Creating Strategic Advantage through EntrepreneurialGovernance in New Ventures

An important literature has made a fundamental link between corporate governanceand corporate strategy. According to agency theory, assigning managersstock options aligns their interests with the interests of the owners of the firm.This paper suggests that this may not apply in the context of new ventures.Instead, an alternative perspective offered in this paper suggests that if contractsare incomplete, then managerial stock ownership not only provides amechanism to align managerial incentives with the owners’ goals, as agencytheory predicts, it also grants top managers residual control rights to be used insubsequent negotiations with the owners. The ability to exercise residual controlrights improves the ex post bargaining position of the CEO as an asset owner,thereby increasing her incentive to make relationship-specific investments thatare specific to the new venture. Thus, in the context of new venture strategyassigning asset ownership to those who have the most important relationshipspecificresources or who have indispensable human capital is a crucial sourceof subsequent competitive advantage. This theory of entrepreneurialgovernance is tested using patent ownership as a proxy for both relationshipspecificinvestments and indispensable human capital of the CEO of the newventure. The empirical results support the main hypothesis posited by theentrepreneurial governance model...