psychological characteristics associated with performence in entrepreneurial firms and smaller...

PSYCHOLOGICAL

CHARACTERISTICS

ASSOCIATED WITH

PERFORMANCE IN

ENTREPRENEURIAL FIRMS

AND SMALLER BUSINESSES*

THOMAS M. BEGLEY and DAVID P. BOYD Northeastern University

EXECUTIVE SUMMARY

This article examines the prevalence of five psychological attributes in a

sample of established entrepreneurs. These attributes are needfor achieve-

ment. locus of control, risk-taking propensity, tolerance of ambiguity, and

Type A behavior. These characteristics are widely regarded as hallmarks

of the entrepreneurial personality.

The focus of the study is twofold: I) Do these attributes distinguish

entrepreneurs (founders) from small business managers (nonfounders)? 2) Does the presence of these

“entrepreneurial” attributes relate to the financial performance of the firm?

Survey questionnaires were completed by 239 members of the Smaller Business Association of

New En,qland. Founders in this sample score significantly higher than nonfounders for three of the

five dimensions: needfor achievement, risk-taking propensity, and tolerance of ambiguity. Both groups

manifest an internal locus of control: that is, they share a perception that they can influence events

in their lives and are thereby free from external forces such as destiny or luck. In terms of Type A

behavior, founders and nonfounders alike score 60% above the midpoint on the Type A scale. Such

Tylpe A persons tend to be competitive, restless strivers who constantly struggle against the limitations

of time.

The relationships between psychological attributes and financial performance are few, but

suggestive. Among founders, internal locus of control relates to a low liquidity ratio. Among non-

founders, high tolerance of ambiguity associates with high return on assets (ROA), and high need for

achievement associates with a high liquidity ratio. A testfor curvilinear&y reveals a “threshold effect”:

in three instances, a psychological attribute associates with corporate performance only to a certain

point. Beyond this optimal level, the psychological pattern appears to become dysfunctional and

*The research was supported in part by grants from the Center for Entrepreneurial Studies at New York University and from Northeastern University’s College of Business Administration and Research and Scholarship Development Fund. We thank Barbara Kane and Ellen Balberfor their assistance in the project. We also acknowledge the cooperation of Lewis Shattuck and Julie Scotield of the Smaller Business Association of New England. Reprint requests should be sent to Thomas M. Begley, College of Business Administration, Northeastern University, Boston, MA 02115.

Journal of Business Venturing 2, 7%93(1987)

0 1987 Elsevier Science Publishing Co., Inc.. 52 Vanderbilt Ave.. New York, NY 10017

79

80 T.M. BEGLEY APV’D D.P. BOYD

$nanciai returnsfalter. In the,fuunders, for example, moderate risk-taking is associated with increused

ROA. However, the ROA of these firms decreases when risk-taking becomes excessive. In similar fashion, founders may see their jrms’ ROA flourish if this a~rr~bl~te is present to a moderate extent. When too pronounced, the pro~~ab~li~ of the jirm may decline. The same pattern exists between tolerance of ambiguity and growth rate in the nonfounder group. Excessive ambiguiy tolerance may

lead ro a lack of response mechanisms for dealing with environmenlaI rhange. in assessing the leadership of e.~~ab~~shed ventures, it might be prudent for bankers, invesfors, and et~trepret~eur~~ themselves to pay heed to the mix of these characteristics.

In studies of entrepreneurial characteristics, attributes such as the following recur with regularity: need for achievement, internal locus of control, moderate propensity for risk taking, tolerance of ambiguity, and more recently, Type A behavior (Begley and Boyd 198.5; Borland 1974; Boyd 1984; Homaday and Aboud 1971; Liles 1974; Sexton and Bowman 1978; Timmons 1978; Welsh and White 1981).

Yet these empirical studies are marked by diverse and disparate results, perhaps due to problems in testing instruments and sample sizes (Sexton and Bowman 1983). As a consequence, more research is required before the salient features of the entrepreneurial personality can be persuasively proclaimed (Hoy and Carland 1983).

Accordingly, the first purpose of this study will be to construct a psychologi~a1 profile of small business entrepreneurs and then determine how closely this profile applies to small business managers. Much of the existing literature uses the general population as a comparison point and thus circumvents the question we propose to address.

Previous research has aiso failed to isolate psychological dimensions which might differentiate successful from less successful entrepreneurs (Sexton and Bowman 1984). Are these characteristics identical to those which distinguish entrepreneurs from managers? To answer these questions, the present study will explore the relationship between the psychological attributes of entrepreneurs and the financial performance of their firms.

