Founder teams and firm value in young public firms: An analysis of the moderating effect of founders' ownership power and team size

• Published date: 01 March 2022
• Author: Alexandra Dawson,Imants Paeglis,Nilanjan Basu
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/corg.12400

ORIGINAL ARTICLE

Founder teams and firm value in young public firms:

An analysis of the moderating effect of founders' ownership

power and team size

Alexandra Dawson

1

| Imants Paeglis

2

| Nilanjan Basu

2

1

Department of Management, Concordia

University, Montreal, Quebec, Canada

2

Department of Finance, Concordia University,

Montreal, Quebec, Canada

Correspondence

Alexandra Dawson, Department of

Management, Concordia University, 1455 Guy

St., Montreal H3H 0A1, Quebec, Canada.

Email: alexandra.dawson@concordia.ca

Funding information

Institut de Finance Mathematique de

Montreal; Desjardins Centre for Innovation in

Business Finance; Social Sciences and

Humanities Research Council of Canada

Abstract

Research Question/Issue: Building on prior work on the relationship between foun-

der ownership and firm value in young public firms, we test the moderating influence

of the presence of cofounders, distinguishing between dyads and teams of three or

more founders.

Research Findings/Insights: We test our hypotheses on a unique sample of 7162

observations from 959 US firms that have been public for less than 20 years and

retained their founders. We show that the presence of one or more cofounders

has distinct moderating effects on the relationship between main founder owner-

ship and firm value, depending on the number and relative ownership power of

the founders. Firm value benefits the most when there is ownership power sym-

metry in dyads of founders and ownership power asymmetry in teams of three or

more founders.

Theoretical/Academic Implications: We make two contributions to the corporate

governance literature. First, we take a more nuanced look at founders and their own-

ership power in young public firms and show that the presence of cofounders has an

effect on firm value. Second, we show that this effect depends on the number of

founders and on whether there is ownership power symmetry or asymmetry among

founders. Overall, our study supports the view that founders continue to matter even

after IPO.

Practitioner/Policy Implications: By shedding light on the effect of founders

retaining ownership power on firm value after IPO, our findings may guide founders

in their decisions to exit their business fully or partially and investors in their

decisions whether to invest in public firms that retain their founders.

KEYWORDS

corporate governance, founder, cofounder, ownership power, firm value

1|INTRODUCTION

Corporate governance literature has traditionally focused on large,

mature, publicly listed firms (Garg, 2020). However, these represent a

small proportion of all listed firms and are often older. For example,

the average age of the typical S&P 500 firm is 67.4 years (Basu

et al., 2015). Because of this, concerns have been raised that relying

on large, established public firms may provide a narrow perspective

and limit the generalizability of corporate governance literature

(Filatotchev et al., 2006; Walters et al., 2010). In turn, this has led

Received: 29 May 2020 Revised: 16 July 2021 Accepted: 23 July 2021

DOI: 10.1111/corg.12400

232 © 2021 John Wiley & Sons Ltd Corp Govern Int Rev. 2022;30:232–251.wileyonlinelibrary.com/journal/corg

scholars to call for greater attention on young public firms as an area

that “is ripe for further study”(Walters et al., 2010, p. 572). These

firms are “generally smaller, younger, and less structurally complex

than more established public companies”(Lungeanu & Zajac, 2019,

p. 491) and, as such, represent a setting in which traditional agency

assumptions may be less applicable than other theoretical frameworks

more prevalent in the stewardship or power literature (Federo

et al., 2020; Walters et al., 2010).

The growing stream of corporate governance studies on young

public firms has to date mostly focused on the relationship between

the board of directors and firm strategy and performance, considering

for example board turnover (Garg et al., 2018), board leadership struc-

ture (Garg et al., 2019), and directors' expertise (Lungeanu &

Zajac, 2019). However, there has been limited attention paid to

another key focus of the corporate governance literature that

addresses “how firm owners influence firm-level outcomes”(Boss

et al., 2013, p. 246) and specifically the role that founders may con-

tinue to play in young public firms. This is surprising seeing that one

third to half of all ventures go through an initial public offering (hence-

forth IPO) with founders in CEO positions (Jain & Tabak, 2008) and

the presence of such founders limits the chances of post-IPO change

of control (Gao & Jain, 2012). This in turn implies that founders may

often remain involved in the firm beyond its IPO. Furthermore,

founders, who remain involved in their firm after it goes public,

continue to have a powerful influence over it (Garg et al., 2018) and

see such influence continue over time (Nelson, 2003).

