Founder retention as CEO at IPO in emerging economies: The role of private equity owners and national institutions

Abstract

We integrate the institutional perspective with research on the governance role of private equity firms in an investigation of Founder-CEO successions in Initial Public Offerings (IPOs) in emerging markets. Using a unique, hand-collected and comprehensive sample of 191 firms having undertaken IPOs in 21 markets across the African continent between January 2000 and August 2016, we apply instrumental variable (IV) Probit methodology and find that higher levels of private equity ownership are positively associated with the probability of the founder's retention as CEO, especially in the context of low-quality formal institutions. Further, in societies with high tribalism, higher private equity ownership is associated with an increased likelihood of founder retention. Voids in the institutional architecture underscore the importance of the founder as a key organizational resource for the firm and a source of institutionalized legitimacy, which in turn confers on the firm an ability to access required resources.

The founder chief executive officer: A review of current insights and directions for future research

“…In contexts where formalized institutions are less common, the role of the firm's leader becomes more salient. For instance, when institutional voids exist, the founder CEO is a key organizational resource who acts as a signal of legitimacy to external and internal stakeholders (Hearn & Filatotchev, 2019). Informal institutions—based on trust, respect, loyalty, and interpersonal dynamics—can compensate for the lack of formalized institutional support in some instances.…”

The influence of regional institutional setting on the performance of innovative entrepreneurship

“…Scholars provided rich evidence that institutional voids prevent the efficient functioning of markets and increases transaction cost for market participants (Khanna and Palepu, 1997;Leff, 1978;Stephan et al, 2015;Turker and Vural, 2017;Su et al, 2019;Brandl et al, 2018;Garrone et al, 2019). Previous research recognised three broad types of the institutional void, namely, institutional voids that hinder market functioning, development and participation (Mair and Marti, 2009;Hearn and Filatotchev, 2019;Tashman et al, 2018). Using private property as one of the most important formal institutions, Puffer et al (2010) provided evidence that formal institutions that are supportive of entrepreneurship in developed economies are sorely inadequate in transition economies; thus, new ventures turn to informal institutional resource, such as trust or blat in Russia and guanxi in China.…”

Is current institutional quality linked to legal origins and disease endowments? Evidence from Africa

“…5 A growing body of work in the area of international business and finance examines the impact of legal origins and institutional quality on a wide range of outcomes, both at country and firm level. Hearn and Filatotchev (2019), for example, use legal origins alongside proxies of formal and informal institutional quality to study the effect of private equity ownership on founder's retention as CEO in Initial Public Offerings (IPOs) in emerging markets. Hearn et al (2018) also account for institutional quality and legal origins while conducting an empirical work on post-IPO retained ownership of private equity in business group constituent firms as compared to unaffiliated companies.…”