Robert Eberhart

Failure Is an Option: Institutional Change, Entrepreneurial Risk, and New Firm Growth

Does an institutional change that eases exit via bankruptcy reform enhance venture growth? We take advantage of a quasi-natural experiment in Japan to examine this question. Using longitudinal data over a 10-year period, we find that bankruptcy reform not only increases the rates of bankruptcy and founding, but more importantly improves the likelihood of high growth ventures. This institutional change disproportionately encourages elite individuals (i.e., those with superior human and social capital) to start firms. In turn, these individuals are more likely to launch high growth ventures. Broadly, we contribute at the nexus of institutional theory and entrepreneurship by placing elite entrepreneurs and venture growth in the spotlight, and by highlighting how an institutional change that eases exit fosters a regenerative cycle of exit, founding and growth by attracting more capable entrepreneurs. Overall, we conclude that lowering barriers to exit via lenient bankruptcy laws encourages superior – and not just more – entrepreneurs to start firms.

What Makes a Winner? Quantifying Luck in Sustained Performance

This study is an empirical examination of the extent to which either managerial skill or random external influences — i.e., luck — are responsible for firm performance. To adjudicate between the respective theoretical claims, we examine how much of the observed cross-sectional dispersion of outcomes can be attributed to differences in luck rather than differences in skill. Using a unique empirical strategy of bootstrap simulations that we compare to the observed results of public companies, we demonstrate that a substantial portion of performance variation depends on random influences rather than on managerial skill. Specifically, our results show that we can expect to observe substantial differences in realized (i.e., actual) performance outcomes even if all CEOs in a given sample are equally skilled, thus suggesting that the true underlying differences in CEO skill are substantially smaller than implied by simply looking at the raw difference in performance outcomes. Our results not only assist researchers in interpreting firm outcomes but also inform ideas of executive pay and responsibility.This study is an empirical examination of the extent to which luck can explain sustained performance. Using a unique empirical strategy of bootstrap simulations that we compare to actual performances of public companies, we observe that over 95% of the differences in performance outcomes between “top” versus “average” performers can be attributed to luck, even if all CEOs are equally skilled. Through this novel empirical approach, we can better incorporate the role of luck into studies of sustained performance, and our findings suggest that more attention should be placed on the role of unanticipated and even uncontrollable changes on performance.

What Makes a Winner? Toward Resolving the Role of Luck and Skill in Sustained CEO Performance

This study is an empirical examination of the extent to which either managerial skill or random external influences — i.e., luck — are responsible for firm performance. To adjudicate between the respective theoretical claims, we examine how much of the observed cross-sectional dispersion of outcomes can be attributed to differences in luck rather than differences in skill. Using a unique empirical strategy of bootstrap simulations that we compare to the observed results of public companies, we demonstrate that a substantial portion of performance variation depends on random influences rather than on managerial skill. Specifically, our results show that we can expect to observe substantial differences in realized (i.e., actual) performance outcomes even if all CEOs in a given sample are equally skilled, thus suggesting that the true underlying differences in CEO skill are substantially smaller than implied by simply looking at the raw difference in performance outcomes. Our results not only assist researchers in interpreting firm outcomes but also inform ideas of executive pay and responsibility.This study is an empirical examination of the extent to which luck can explain sustained performance. Using a unique empirical strategy of bootstrap simulations that we compare to actual performances of public companies, we observe that over 95% of the differences in performance outcomes between “top” versus “average” performers can be attributed to luck, even if all CEOs are equally skilled. Through this novel empirical approach, we can better incorporate the role of luck into studies of sustained performance, and our findings suggest that more attention should be placed on the role of unanticipated and even uncontrollable changes on performance.

