Agency and Governance in Strategic Entrepreneurship

Abstract

This paper aims to highlight the opportunity to contribute to our understanding of strategic entrepreneurship by exploring the construct through the lens of agency theory. In particular, we claim a fundamental link between a new venture's control of critical resources and the distribution of equity between the principal and agent. According to agency theory, assigning top executives ownership in the firm provides arrangements that are compatible with the incentives of the owners of the firm. This paper suggests that agency theory has special relevance when considered in a strategic entrepreneurship context. This is because the function of managers in entrepreneurial new ventures is fundamentally different from their counterparts in large established, incumbent corporations. While both types of managers have to provide managerial and organizational expertise, managers in entrepreneurial new ventures have an additional function that is essential to the competitive advantage and performance of the new venture—providing knowledge and human capital, which, in many cases, is intrinsically linked to the capital resources of the new venture. Our framework is tested using patent ownership as a proxy for both relationship–specific investments and indispensable human capital of the top manager of the new venture. The empirical results support the main hypotheses posited by the entrepreneurial governance model. In particular, patent ownership of the top manager significantly increases the percentage of equity held, while the number of patents held by the firm significantly decreases the percentage of ownership.