Entrepreneurial orientation, CEO power and firm performance: an upper echelons theory perspective

Abstract

PurposeAdopting insights from the upper echelons theory, this study aims to investigate the relationship between entrepreneurial orientation (EO) and firm performance under the contingent influence of chief executive officer (CEO) power.Design/methodology/approachData were collected from a sample of large publicly-traded Indian software firms using the Prowess Database of Center for Monitoring Indian Economy (CMIE). Panel data regression analysis was used to test the study's hypotheses.FindingsThe results indicate that EO has an inverted U-shaped relation with firm performance. Strong support is also found for a negative moderating influence of CEO power on the inverted U-shaped relationship between EO and firm financial performance, suggesting that powerful CEOs eventually harm entrepreneurial firms.Practical implicationsThe study encourages firms to have entrepreneurship orientation, but at a moderate level, to get the maximum benefit of EO. The study also explains to managers to what extent CEO power drives EO.Originality/valueThe study contributes to the intersection of corporate entrepreneurship and upper echelons theory. The study shows that CEO power negatively affects the EO and firm's performance relationship. This study holds important insights for managers of entrepreneurial firms, especially in international contexts and emerging markets.

Celebrity CEOs, digital transformation and firm performance in China: the moderating role of controlling shareholders and institutional investors

“…Moreover, there is no consensus in the academic community on whether celebrity CEOs have an inhibitory or promotional effect on firm performance. Some scholars argue that celebrity CEOs can enhance company performance and bring about excess returns ( Nguyen, 2015 ; Bao et al, 2023 ), while others suggest that celebrity CEOs may engage in rent-seeking behavior or conceal negative information about the company, leading to a decline in firm performance ( Malmendier and Tate, 2009 ; Cho et al, 2016 ; Saiyed et al, 2023 ).…”

“…To maintain their social status and personal benefits, celebrity CEOs may engage in self-interest or even unethical behavior to continuously improve firm performance or attract social attention, which can have negative implications for the firm. These negative impacts include rent-seeking behavior, hiding negative information about the firm, and ultimately leading to a decline in firm performance ( Malmendier and Tate, 2009 ; Cho et al, 2016 ; Saiyed et al, 2023 ). Other studies indicate that celebrity CEOs have only a short-term promotional effect on company performance and, in the long run, may cause negative market reactions ( Wade et al, 2006 ).…”

CEO power and corporate strategies: a review of the literature

“…The most widely referred theory about CEO power literature is agency theory. Based on this theory, studies have found that CEO power leads to lower firm value and performance (Bebchuk et al 2011;Veprauskaitė and Adams 2013;Duru et al 2016); needs increased monitoring by outside directors (Combs et al 2007), could lead to entrenchment (Finkelstein and D'Aveni 1994); lower leverage (Jiraporn et al 2012;Chintrakarn et al 2014); poor credit rating and higher bond yields (Liu and Jiraporn 2010); lower bank risk-taking (Pathan 2009); moderates the positive relation between board strength and firm strategy (Tuwey and Tarus 2016); lower dividend payout (Chintrakarn et al 2018); use less equitybased compensation that weakens board monitoring (Ryan and Wiggins;2004); lower CSR exposure and alleviates the positive effect of board capital on CSR exposure (Muttakin et al 2018); reduces the effect of ESG disclosure on market-based risk than accountingbased risk (Menla ; positively influences earnings management (Le et al 2022); lower R&D investment (Naaman and Sun 2022); lower entrepreneurial orientation (Saiyed et al 2023); lower idiosyncratic volatility (Tan and Liu 2016); positively related Director reputation theory: directors pursue to create and uphold their reputation, thereby improving their human capital to enhance their chances of getting appointments in other boards Fama (1980); Fama and Jensen (1983) Zajac and Westphal (1996a, b); Zajac and Westphal (1996b) to CSR (Pucheta-Martínez and Gallego-Álvarez 2021); lower corporate sexual orientation policies (Brodmann et al 2021).…”

CEO intellectual capital, dual innovation and sustainable growth of small and medium-sized enterprises: evidence from China

“…They found that CEO emotional stability and agreeableness are positively related to cost efficiency and profitability, whilst CEO conscientiousness is negatively related to them. Based on the upper echelons theory, Saiyed et al (2023) explore the effects of entrepreneurial orientation and CEO power on firm performance. Their results suggest that CEO power plays a negative moderating role on the inverted U-shaped relationship between entrepreneurial orientation and financial performance, indicating that powerful CEOs are likely to harm entrepreneurial enterprises.…”

“…They found that CEO emotional stability and agreeableness are positively related to cost efficiency and profitability, whilst CEO conscientiousness is negatively related to them. Based on the upper echelons theory, Saiyed et al. (2023) explore the effects of entrepreneurial orientation and CEO power on firm performance.…”