Given the diverse definitions of entrepreneurship in the literature (Begley and Boyd, in press), we propose a simple distinction in this study: an entrepreneur is a person who has founded his or her own enterprise. The comparison group of nonentrepreneurs we propose to examine is neither the general population nor large-company managers; rather we will focus on chief executives who are running smaller business firms which they did not found.

An elementary distinction is often made between the founder of an enterprise and the person who later becomes chief executive officer (Carland, et al. 1984). According to our definition, the founder is considered an entrepreneur but the successor is not. This simple classification avoids dependence on subjective distinctions such as strategic preference and orientation toward innovation. In this definition, entrepreneurship and new venture creation (Timmons, Smollen, and Dingee 1985) are synonymous.

In the following section, we develop hypotheses on 1) the psychological profile of founders versus successors, and 2) the relationship between psychological characteristics and financial performance among founders. In examining financial performance, we concentrate on founders since the dearth of literature on nonfounders limits hypothesis generation.

NEED FOR ACHIEVEMENT

Since the pioneering work of McCJelland (1961), the need to achieve (n ach) has been associated with entrepreneurial behavior. High achievers set challenging goals and value

PSYCHOLOGICAL CHARACTERISTICS ASSOCIATED WITH PERFORMANCE 81.

feedback as a means of assessing goal accomplishment. They compete with their own standards of excellence and continuously seek to improve their performance.

Although a study of business students by Hull, Bosley, and Udell (1980) found that n ach was a weak predictor of prospective entrepreneurs, most studies support the prevalence of high n ach among practicing entrepreneurs (Sexton and Bowman 1985). For example, Homaday and Aboud (197 1) as well as DeCarlo and Lyons (1979) found that entrepreneurs score higher than normative groups. Both studies used the Edwards Personal Preference Test (EPPS), which appears more reliable than the Thematic Apperception Test (Entwistle 1972).

Based on research to date, the authors propose to test this hypothesis:

Hypothesis l(a). In a sample of small business CEOs, founders will manifest a higher achievement orientation than nonfounders.

If the achievement drive is pronounced among founders, it should propel them toward high performance. In studies of successful entrepreneurs, a high achievement orientation seems invariably present (Sexton and Bowman 1983). This finding obtains despite variance in the measures employed. Komives (1972), for example, used Gordon’s Study of Personal Values to assess the achievement drive of 20 successful high-technology entrepreneurs. He found that high n ach values were characteristic of his sample. Similarly, Smith and Miner (1984), using a new projective technique, reaffirmed the correlation between the achievement proclivity of entrepreneurs and the growth rate of their firms.

Given the unremitting aspiration of high achievers, corporate financial performance is an implant indicator of goal accomplishment. Profit and growth data are objective ways of providing feedback (Timmons et al. 1985).

Accordingly, as a second hypothesis, the authors postulate that:

Hypothesis l(b). Among small business founders there will be a positive relationship between need for achievement and corporate financial performance.

LOCUS OF CONTROL

The Locus of Control Scale measures subjects’ perceived ability to influence events in their lives. Internal persons believe in the efficacy of their own behavior and give little credence to “external” forces such as destiny, luck, or “powerful others.” In contrast, externals reject the credo that personal effort is the primary determinant of outcomes. One person wields little influence over the varied contingencies of life (Seligman 1975).

Rotter (1966) submitted that an intemai control locus was consonant with a high achievement orientation. Subsequent research has confirmed this relationship (Brockhaus 1982). The tie is logical, since the internality of high achievers persuades them that their actions can affect relevant outcomes. This is not, of course, tantamount to the naive belief that individuals can ordain the final configuration of environmental events; rather internals believe that judicious efforts can moderate external impacts (Kobasa, Maddi, and Kahn 1982).

While control disposition may be useful for distinguishing entrepreneurs from the general population, it is not a valid discriminator of entrepreneurs and managers (Brockhaus and Nord 1979). Entrepreneurs seem to be characterized by internality, but so do managers. Nevertheless, the two groups may be differentiated by degree of intemality. As an hypothesis, the authors postulate that:

Hypothesis 2(a). In a sample of small business CEGs, founders will manifest higher internal locus of control than nonfounders.

