Creating Strategic Advantage Through Entrepreneurial Governance in New Ventures

23 Pages Posted: 16 Nov 2007

See all articles by David B. Audretsch

David B. Audretsch

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Erik E. Lehmann

University of Augsburg - Faculty of Business and Economics

Lawrence Avery Plummer

affiliation not provided to SSRN

Date Written: November 12, 2007

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

JEL Classification: M13, L 20, R30

Suggested Citation

Audretsch, David B. and Lehmann, Erik E. and Plummer, Lawrence Avery, Creating Strategic Advantage Through Entrepreneurial Governance in New Ventures (November 12, 2007). Jena Economic Research Paper No. 2007-086, Available at SSRN: https://ssrn.com/abstract=1029652 or http://dx.doi.org/10.2139/ssrn.1029652

David B. Audretsch (Contact Author)

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Erik E. Lehmann

University of Augsburg - Faculty of Business and Economics ( email )

Universitätsstr. 16
Augsburg, 86135
Germany

Lawrence Avery Plummer

affiliation not provided to SSRN ( email )

No Address Available

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