Knowledge that Transforms

Research summary Women continue to be disproportionately underrepresented in new venture creation. We investigate whether and how founders can differently influence future entrepreneurial career choices of their male and female joiners. Using a large sample of startup firms with personnel where founders interact closely with joiners, we demonstrate that founders have a strong influence on a joiner's entrepreneurial career choice if both are female. We find empirical support for role modeling as a key underlying mechanism, accounting for alternative explanations such as selective matching based on gender and push‐driven factors. These findings increase our understanding of the roles of socialization and organizational context in shaping the career outcomes of employees, and provide evidence of a multiplier effect of female entrepreneurs. Managerial summary Women are less likely to be entrepreneurs than men. We investigate whether working in a startup founded by a woman instead of a man influences individuals' decision to become an entrepreneur later. We find this to be the case for women. This result is best explained by female founders acting as role models for their female employees in male‐dominated domains. Female founders able to break gender stereotypes seem to have an influence on the career choices of their female employees, especially among those who have lacked contact with entrepreneurs. Moreover, this influence is stronger if the female founder and employee have similar backgrounds. These findings confirm the importance of social interactions at work and suggest new ways to inspire more women to launch startups.

We propose that institutions that reduce barriers to entrepreneurship lead to intended consequences, increasing entry rate among individuals facing obstacles to entrepreneurship, such as women. But these regulations also have unintended consequences, decreasing the value appropriated by women who stay in paid employment, as these women lose support of their departing peers. Using an exogenous reduction in entry barriers in Portugal between 2005 and 2009, we find that women launch new ventures at higher rates than men, when entry barriers fall, but the same changes lead to a relative decline in women's wages in paid employment. These effects are amplified for women in managerial positions, who benefit if they leave but lose if they stay. Our study contributes to a nuanced understanding of rent‐allocation in firms. Managerial Summary We study the unintended consequences of lowering barriers to entry—an important institutional change to foster entrepreneurship, especially among those facing strongest entry barriers. We examine the effects of such regulations on women departing to entrepreneurship and those staying in incumbent firms, using the registry data from Portugal. The results show that lowering entry barriers leads to higher rates of entrepreneurial entry among women, as intended. But we also find that this deregulation reform results in a wider gender pay gap among those who stay in incumbent firms. We attribute these increases to reductions in bargaining power and productivity, which result from the departure of socially‐proximate peers. Finally, these intended and unintended consequences are especially common among female managers—who are more likely to leave for entrepreneurship, on the one hand, but also more likely to witness greater pay gaps in wage work, on the other hand.

Research Summary In this study, we offer a novel approach, establishing how firm conduct and competitive interactions among firms jointly provide microfoundations of risk–return relations. Firms influence each other, and the way they reciprocate these influences to cause mutual adjustments is a core feature of industry dynamics. This core feature fundamentally influences risk–return relations. Based on our approach, we develop models that allow us to trace how, at the microlevel, firm conduct in conjunction with competitive interactions generate risk–return relations, and how these are associated with macrolevel measures of industry concentration. That translates into an approach that affords fine‐grained predictions of risk–return relations based on the nature of competition in an industry—for example, Cournot or Bertrand—and observations of the industry's competitive intensity and concentration. Managerial Summary The risk‐return trade‐off is of critical importance for strategic management. Yet, the relation between industry conditions and the shape of risk‐return relations is often unclear. We develop a framework that allows managers to understand how industry conditions generate risk‐return relations, and how these can be inferred from macro‐level measures of industry concentration. At the micro‐level, we show that low variation in operational implementation of strategies may, under some conditions, be associated with high variation as well as high means in financial returns. Our primary insight is that the risk‐return trade‐off changes with competitive intensity: Starting from industries with two or three firms, we show that increasing competitive intensity – higher number of firms, higher entry and exit barriers – gives rise to a predictable sequence of risk‐return relations that change over the life‐cycle of industries. Overall, we contribute a framework that allows managers to infer the risk‐return trade‐off for the industry that their business units are located in.