82 T.M. BEGLEY AND D.P.BOYD

Even if the total sample under study is typified by an internal locus of control, variation among internal scores may serve as a useful predictor of corporate financial performance. In a longitudinal study by Brockhaus (cited in Brockhaus 1982), owners of surviving ventures manifested higher internality than their cohorts who had failed. Since internals are imbued with self-confidence and possess a penchant for action, they may be more likely to affect the outcome of events (Brockhaus 1974; Durand and Shea 1974). Conversely, extremely high external scores might denote a sense of detachment from one’s distinctive skills and sentiments. In line with this reasoning, Maddi, Kobasa, and Hoover (1979) found that external locus of control showed a positive correlation with powerlessness. This may explain why externals often experience more job alienation than internals (Mitchell 1977; Seeman 1967; Wolfe 1972).

Other studies substantiate the tie between locus of control and a variety of performance indicators. For example, internal beliefs have been related to task orientation and academic achievement (Lefcourt 1965). Effective groups tend to be led by internals (Anderson and Schneider 1978). Internal small business CEOs are also more resilient in the face of environmental stressors (Anderson 1977; Anderson, Hellriegel, and Slocum 1977).

Factors besides energy and resilience may contribute to the success of internals. In a study by Julian, Lichtman, and Ryckman (1968), internals were less likely to engage in risky behaviors than were externals. Achievement performance might obviously be facilitated for those selecting high-probability outcomes. According to other studies, however, internal executives are less conservative than their external counterparts. Since internals are sanguine about the possibility of influencing the firm’s direction, they do not recoil from bold and imaginative strategies. In a study of 33 business firms. Miller and Friesen (1982) found that the more internal the top executive, the more innovative the firm.

Whatever the causal dynamic might be, an internal control disposition appears to be associated with corporate financial performance (Anderson 1977). The authors propose to test Brockhaus’ suggestion that “this internal belief and the associated greater effort . hold promise for distinguishing successful entrepreneurs from the unsuccessful” (Brockhaus, 1982). Specifically. we suggest that:

Hypothesis 2(b). Among small business founders there will be a positive relationship between internal locus of control and corporate financial performance.

RISK-TAKING PROPENSITY

McClelland observed that entrepreneurs exhibit moderate risk-taking propensities. While subsequent studies have substantiated this tendency in entrepreneurs (see Sexton and Bow- man 1983, for a review), Brockhaus (1980) found that managers were similarly situated along the risk dimension. A subsequent study suggests that risk-taking propensity may in fact distinguish the two groups (Sexton and Bowman 1986). Since the present study will use an instrument similar to that of Sexton and Bowman, the authors propose the following hypothesis:

Hypothesis 3(a). In a sample of small business CEOs, founders will manifest higher risk-taking propensity than nonfounders.

Brockhaus (1982) suggests that risk-taking propensity has no direct bearing upon financial performance. He renders this observation “tentatively” because his sample consisted of new ventures. Brockhaus cautions that established entrepreneurs might be characterized by a different risk profiie. Several writers have indicated that the process of entrepreneurship

PSYCHOLOGICAL CHARACTERISTICS ASSOCIATED WITH PERFORMANCE 83

might palliate the proclivity for risk. Timmons et al. (1985), for example, argue that risk taking decreases as net worth accumulates. Venturesome boldness may be tempered when there is an asset base to protect. In similar fashion, Smith and Miner (1985) note that risk avoidance is stronger among entrepreneurs heading fast-growing firms than among those heading slow-growth firms. Such suggestions accord with conceptual models of successful entrepreneurs. Palmer (197 l), for instance, writes that the effective entrepreneur “can cor- rectly interpret the risk situation and then determine policies which will minimize the risk involved.” As entrepreneurs scan their environment, they simultaneously seek to exploit opportunity and to avoid threat (Welsch and Young 1982).

Therefore, among the established entrepreneurs who typify our sample, the authors hypothesize an inverse relationship between financial success of the firm and risk-taking propensity of the owner. Accordingly, we submit that:

Hypothesis 3(b). Among small business founders there will be a negative relationship between risk-taking propensity and corporate financial performance.

TOLERANCE OF AMBIGUITY

Individuals perceive ambiguity when they lack sufficient cues to structure a situation. Ac- cording to Budner (1962), ambiguity may emanate from novelty, complexity. or insolubility. Budner defines intolerance of ambiguity as the tendency to perceive ambiguous situations as threatening; tolerance of ambiguity is the tendency to perceive such situations as desirable. MacDonald (1970) is even less circumspect when he claims that persons with high ambiguity tolerance deliberately seek unstructured situations. For these entrepreneurial individuals, goal accomplishment is not predicated on uniformity, stability, or predictability. The focal point is the product rather than the process (Lafond 1984).

Their internal locus may help entrepreneurs lessen dissonance and preserve equilibrium; their robust control orientation may preclude, or at least discount, the possibility of unfa- vorable outcomes (Gasse 1982). Among internals lack of structure does not seem to induce job ambivalence (Organ and Greene 1974).

