We join research in entrepreneurship and corporate fi nance to investigate fi nancial constraints on investments by IPO INTRODUCTIONFirms' competitiveness and growth prospects turn on their abilities to seek out business opportunities, access resources, and make strategic investments (e.g., Ghemawat, 1991;Hitt et al., 2001). Information plays a critical role in shaping fi rm investment and its returns since fi rms holding privileged information are able to pursue profi table business opportunities and obtain competitive advantages when imperfections exist in factor markets (e.g., Kirzner, 1973;Barney, 1986). If markets for obtaining fi nancial resources are assumed to be perfect, fi rms can theoretically make an investment based solely on its marginal profi tability (e.g., Modigliani and Miller, 1958). However, given imperfections that arise in fi nancial and factor markets, important and interesting connections surface between fi rms' investment and fi nancial decisions. Firms can then confront trade-offs between the competitive advantages certain investments might create and the fi nancing costs of pursuing opportunities. The result can be that fi nancial constraints can become more serious and restrict fi rms' ability to make certain investments.In previous corporate fi nance research, the term fi nancial constraints has been used to refer to the problem whereby a fi rm foregoes investments because it lacks access to external fi nancial resources and does not have internal funds to pursue a profi table opportunity (e.g., Stein, 2003). As will be discussed later, such constraints are a consequence of information asymmetries in capital markets (e.g., Myers and Majluf, 1984). In a theoretical argument analogous to Akerlof's (1970) opportunities due to asymmetric information. The fi rm will, therefore, pass up certain investment opportunities that are costly to fi nance externally when the fi rm lacks internal cash fl ows from operations. Empirical studies testing the implications of analytical models of fi rm investment have produced evidence that fi rms' capital expenditures are indeed sensitive to their operating cash fl ows, after accounting for investment opportunities (e.g., Fazzari, Hubbard, and Petersen, 1988). This research on the antecedents of fi rm investment also has important parallels with studies by strategy and management scholars on the important role fi nancial slack plays in determining fi rm outcomes such as innovation (e.g., Kim, Kim, and Lee, 2008) and performance (e.g., Bromiley, 1991). A separate, but also substantial, stream of research in entrepreneurship has suggested that fi nancial constraints will be particularly problematic for some types of fi rms. As one example, Baker and Nelson (2005) described possible approaches small fi rms in resource-poor environments might consider, including bricolage-making do with means and resources at hand (Lévi-Strauss, 1967)-or resource-seeking behaviors, such as attempting to raise capital (e.g., Berger and Udell, 1994). As another example, new...
How CEOs affect strategy and performance is important to strategic management research. We show that sophisticated statistical analysis alone is problematic for establishing the magnitude and causes of CEO impact on performance. We discuss three problem areas that substantially distort the measurement and sources of a CEO performance effect: (1) the nature of performance time series, (2) confounding and (3) the discovery of many interactions associated with the CEO performance effect. We show that the aggregate of empirical research implies complex interdependency as the driver of the CEO performance effect. This suggests a ‘fit’ model requiring new research approaches. Copyright © 2011 John Wiley & Sons, Ltd.
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