Cage the Songbird: An experiment testing the impact of formalization on firm performance

Abstract

Prior research on formal structure and firm performance has explored age-related contingencies of the relationship. However, scholarship in this area has not explicitly teased apart the differential impact of firm age and size despite evidence that the two should be treated separately. In this study, we disentangle the moderating effects of firm age and size on the formalization–performance relationship using a randomized controlled experiment with a sample of 3,500 small and medium enterprises in Peru. Our Results demonstrate that increased formalization leads to higher firm performance. This relationship is more pronounced for larger ventures, the benefits of formalization increase as a firm grows. However, contrary to expectations and past research, firm age had no moderating effect on the formalization–firm performance relationship. The results are surprising because prior research has argued that firm age is a key driver of this relationship. Yet, we show that firm age has no impact on the relationship when age-related hypotheses are tested using a randomized experiment. Rather, firm size appears to be the essential driver of whether formalization increases firm performance in dynamic settings.