New Growth Markets: Supportive Intermediaries and Entrepreneurship

Research Summary: Our study shows how institutional intermediaries established to foster the creation of new firms might hinder new firm growth instead. We show that intermediaries can reduce new firm growth rates due to institutional conflict. To analyze this idea, we examine the setting of junior stock exchanges, which are commonly formed to facilitate entrepreneurial growth. The introduction of these exchanges focused investment into new technology firms, reduced investment in other sectors, and led to diminishing new firm growth. Our findings demonstrate how institutional conflict causes unintended effects and reveals the complexity of influencing entrepreneurship with institutional intermediaries. Managerial Summary: Investors and entrepreneurs face uncertainty when deciding what firms to start and fund. We show that an intermediation effort to make entry easier for entrepreneurs increases the uncertainty that entrepreneurs and investors face. For investors, the enthusiasm for technology firms engendered by the new exchange can motivate investment in marginal firms to maintain as desired deal flow. However, lower firm growth and less liquidity in the future is likely. For entrepreneurs, our results indicate that it is more challenging to manage technology firm growth as well as there is potential opportunity to investigate other industries. Finally, for policy‐makers and supporters of the new exchanges, our results imply that investment flows are altered as intended, but unless listing standards remain high, the virtuous cycle of investment upon which a healthy entrepreneurial climate rests may be disrupted, muting the intended effects of the new exchange.

Supportive Intermediaries: Junior IPO Markets and Entrepreneurship

Research Summary: Our study shows how institutional intermediaries established to foster the creation of new firms might hinder new firm growth instead. We show that intermediaries can reduce new firm growth rates due to institutional conflict. To analyze this idea, we examine the setting of junior stock exchanges, which are commonly formed to facilitate entrepreneurial growth. The introduction of these exchanges focused investment into new technology firms, reduced investment in other sectors, and led to diminishing new firm growth. Our findings demonstrate how institutional conflict causes unintended effects and reveals the complexity of influencing entrepreneurship with institutional intermediaries. Managerial Summary: Investors and entrepreneurs face uncertainty when deciding what firms to start and fund. We show that an intermediation effort to make entry easier for entrepreneurs increases the uncertainty that entrepreneurs and investors face. For investors, the enthusiasm for technology firms engendered by the new exchange can motivate investment in marginal firms to maintain as desired deal flow. However, lower firm growth and less liquidity in the future is likely. For entrepreneurs, our results indicate that it is more challenging to manage technology firm growth as well as there is potential opportunity to investigate other industries. Finally, for policy‐makers and supporters of the new exchanges, our results imply that investment flows are altered as intended, but unless listing standards remain high, the virtuous cycle of investment upon which a healthy entrepreneurial climate rests may be disrupted, muting the intended effects of the new exchange.

'I Meant to Do That': Evaluating Luck versus Skill in Firm Performance

This study is an empirical examination of the extent to which either managerial skill or random external influences — i.e., luck — are responsible for firm performance. To adjudicate between the respective theoretical claims, we examine how much of the observed cross-sectional dispersion of outcomes can be attributed to differences in luck rather than differences in skill. Using a unique empirical strategy of bootstrap simulations that we compare to the observed results of public companies, we demonstrate that a substantial portion of performance variation depends on random influences rather than on managerial skill. Specifically, our results show that we can expect to observe substantial differences in realized (i.e., actual) performance outcomes even if all CEOs in a given sample are equally skilled, thus suggesting that the true underlying differences in CEO skill are substantially smaller than implied by simply looking at the raw difference in performance outcomes. Our results not only assist researchers in interpreting firm outcomes but also inform ideas of executive pay and responsibility.This study is an empirical examination of the extent to which luck can explain sustained performance. Using a unique empirical strategy of bootstrap simulations that we compare to actual performances of public companies, we observe that over 95% of the differences in performance outcomes between “top” versus “average” performers can be attributed to luck, even if all CEOs are equally skilled. Through this novel empirical approach, we can better incorporate the role of luck into studies of sustained performance, and our findings suggest that more attention should be placed on the role of unanticipated and even uncontrollable changes on performance.

