Executive and Corporate Correlates of Financial Performance in Smaller Firms

TLDR: In this paper, Kane et al. examined the relationship between financial criteria and characteristics of the firm and the chief executive officer (CEO) and concluded that the background of the person in charge can have a major impact on company performance, because that person is typically the locus of decision-making.

Abstract: EXECUTIVE AND CORPORATE CORRELATES OF FINANCIAL PERFORMANCE IN SMALLER FIRMS* The research discussed in this article takes a first step toward isolating factors associated with high performance in smaller businesses. The study examines relationships between financial criteria and characteristics of the firm and the chief executive officer (CEO). * This research was supported in part by the Research and Scholarship Development Fund and the College of Business Administration of Northeastern University. The authors thank Barbara Kane, Pamela Kupchik, and June Remington for their research assistance, and Lewis Shattuck, Executive Director of the Smaller Business Association of New England. It is often noted that small business start-ups have high mortality rates in their initial stages. Efforts have been made to define features related to firm dissolution in the early stages of business.1 There is little empirical evidence, however, on the dynamics of performance in the mature years. 1 See Arnold Cooper, "The Entrepreneurship-Small Business Interface' in Calvin Kent, Donald Sexton, and Karl Vesper, eds., Encyclopedia of Entrepreneurship (Englewood Cliffs, New Jersey: Prentice-Hall, 1982), pp. 193-205. The Smaller Business Association of New England (SBANE) is a major association of predominantly mature firms. SBANE seeks to advance the welfare of smaller businesses in the social and political arena. This organization was chosen as a source of data for the present study of executive and corporate correlates of financial performance in mature small- to mid-sized firms. THE SAMPLE SBANE provided a list of its 2,300 members. One thousand companies were randomly selected from this list. In the fall of 1981, the CEOs of these companies were mailed a questionnaire which included a letter of endorsement from SBANE's executive director. Respondents were assured of confidentiality. Completed returns numbered 471, a 47 percent response rate. These responses provided the data base for the analysis that follows. VARIABLES SELECTED FOR STUDY The survey questions fall into four categories: characteristics of the firm, background characteristics of the CEO, psychological profile of the CEO, and financial performance measures. Characteristics of the Firm The following characteristics of the firm were solicited: age, number of employees, total revenues in the most recent fiscal year, and the company's debt-to-equity ratio. These variables represent longevity, size, and leverage. Characteristics of the CEO Background characteristics of the CEO were also obtained. In a smaller company, the background of the person in charge can have a major impact on company performance, because that person is typically the locus of decision-making. Founder status was ascertained, since founders are likely to manifest extreme commitment to the venture's success. CEO time in position and time with the company are indicators of experience. Survey questions also asked about CEO's age, sex, education, and marital status. Psychological Profile Psychological assessment of the CEO concentrated on Type A behavior. The Type A construct is intended to measure the degree to which a respondent displays "extremes of competitiveness, striving for achievement, aggressiveness, haste, impatience, restlessness, hyperalertness . . . and fellings of being under the pressure of time and under the challenge of responsibility.'2 2 C. D. Jenkins, "The Coronary-Prone Personality, in W. D. Gentry and R. B. Williams, Jr., eds., Psychological Aspects of Myocardial Infaretion and Coronary Care (St. Louis: Mosby, 1975). The most widely used pencil-and-paper test, the Jenkins Activity Survey (JAS), was selected as the Type A scale for use in this study.3 This 52-item test measures four dimensions: overall Type A tendencies, speed and impatience (Factor S), job involvement (Factor J), and hard-driving competitiveness (Factor H). …