One such source of power, on which our study focuses, is owner-

ship power

1

that arises from the equity founders hold in the business

(Finkelstein, 1992; Zhang et al., 2011). This type of power gives foun-

ders influence in an ownership capacity over the firm both formally,

via equity ownership, and informally, via the status as founder

retaining equity in the firm and maintaining power through continued

and long-term interactions with board members and other key stake-

holders (Daily & Johnson, 1997; Finkelstein, 1992). A recent study

addressing this gap in the literature found a convex relationship

between founder ownership and firm value in young public firms. In

particular, the authors found that firm value was higher when founder

ownership is high and lower when founder ownership is at intermedi-

ate levels, due to stewardship and agency effects prevailing,

respectively (Dawson et al., 2018).

Another limitation of prior research is that studies on founders

and firm value have paid little attention to the presence of

cofounders. Although we often read about the entrepreneur, their

characteristics, how they identify opportunities, and so on, in reality,

“[t]he ‘entrepreneur’is more likely to be plural, rather than singular.”

(Gartner et al., 1994, p. 6). In fact, over half of new ventures are

started by two or more people (Davidsson & Honig, 2003; Klotz

et al., 2014), as are an even larger proportion of high-performing

ventures (Beckman, 2006; Chowdhury, 2005; Steffens et al., 2012).

Yet, prior research on the largest public firms has often lumped

together so-called founder firms without distinguishing whether they

have one or more founders (e.g., Cannella et al., 2015; Jaskiewicz

et al., 2017; Miller, Le-Breton Miller, & Lester, 2011). This is an

important oversight because, far from being “lone heroes,”firms are

often led by entrepreneurial teams who start a business together and

have significant financial interest in the venture (Cooney, 2005; Kamm

et al., 1990). The sustained presence of such teams may affect the

firm's performance differently and even beyond IPO than the

presence of single founders (Cooney, 2005; Kamm et al., 1990;

Lechler, 2001).

In this paper, we contribute to corporate governance literature by

addressing the above limitations and taking research on the relation-

ship between founders and firm value in young public firms one step

further. We begin by defining the main founder as the founder with

the largest equity stake. We then ask the following research ques-

tions: What is the moderating effect of the presence of cofounders on

the relationship between the main founder's ownership and firm value

in young public firms? And how does it vary depending on founder

team size? To address these questions, we draw on the literature on

ownership power (Finkelstein, 1992) and power balance in dyads and

small groups (Friedkin & Johnsen, 2011; Mannix, 1993). Based on this

literature, we hypothesize that the presence of cofounders will mod-

erate such relationship differently depending on whether there are

two cofounders (founder dyad) or more than two cofounders (founder

team) and on whether there is ownership power balance or imbalance

between or among cofounders, respectively. To test our hypotheses,

we created and analyzed a unique, hand-collected sample of 959 US

public founder firms, which we followed from the time of their IPO

for up to 19 years thereafter, as long as the founder remained with

the firm.

We make two key contributions to the corporate governance lit-

erature. First, our findings extend research on the relationship

between founder presence and firm value by filling a gap in the litera-

ture that has studied the effect of founder presence on firm value at

various stages of a firm's lifecycle—that is, at startup (e.g., Jayaraman

et al., 2000), at IPO (e.g., Bruton et al., 2010; Wasserman, 2003) and

in larger and older public firms (e.g., S&P 500 in Anderson &

Reeb, 2003; or Fortune 500 in Adams et al., 2009; and Villalonga &

Amit, 2006)—but has paid less attention to young public firms

(e.g., Dawson et al., 2018), where founders are much more present

and active compared to the S&P 500 or Fortune 500 firms. As such,

our study supports the idea that founder teams matter not only at

startup but even after the firm goes public (Abebe et al., 2020;

Nelson, 2003). At the same time, by contributing to the conversation

on young public firms, we answer calls in the corporate governance

literature to move beyond its predominant focus on large, mature

public firms (Filatotchev et al., 2006; Garg, 2020), which limits gener-

alizability of findings to earlier stage firms in which founders tend to

be more powerful influences (Garg et al., 2018; Lungeanu &

Zajac, 2019). Second, drawing from the literature on ownership power

(Emerson, 1962; Finkelstein, 1992; Mannix, 1993) and on power bal-

ance in dyads and small groups (Friedkin & Johnsen, 2011;

Mannix, 1993), we show that the relationship between the ownership

stake held by the main founder and firm value is moderated by the

presence of cofounders, and that this moderating effect depends on

the size of the founding team and on whether there is ownership

DAWSON ET AL.233