Entrepreneurial orientation and firm value: Does managerial discretion play a role?

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Considerable interest exists in understanding the extent to which entrepreneurial orientation (EO) generates value in the capital markets. Drawing on insights from the discretion literature, we focus on three distinct loci of managerial discretion—organizational, industrial, and national—to examine their contingent influence on the EO-value relation. Predictions were tested on a panel dataset of firms from five advanced economies listed in the Forbes 2000 ranking. Data were analyzed using ordinary least squares to reveal that the contribution of EO to firm valuation is statistically significant and economically meaningful when organizational and/or industrial discretion are high: each unit increase in EO boosts value generation by 7.4 % when organizational discretion is high and 5.6 % when industrial discretion is high. EO therefore creates value for the firm in capital markets when the appropriate discretionary conditions are present. These findings suggest that the relation between EO and capital market value is more complex than generally believed.

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  1. 1.

    There are two different ways in which EO has been conceived in the literature: the gestalt approach (Covin and Slevin 1989; Miller 1983) and the disaggregated approach (Lumpkin and Dess 1996). Wales et al. (2013) found that 123 of the 150 EO articles published from 1976 to 2010 adopted the gestalt construct, so that it is now the dominant paradigm in the field (Anderson and Eshima 2013). Covin et al. (2006) explain that though the gestalt and disaggregated conceptualizations share the same name (‘EO’), they are actually two very different constructs. Our focus in this study is on the gestalt EO conception.

  2. 2.

    Hambrick and Finkelstein (1987) developed the managerial discretion construct that has since received much attention in the management literature, as well as in accounting (Adams and Hossain 1998), marketing (Boyd et al. 2010) and finance (Adams et al. 2005). However, the broad notion of discretion already existed in various literatures such as economics (Williamson 1973) and sociology (Lieberson and O’Connor 1972) before Hambrick and colleagues introduced it to management researchers.

  3. 3.

    Since 2004, every year Forbes ranks the 2000 largest publicly listed companies around the world based on a composite score reflecting the sum of four equally weighted metrics: revenues, profits, assets, and market cap. The ranking is the result of a multi-step procedure: (1) Four separate lists are created for the 2000 biggest companies in each of the metrics. Only companies that make it to at least one of the four lists merits further consideration; (2) Each company is assigned a separate score for each of the four metrics based on its ranking in that list. Companies that rank below the minimum cutoff for the year for a metric receive a score of zero on that metric; (3) Scores for the four metrics are added up for each company to obtain a composite score. The highest composite score gets the highest rank.

  4. 4.

    Our sample does not include data for 2009 because of two reasons. First, the 2010 Forbes ranking is based on 2009 firm data. Second, 2009 was the year of ‘Sudden Stop’ (Mendoza 2010) when worldwide GDP growth fell from 3.76 % in 2008 to 0.07 % in 2009 (3.9 % to −0.04 % respectively, if one does not consider Zimbabwe and the West Bank).

  5. 5.

    According to Wangrow et al’s (2015) recent review of the empirical discretion literature, 43 published articles have empirically measured discretion since the publication of Hambrick and Finkelstein (1987). We found 7 other empirical journal articles using discretion during the period 1987-2015 (August), so the total number of published empirical discretion studies comes to 50. Of these, we found that 14 studies used discretion at the organizational level, 20 at industrial level, and 5 at the national level (3 are at individual level, 1 mixes organizational and industrial levels, 1 mixes industrial and organizational levels, and 7 could not be coded for lack of relevant information). Thus, we successfully identified the measurement for discretion in 43 articles. Based on this analysis, we identified measures for organizational, industrial, and national discretion that could be considered most reliable and reputable, depending on where they were published, by whom, and how much impact they have had on the field.

  6. 6.

    Graffin et al. (2011) actually used five indicators: the four we used here plus average annual advertising intensity (advertising/sales). Unfortunately, advertising expenses was not available for the non-American firms in our sample. Using data for American firms only, we calculated the correlation between organizational discretion with and without advertising intensity, and found it to be 0.91 (p < 0.01), which suggests that the two overlap almost completely.

  7. 7.

    Results are robust to using quartiles instead of tertile in conceiving high versus low discretion. We thank an anonymous reviewer for this suggestion.


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Our sincerest gratitude to the editor Wolfgang Kursten and the two anonymous reviewers who were tremendously constructive and helpful during the review process. We also thank Nachiket Bhawe, Alka Gupta, and Erik Markin for suggestions and comments on prior drafts of this paper. Early versions of this research were presented at Kent State University, Indian Institute of Management at Ahmedabad, and University of Texas at El Paso, where it received much useful feedback. Of course, all errors and omissions remain our own.

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Correspondence to Vishal Gupta.

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Gupta, V., Mortal, S.C. & Yang, T. Entrepreneurial orientation and firm value: Does managerial discretion play a role?. Rev Manag Sci 12, 1–26 (2018) doi:10.1007/s11846-016-0210-3

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  • Entrepreneurial orientation
  • Managerial discretion
  • Firm value

JEL Classification

  • C12
  • L25
  • L26
  • M10