Given the uncertainty inherent in the entrepreneurial environment, Schere ( 1982) called the owner’s role “an ambiguity-bearing role.” ScherC found that entrepreneurs displayed more ambiguity tolerance than either top executives or middle managers. Accordingly, the authors hypothesize that:

Hypothesis 4(a). In a sample of small business CEOs, founders will manifest higher ambiguity tolerance than nonfounders.

Entrepreneurs may be energized by the diverse opportunities of a fluid environment (Timmons et al. 1985). As Gasse (1982, p. 59) observes, entrepreneurs may view uncertainty as “an exciting stimulus rather than a severe threat”. If ambiguity tolerance serves as a motivational catalyst, it may foster entrepreneurial success. It has been linked, for example, to creative behavior (Budner 1962) and to superior performance in complex tasks (MacDonald 1970). Conversely, intolerance of ambiguity has been associated with stereotypic categor- ization of novel stimuli (Budner 1962). The views of rigid persons are often undifferentiated from situation to situation (Kounin 1948). Since such individuals are not prone to recast their response repertoire, they recognize fewer possibilities for action.

While high tolerance of ambiguity does not ensure successful resolution of environmental exigencies, we nevertheless expect ambiguity tolerance to be associated with entrepreneurial success. Accordingly, we propose that:

84 T.M. BEGLEY AND D.P. BOYD

Hypothesis 4(b). Among small business founders there will be a positive relationship between tolerance of ambiguity and corporate financial performance.

TYPE A BEHAVIOR

Friedman and Rosenman (1974) defined the Type A Behavior Pattern (TABP) as:

an action-emotion complex that can be observed in any person who is aggressively involved in a chronic, incessant struggle to achieve more and more in less and less time, and if required to do so, against the opposing efforts of other things or other persons.

The TABP is thus an exaggerated stylistic response to environmental challenge. Major pattern elements include impatience and instability, time urgency, driving ambition, acceferated activity. and generalized competitiveness.

For small business populations, a qualification should be made about definitional criteria. Prior research (Begiey and Boyd 1986) supports the assertion of Timmons et al. (1985) that growth-minded entrepreneurs strive to surpass their own results; they compete with themselves more than with others. Since small business CEOs have reached the apex of their firms, they are largely exempt from hierarchical rivalry. TABP questionnaires, however, are oriented toward intracompany competition; small business leaders might therefore score low on this facet of the global Type A construct.

Despite modest scores on the competitive dimension, various studies have documented the prevalence of Type A behavior among small business owner-managers (Begley and Boyd 1985, 1986; Boyd 1984). The Type A scores in all these studies are significantly above national norms. In the most recent study, smaller firm respondents had a higher Type A mean score than any of the 35 managerial groups from whom the national norms were originally derived (Begley and Boyd 1986). Even after external pressures have abated, the TABP remains an enduring characteristic of small business CEOs (Boyd and Gumpert 1983).

Studies to date, however, have focused on small business owner-managers as a col- lective entity that includes but does nor isolate founders. Only one study has used the founder-nonfounder distinction as the basis for a TABP comparison. In that study (Boyd and Gumpert 1983), the Type A mean of founders was higher than the Type A mean of nonfounders. Therefore, the authors hypothesize that:

Hypothesis 5(a). In a sample of small business CEOs, founders will manifest more Type A behavior than nonfounders.

As a result of their orientation toward achievement, Type A executives may be more likely to achieve success than their Type B colleagues (Shekelle, Schoenberger, and Stamler 1976). Some studies support this observation (Boyd 1984; Howard, Cunningham, and Rech- nitzer 1977). In a study of 236 managers from 12 different companies, Howard et al. ( 1977) found that Type A behavior was related to recent company growth rates. Yet an opposing argument seems equally plausible. The hyperkinetic style of Type A executives may repel associates. Type A bosses, with their demanding expectations, often create enormous stress for subordinates. Moreover, Type As appear to be poor time managers, often substituting speed for deliberation. Sheer hyperactivity replaces well-monitored progress (Friedman and Rosenman 1974).

For a smaller firm, the CEOs arousal and alacrity might eventually become dysfunctional. In a recent study (Begley and Boyd 19861, Type A behavior of small business owner-

PSYCHOLOGlCAL CHARACTERfSTfCS ASSOCIATED WITH ~ERFURMANC~ 85

managers associated negatively with pro~tability. 3ased on this finding, the authors propose the folfowing hypothesis:

Hypothesis 5(b). Among small business founders there will be a negative relationship between Type A behavior and corporate financial performance.

