Table 3 includes the results of the analysis for survival, and as can be seen, the overall model is significant, and the only significant terms in the full model are stock for all employees and the interaction of employee stock and risk. The interaction was interpreted by plotting the probability of survival for firms in the low, medium, and high risk categories (developed by dividing the risk variable into three categories). Figure 1 shows the results of that analysis, and as can be seen, firms with low and medium risk benefit by having stock plans for all employees, however, firms with high risk do not seem to receive a gain or loss from stock programs for all employees. (See Table 3.)
Table 4 includes the results of the regression analyses for stock price for years 1990 through 1993. Two interaction terms are significant for year end 1990, and those are executive team and risk and CEO and risk. The data were plotted by creating two categories of risk (high and low), and the results are shown in Figure 2. The results indicate that both high and low risk firms obtain higher stock prices when the CEO and executive team have lower levels of firm ownership. The benefit is greater for CEO ownership.
The primary hypothesis of this study is that proliferation of ownership throughout the organization has a positive effect on performance of entrepreneurial firms. The results of the logistic regression support that hypothesis in that the only variables significantly predicting survival are those related to employee ownership for all employees. The hypothesis that all employee ownership should be most effective for high risk firms, however, was not supported. In fact, the results of the interaction effect seem to indicate that low and medium risk firms benefit most from utilizing ownership throughout the business.
Perhaps the higher risk firms cannot really afford everyone in the organization taking risks. In addition, employees in these companies might not view ownership as an incentive because the likelihood of their ownership being worth anything might be perceived as very low. Agency theory claims that agents are naturally risk averse, and it might be that the use of ownership in high risk firms places too much risk with the employees, thus resulting in the type of risk averse behavior that is not supportive of organizational goals.
The results of the analyses with stock price paint a very different picture, where stock for all employees is not significant, but CEO ownership and top team ownership are both significant for stock price in 1990. The interaction effects are also significant, and the results seem to indicate that regardless of risk level faced by the firm, companies are better off with CEOs and top management teams that have lower levels of ownership in the firm. These results might be the reaction of investors who see CEO ownership, particularly, as a potential problem for assuring firm growth. It might also be the result of these owners making decisions that are best for long-term business performance while risking short-term quarterly returns, which are rewarded by the stock market. The findings might also reflect the fact that high CEO and management team ownership leave less stock for others in the company. If this interpretation is correct, it supports the hypothesis that ownership proliferation, rather than ownership concentration, is important for firm performance.
The longer-term stock results only show an effect for CEO ownership in 1991; after that point in time, there is no effect for CEO or top management team ownership. Of course, the data for later years become difficult to interpret because sample size begins to decrease (companies begin to "die"), and the data utilized as the independent variables represent the company at the time of the IPO. The present analysis includes no information on change that took place between 1988 and the subsequent years.
There are, of course, several limitations that should be considered when interpreting the findings. The sample of IPO firms might not be representative of all firms at this stage. In fact, it could be argued that this particular sample is made up of companies with greater chances of survival as the 1988 IPO companies were somewhat affected by the stock market crash of 1987 (investors being more cautious). There is also a possibility of positive bias in the reporting of data in the prospectus. In addition, the coding process, which has been called "cruel and unusual punishment" (Marino et. al., 1989), could also be prone to errors in interpretation even though measures were taken to minimize these problems.
Theres a saying that "too many chiefs and not enough indians" is bad for business; the results of this research suggest that many chiefs, at least many internal owners, is good for business in entrepreneurial firms. Additional research that further evaluates the effect of proliferation of ownership on firm performance in entrepreneurial firms and the process by which this phenomenon helps or deters organizational growth should be pursued.
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Last Updated 4/27/97 by Germaine Wong
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