Research summary Buyer firms respond to supplier employee mobility by reshuffling work among suppliers. However, the extant literature has not considered plural‐sourcing firms which can bring work back in‐house. In this paper, we develop a governance framework in which buyers engage in a comparative assessment of the costs associated with different sourcing modes following supplier employee mobility. Due to the imperfect transferability of social capital and associated uncertainty, buyers face increased contracting costs when supplier employees move. This prompts plural‐sourcing buyers to increase their reliance on insourcing when the costs of adjusting in‐house capacity are relatively low and when the costs of switching to alternative suppliers are relatively high. The analysis of data on patent prosecution activities and patent attorney mobility provides support to our theory. Managerial summary This study provides a decision framework for buyer firms when their suppliers experience employee departures. Buyers may choose to (a) stay with the suppliers suffering employee losses or (b) follow mobile employees to their new suppliers. However, in both cases contracting becomes more difficult due to the disruption in supplier relationships or the need to work with new suppliers. There is a third option (c) though which is to bring work in‐house. We explain that buyers opt for option (c) when it is easy to expand in‐house capacity and when the costs of switching to alternative suppliers already in use are relatively high. Thus, supplier employee mobility may lead buyer firms to adjust their reliance on outsourcing even when there are no buyer employee departures.

Research Summary With the growth of digital platforms, understanding the role of property rights on those platforms has become increasingly important. Digital piracy, the unauthorized copying and distribution of digital products, is therefore an important strategic issue, both because of lost revenues and because it is thought to decrease innovation. Yet, while the latter effect is often argued, empirical evidence is limited. We study whether piracy affects innovation and whether it leads firms to shift to different types of innovations. By studying a large piracy event in a mobile app marketplace, we find that piracy leads to a decrease in the release of incremental innovations, such as bug fixes, but does not decrease more substantial revisions. Additionally, it is associated with subsequent new product development. Managerial Abstract For many platform companies, a critical issue is understanding how piracy and imitation should be regulated, motivated in part by a common narrative that piracy will eliminate innovation on these platforms. The present article suggests that these effects are slightly more nuanced. We find that piracy does lead to a decline in incremental innovations, such as bug fixes or appearance tweaks, but no discernible decline in more major innovations, such as feature updates or entirely new versions. This implies that piracy can shape the type of innovation, potentially leading to products that are less polished and refined but not affecting the overall level of innovation.

Research summary This article introduces a new measure of long‐term firm performance: long‐term investor value appropriation (LIVA). This measure helps to address a disconnect between the common theoretical assumption that managers optimize firm value, and the widespread empirical practice of measuring performance using short‐term ratios such as return on assets (ROA). LIVA can lead to markedly different strategic insights compared to commonly used measures such as ROA and cumulative abnormal returns. For instance, the widely cited finding of a U‐shaped relation between acquisition experience and performance turns out to be largely driven by short‐term stock price movements and vanishes when using 10‐year LIVA. Managerial summary Managers have a large number of performance measures at their disposal, such as return on assets, total shareholder returns, and earnings before interest and taxes. However, these short‐term measures do not capture well whether a firm creates long‐term shareholder value, which is one of the primary objectives for most firms. Addressing that gap, this article introduces a new measure called long‐term investor value appropriation (LIVA). LIVA can be constructed using publicly available stock market data and it can help managers to better analyze historical long‐term performance.

Research Summary We investigate how hedge fund activism affects firms' financial and social performance. So far, research has examined either the impact of hedge fund activism on firms' short‐term financial performance, or how other types of shareholder activism affect firms' social performance. Crossing these boundaries with data on 1,324 activist hedge fund campaigns between 2000 and 2016, we find a clear trade‐off associated with hedge fund activism: benefits are shareholder‐centric and short‐lived, reflected in immediate increases in market value and profitability; however, these increases come at a mid‐ to long‐term cost to other stakeholders, captured by decreases in operating cash flow, investment spending, and social performance. We discuss our findings from a multi‐stakeholder perspective to move beyond a polarizing debate about the merits of hedge fund activism. Managerial Summary With hedge fund activism on the rise, determining the consequences of equity ownership by activist hedge funds on target companies' short‐term and long‐term financial and social performance takes on central importance. In this study, we find hedge fund campaigns are associated with three broad sets of outcomes for targeted companies: (a) an immediate but short‐lived increase in market value and profitability, and an immediate and long‐lived decline in operating cash flow; (b) decreases in number of employees, operating expenses, R&D spending, and capital expenditures; and (c) the suppression of corporate social performance. By capturing the range of positive and negative effects on target companies, our study presents the competing implications of hedge fund activism on business and society.

