Effect of Managerial Compensation and Ability on the Relationship between Business Strategy and Firm Value: For Small and Medium-Sized Enterprises (SMEs)

Abstract

This study examines the effect of managerial ability and compensation on the relationship between business strategy and firm value for small and medium-sized enterprises (SMEs). Managers determine, plan, implement, and maintain a firm’s business strategy. Therefore, the characteristics of a manager are an important factor in the selection and success of a business strategy. We believe that managerial abilities are important factors in determining that success. If the managerial ability is good, the manager is more likely to implement a strategy suitable for the firm, significantly affecting the firm’s value. Managers are also more motivated to work harder if their compensation level is high. Therefore, the manager will make efforts to successfully lead the firm’s business strategy. In small and medium-sized enterprises (SMEs), the role of managers is important for carrying out strategies due to the lack of internal resources and difficulties in external funding. Therefore, we examine whether managerial ability and compensation affect the relationship between business strategy and firm value for SMEs. The analysis period is from 2011 to 2017, and the analysis was based on 1615 (firm/year), due to some of the listed SMEs being non-financial businesses with a December settlement of accounts. As a result of the analysis, managerial compensation and ability demonstrated different effects depending on the type of strategy, in terms of the relationship between business strategy and firm value. We suggest that managerial ability and compensation affect the value of a firm and moderate the relationship between business strategy and firm value.

The Impact of Business Strategy between Corporate Ownership and Investment Efficiency

“…The results in Table 4, Models 2 and 3, report that the prospector strategy interaction term with managerial ownership has a positive coefficient of 0.013, a t-value of 2.087, and is significant at the 5% level. The finding is consistent with (Park & Byun, 2022). The prospector strategy interaction with concentrated ownership has a positive coefficient of 0.010, a t-value of 2.764, and is significant at the 1% level on investment efficiency.…”

“…Contrary to above, Family owned businesses are more prefer to prospector when it comes to various control arrangements (Chuang et al, 2014). It is also found that in the presence of prospector and defender strategies, managerial owned firm exhibit cost stickiness behaviour in investment (Park & Byun, 2022;Restuti et al, 2022) . However, the empirical evidence on the interactional impact of prospector and defender strategies on investment is very limited.…”

“…The business strategy of a company has a significant impact on the organizational structure, resource allocation, long-term objectives, and vision of the company (Park & Byun, 2022). Miles and Snow business typologies are prominent for their practical implications, which include prospectors and defenders as well (C. Lin et al, 2014).…”

“…Managers who are paid more creatively in cash or shares are more likely to work harder to effectively lead the company's business plan (Park & Byun, 2022). Restuti et al (2022) argue with cost skinless behavior of managers, prospector strategy execution causes managers to maintain cost stickiness despite declining revenues, hold back resources for innovation, invest in new profitable ventures at a loss, and ultimately lead excessive or ineffective investment.…”

Entrepreneurial Competencies and Success of SMEs in Changwon, South Korea

“…This enables them to meet the needs of local consumers and compete effectively. Changwon's SME owners demonstrate effective decision-making skills (Park & Byun, 2022). They possess the ability to analyze complex situations, evaluate alternatives, and make informed choices, which is crucial for navigating the dynamic business environment.…”