form of selection bias. In addition to acting as a financial intermediary between investors and entrepreneurs, venture capital is important in fostering founder succession in value-accretive start-ups (Ewens &amp; Marx 2018). This introduces a potential selection bias when examining the performance of listed founder companies. When scaled by GDP, Australia’s venture capital industry is tiny compared to the United States, suggesting that this selection bias is less prevalent in the Australian context. Despite this, our findings point to a strong positive causal effect of founder-CEOs on firm performance for ASX-listed stocks.

Our findings also contribute to the investment management industry. Although the study does not examine the stock returns of founder-led firms, the finding of a positive causal effect of founder-CEO firms on accounting and market-based performance provides a sound foundation to investigate the benefits of including founder-led stocks into portfolio construction processes.