Creating Strategic Advantage through Entrepreneurial Governance in New Ventures

David B. Audretsch (), Erik E. Lehmann and Lawrence A. Plummer
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Erik E. Lehmann: University of Augsburg and Max Planck Institute of Economics
Lawrence A. Plummer: Clemson University and Max Planck Institute of Economics

No 2007-086, Jena Economic Research Papers in Economics from Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics, Thueringer Universitaets- und Landesbibliothek

Abstract: An important literature has made a fundamental link between corporate governance and corporate strategy. According to agency theory, assigning managers stock options aligns their interests with the interests of the owners of the firm. This paper suggests that this may not apply in the context of new ventures. Instead, an alternative perspective offered in this paper suggests that if contracts are incomplete, then managerial stock ownership not only provides a mechanism to align managerial incentives with the owners' goals, as agency theory predicts, it also grants top managers residual control rights to be used in subsequent negotiations with the owners. The ability to exercise residual control rights improves the ex post bargaining position of the CEO as an asset owner, thereby increasing her incentive to make relationship-specific investments that are specific to the new venture. Thus, in the context of new venture strategy assigning asset ownership to those who have the most important relationship-specific resources or who have indispensable human capital is a crucial source of subsequent competitive advantage. This theory of entrepreneurial governance is tested using patent ownership as a proxy for both relationship-specific investments and indispensable human capital of the CEO of the new venture. The empirical results support the main hypothesis posited by the entrepreneurial governance model.

Keywords: managerial equity ownership; new ventures; property rights; governance; knowledge; innovation (search for similar items in EconPapers)
JEL-codes: M13 L20 R30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cse, nep-ent, nep-ino and nep-knm
Date: 2007-11-12

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Persistent link: http://EconPapers.repec.org/RePEc:jrp:jrpwrp:2007-086

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