Abstract
In the light of the large number of signals found empirically to predict firms’ stock returns, some researchers in this field speak of data mining. To avoid this, newly proposed so-called return predicting signals should be based on a theoretical foundation. Building on research on identity and entrepreneurial orientation, I propose that firm status (i.e., “founder CEO” and “family” firms) is a viable signal that predicts part of firms’ stock returns. My results suggest that a “founder CEO firm” indicator has predictive value for explaining part of the cross-section of stock returns while controlling for established risk factors, whereas a “family firm” indicator does not. Additionally, the performance of a risk factor created from a “founder CEO firm” indicator cannot be explained by the common risk factors currently used. Finally, the results from a mean-variance spanning test suggest that it would be beneficial to include a “founder CEO firm” risk factor in the set of common risk factors currently established in the asset pricing literature. My results have several implications for both research and practice.
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