Do entrepreneurs matter?

By Paul Walker 23/04/2013

According to Sascha O Becker and Hans K. Hvide over at the short answer is yes.

Becker and Hvide write

Governments try to boost competitiveness through a vast array of policies. Newly founded firms have the potential to give new impetus to an economy. The question arises: what matters more, the horse (i.e. the products) or the jockey (i.e. the owner-manager) in the life of young firms? Do entrepreneurs matter and should they be encouraged by economic policy? Few empirical studies focus on how entrepreneurs affect the performance and value of firms (see Syverson 2011). If entrepreneurs personally embed a major part of the value of the firm, it will be difficult to pledge the value of the firms to outside investors, which in turn leads to liquidity constraints and underinvestment in entrepreneurial firms (as in Hart and Moore 1994).

Brynjolfsson (1994) and Rabin (1993) are additional papers which highlight the problems that reliance on human capital can have for the development of firms. While the Brynjolfsson model is distinct from the Rabin model, they are complementary. The relationship between information, ownership and authority is central to both papers. Rabin works within a framework utilising an adverse selection model and shows that the adverse selection problems can be such that, in some cases, an informed party has to take over the firm to show that their information is indeed useful. The Brynjolfsson model is a moral hazard type framework which deals with the issue of incentives for an informed party to maximise uncontractible effort.

Brynjolfsson argues that the increased importance of information technology will result in reduced integration and smaller firms insofar as this increased reliance on IT leads to better informed workers, who need incentives; enables more flexibility and less lock-in in the use of physical assets, and allows direct coordination among agents, reducing the need for centralised coordination. On the other hand, the Brynjolfsson framework suggests that more integration will result from information technology where network externalities or informational economies of scale support the centralised ownership of assets, and it facilitates the monitoring, and thus contractibility, of agent’s actions. Clearly in any given case more than one of these phenomena may be important.

Within the Rabin framework it is suggested that firms are more likely to trade through markets when informed parties are also superior providers of productive services that are related to their information. But if, on the other hand, information is a firm’s only competitive advantage, it is likely to obtain control over assets, possibly by buying firms that currently own those assets.

Becker and Hvide argue that human capital/personalities are important for firms. Looking into the death of a firm’s founder during the first ten years of a company’s existence, the data suggest that entrepreneurs matter – they are the ‘glue’ that holds a business together.

We expected businesses that experienced the death of a founder-entrepreneur to have some kind of a dip in performance immediately after the death owing to the upheaval, but we anticipated there would be a bounce back. However, the results were quite surprising. Even four years after the death, most firms show no sign of recovering and the negative effect on performance appears to continue even further beyond that, […]

A simple explanation for our findings could be reverse causality: poor firm performance leads to entrepreneurs having a higher probability of dying. To deal with this possibility, we look at whether there are pre-treatment differences between treated and matched controls. We do not find evidence of pre-treatment effects, […]. This suggests that reverse causality is not a major force behind our findings.

For how long in a firm’s life does the entrepreneur matter? The very youngest companies suffered most after the founder’s death, but significant effects were still felt by companies that were up to ten years old. The degree of ownership the founder had retained matters. The death of a founder with a 50% stake had about half the impact of losing a founder who had retained a majority shareholding. The level of formal education of the founder also showed a strong correlation with the damage that person’s death could have. Those with the most highly educated founders experienced the largest drops in sales performance after the founder’s death. There was no difference between the results for family and non-family companies, between rural and urban businesses, or when comparisons were made between different sectors.

It could simply be that the founder was a fantastic sales person who generated a disproportionately high level of sales. On the other hand, it could be down to a leadership effect, where the founder-entrepreneur inspires the employees to perform as best they can and without the presence, that drive slips away.

Possibly, entrepreneur death induces a voluntary shutdown by heirs of unprofitable firms that provided the entrepreneur with private benefits, so that there is no social loss. Using quantile regressions, we find strong negative effects of entrepreneur death on sales and assets also among successful firms. The bankruptcy code in Norway is similar to Chapter 7 in the US bankruptcy code, i.e., bankruptcy is associated with creditors taking control and is not ‘voluntary’ as in Chapter 11 in the US bankruptcy code. We find that firms where the entrepreneur dies have twice the probability of going bankrupt. This, again, is evidence supporting that entrepreneurs create value.

Another concern is that many firms in our database are very small, and possibly motivated by providing tax or private benefits to the entrepreneur.

Fortunately, a substantial fraction of firms in our database are not tiny, even in the first year – the 75th percentile for book value of assets and number of employees in the first year of operations is about $400,000 and four, respectively.

The conclusions of the article are

All our results are consistent with a simple mechanism: entrepreneurs personally embed a major part of the value of the firm, and the entrepreneur vanishing has a large negative impact. The death of the founder appears to shift the firm outcome distribution to the left. For firms in the lower part of the outcome distribution, the consequence is a higher probability of closing down, while for firms higher up in the quality distribution, the effect will be a significant reduction in firm growth.


  • Brynjolfsson, Erik (1994). ‘Information Assets, Technology, and Organization’, Management Science, 40(12): 1645-62.
  • Hart, O and J Moore (1994), ‘A Theory of Debt Based on the Inalienability of Human Capital’, Quarterly Journal of Economics, 109, 841-879.
  • Rabin, Matthew (1993). ‘Information and the Control of Productive Assets’, Journal of Law, Economics, and Organization, 9(1) Spring: 51-76.
  • Syverson, C (2011), “What Determines Productivity?”, Journal of Economic Literature 49, 326-365.