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Creating Strategic Advantage through Entrepreneurial Governance in New Ventures

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Author Info

  • David B. Audretsch

    (Max Planck Institute of Economics and Indiana University)

  • Erik E. Lehmann

    (University of Augsburg and Max Planck Institute of Economics)

  • Lawrence A. Plummer

    (Clemson University and Max Planck Institute of Economics)

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.

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File URL: http://zs.thulb.uni-jena.de/receive/jportal_jparticle_00082393
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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2007-086.

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Date of creation: 12 Nov 2007
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Handle: RePEc:jrp:jrpwrp:2007-086

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Keywords: managerial equity ownership; new ventures; property rights; governance; knowledge; innovation;

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