Informal Certification: Resolving the Tension Between Lowering the Burdens of Entry and Obtaining Legitimacy

This study argues that regulatory changes that ease the entry of new firms can deprive the firms of the legitimacy they need to thrive. Using insights from research on the effects of institutional change on entrepreneurship and quantitative data from new firm credit records, this study offers evidence that new firms in emerging industries avoid regulatory assistance to retain the informal certification of organizational achievements that confer legitimacy. Evidence from initial capital levels of new firms shows that after a dramatic lowering of required starting capital regulations, new firms in an emerging industry opt instead for high capital levels. This study adds to the ideas of prior literature on certification and legitimacy with the idea that organizational achievements that are accepted by a salient audience can legitimate new firms even without a central certifying actor. Thus, this study the notion that common policy efforts to promote entrepreneurship can deprive a new firm of informal certifications that it needs, rendering the policy effect moot. It shows that the new theoretical construct of informal certification can explain the apparently divergent ideas of institutional forces and economic incentives on entrepreneurial activity. In this way, the relative ineffectiveness of neo-classical prescriptions to promote entrepreneurship is clarified.

Too Much of a Good Thing: The Introduction of New Organizational Practices to Stimulate New Firm Growth

Research Summary: Our study shows how institutional intermediaries established to foster the creation of new firms might hinder new firm growth instead. We show that intermediaries can reduce new firm growth rates due to institutional conflict. To analyze this idea, we examine the setting of junior stock exchanges, which are commonly formed to facilitate entrepreneurial growth. The introduction of these exchanges focused investment into new technology firms, reduced investment in other sectors, and led to diminishing new firm growth. Our findings demonstrate how institutional conflict causes unintended effects and reveals the complexity of influencing entrepreneurship with institutional intermediaries. Managerial Summary: Investors and entrepreneurs face uncertainty when deciding what firms to start and fund. We show that an intermediation effort to make entry easier for entrepreneurs increases the uncertainty that entrepreneurs and investors face. For investors, the enthusiasm for technology firms engendered by the new exchange can motivate investment in marginal firms to maintain as desired deal flow. However, lower firm growth and less liquidity in the future is likely. For entrepreneurs, our results indicate that it is more challenging to manage technology firm growth as well as there is potential opportunity to investigate other industries. Finally, for policy‐makers and supporters of the new exchanges, our results imply that investment flows are altered as intended, but unless listing standards remain high, the virtuous cycle of investment upon which a healthy entrepreneurial climate rests may be disrupted, muting the intended effects of the new exchange.

How Making It Easier to Succeed Reduces Success: IPO Reform and New Firm Performance

Research Summary: Our study shows how institutional intermediaries established to foster the creation of new firms might hinder new firm growth instead. We show that intermediaries can reduce new firm growth rates due to institutional conflict. To analyze this idea, we examine the setting of junior stock exchanges, which are commonly formed to facilitate entrepreneurial growth. The introduction of these exchanges focused investment into new technology firms, reduced investment in other sectors, and led to diminishing new firm growth. Our findings demonstrate how institutional conflict causes unintended effects and reveals the complexity of influencing entrepreneurship with institutional intermediaries. Managerial Summary: Investors and entrepreneurs face uncertainty when deciding what firms to start and fund. We show that an intermediation effort to make entry easier for entrepreneurs increases the uncertainty that entrepreneurs and investors face. For investors, the enthusiasm for technology firms engendered by the new exchange can motivate investment in marginal firms to maintain as desired deal flow. However, lower firm growth and less liquidity in the future is likely. For entrepreneurs, our results indicate that it is more challenging to manage technology firm growth as well as there is potential opportunity to investigate other industries. Finally, for policy‐makers and supporters of the new exchanges, our results imply that investment flows are altered as intended, but unless listing standards remain high, the virtuous cycle of investment upon which a healthy entrepreneurial climate rests may be disrupted, muting the intended effects of the new exchange.