Research Summary Activist hedge funds are the new breed of corporate raiders, yet we know little about how the management and board of target firms respond to activist investors. Using a behavioral perspective, we propose that an activist's reputation for being confrontational conveys information to the target company as to what they are likely to encounter in an activist campaign. To avoid the potential adverse consequences of engaging in such a contest, we propose and find that target companies are more likely to settle with an activist known for being confrontational. Our study contributes to corporate governance research by providing insight into the importance of the social context surrounding activist campaigns and the role of reputation in influencing how companies respond to activist investors. Managerial Summary Given that hedge fund activism is having a major impact on firm's strategic and financial decision‐making, it is important to understand how these activist investors influence companies. An activist campaign is a highly disruptive event leading to considerable ambiguity and uncertainty as to what is likely to transpire. Given this information void, our study finds that the board and management respond based on the reputation of the activist investor that has taken a stake in the company. That activist investors with a reputation for being hostile are more successful may be a defensive response on the part of management in order to avoid the potential adverse consequences of a hostile campaign. This has implications for corporate governance and the fiduciary duty of the board.

Research summary To what extent do firms rely on basic science in their R&D efforts? Several scholars have sought to answer this and related questions, but progress has been impeded by the difficulty of matching unstructured references in patents to published papers. We introduce an open‐access dataset of references from the front pages of patents granted worldwide to scientific papers published since 1800. Each patent‐paper linkage is assigned a confidence score, which is characterized in a random sample by false negatives versus false positives. All matches are available for download at http://relianceonscience.org . We outline several avenues for strategy research enabled by these new data. Managerial summary To what extent do firms rely on basic science in their R&D efforts? Several scholars have sought to answer this and related questions, but progress has been impeded by the difficulty of matching unstructured references in patents to published papers. We introduce an open‐access dataset of references from the front pages of patents granted worldwide to scientific papers published since 1800. Each patent‐paper linkage is assigned a confidence score, and we check a random sample of these confidence scores by hand in order to estimate both coverage (i.e., of the matches we should have found, what percentage did we find) and accuracy (i.e., of the matches we found, what percentage are correct). We outline several avenues for strategy research enabled by these new data.

Research summary Although prior research highlights the organizational and cognitive challenges associated with achieving organizational ambidexterity, there has been comparatively less empirical attention focused on the cognitive characteristics that may differentiate top managers of firms that achieve ambidexterity. We build on emerging research and identify cognitive flexibility as a cognitive characteristic with particular relevance to the challenges associated with ambidexterity and suggest that it works through chief executive officers (CEOs)' information search activities. We find that cognitively flexible CEOs are more likely to engage in effortful and persistent information search and rely to a greater extent on outside sources of information. In turn, effortful and persistent information search activities are associated with higher levels of organizational ambidexterity. Our study pushes forward the research agenda on cognitive micro‐foundations of firm capabilities. Managerial summary Ambidextrous organizations, or organizations that have the capability to pursue both incremental and discontinuous innovation, enjoy more sustainable competitive advantages. However, the achievement of organizational ambidexterity poses unique demands for top managers, including cognitive challenges. To help managers better understand these challenges, this study focuses attention on the role of the CEO in the achievement of organizational ambidexterity, and on CEO cognitive flexibility as a potential influencing factor. Our results suggest that CEO cognitive flexibility may influence organizational ambidexterity indirectly through its effect on CEO information search activities, in particular where and how intensely CEOs search for information. Our study reinforces the importance of human factors in the executive office for the development of firm dynamic capabilities, and the implementation of an innovation‐based strategy.