The hy~tbes~s on the relationships between psychological characteristics and financial performance predict linear relationships. However, the literature hints that for at least some of the psychological variables, the relationships may be curvilinear. For example, McClelland ( 1961) found the risk-taking propensity of successful entrepreneurs to be moderate rather than high or low. Further, an extremely high posture on locus of control or tolerance of ambiguity might be dysfunctjona1 for an entrepreneur. Therefore, we will test for curvilinear ~lationships.

MEASURES

Achievement motivation was measured by a subset of items taken from the EPPS. Information on reliability and validity is reported in the EPPS manual (Edwards 1959). The manifest needs associated with the EPPS achievement variable include: to do one’s best, to be successful, to accomplish tasks requiring skill and effort, to accomplish something of great significance, to do a difficult job well, and to be a recognized authority. One’s response to these items reAects an active or passive attitude toward decision making and personal goal setting. Our response format utilized option categories of strongly agree, agree, neither agree nor disagree, disagree, strongly disagree. The five items selected for our scale had a coef IGent alpha of 0.672.

Locus of control was measured by the familiar Rotter scale (Rotter 1966). Considerable research has shown this scale to be a reliable and valid index of one’s belief in the relative efficacy of external forces (Phares 1976). In the present survey, ten items were presented in Rotter’s forced choice format. The original wording was modified in several instances, so external-internal attribution focused on business issues rather than general iife events. The coefficient alpha in our study was 0.702.

Propensity for risk-taking was assessed by the Jackson Personality Inventory (JPI) (Jackson 1976). Various studies have supported the validity of the JPI as a measure of generalized risk-taking (Jackson, Hourany, and Vidmar 1972). Acceptable internal consist- encies have been reported for this ins~ment (Jackson 1977). The scale renders scores for the relatively independent components of monetary, physical, social, and ethical risk-taking. For purposes of the present research, the monetary risk-taking items were used, since these best approximate the reality of business situations, Eight items were selected. As with the EPPS, a five-point response format of disagreement/agreement was employed. The items had a coefficient alpha of 0,784.

The conceptual theme of the scale aligns with Palmer’s de~nition of risk-taking as “the willingness to commit to a course of action which may result in rewards or penalties associated with success or failure” (1971:32). The high JPI scorer takes monetary chances and enjoys adventures having an element of peril. Low scorers, on the other hand, are unlikely to bet, even in situations where the potential gain is high. They avoid uncertain monet~ outcomes and gravitafe toward predictable settings. Specific items are as follows: “lf 1 invested in stocks, it would probably be in safe stocks from weIl-known companies”; “lf the possible reward was very high, I would not hesitate puking my money in a new


business that could fail”; “I probably would not take the chance of borrowing money for a business deal even if it might be profitable.”

Ambiguity tolerance was assessed by eight items from the Budner Scale of Toler- ance-Intolerance of Ambiguity (Budner 1962). The Budner Scale represents a homogeneous dimension of self-report. The scale measures the willingness of an individual to deal with uncertainty. Sample statements include: “A good job is one where what is to be done and how it is to be done are always clear”; “ It is more fun to tackle a complicated problem than to solve a simple one”; “ A person who leads an even, regular life with few surprises really has a lot to be grateful for.” The response format paralleled that of the EPPS and the JPI. The scale items in our study had a coefficient alpha of 0.616.

The Framin~ham Type A scale was used to measure Type A behavior (Haynes et al. 1978). Of the paper-and-pencil measures designed to assess Type A patterns in the workplace, this scale is recommended by the pioneer of the A/B typology (Chesney and Rosenman 1980). The Framingham scale has significantly predicted the incidence of coronary heart disease in both sexes after 8 years of follow-up (Haynes et al. 1980). It has also been related to self-reports of emotional lability, daily stress, tension, anxiety, and anger (Haynes et al. 1978). In the present study, 7 of the 10 scale items were used, a revision recommended by Haynes (Chesney et al. 1981). The Framingham scale asks subjects to indicate the accuracy of self-descriptive statements. Sample items include: “I am pressed for time”; “I am hard driving”; “ I get restless when 1 have to wait for something.” A five-point Likert format was used, with response options of very often, often, sometimes, rarely and never. The greater the agreement with the designated statements, the higher the Type A score. The coefficient alpha in the present study was 0.723.

Two indicators of company characteristics were included in this study: company size and company age. Size was measured by asking for the “company’s sales revenues for the last compiled fiscal year.” Eight response options were given, ranging from “O-199,000” to “20 million or over.” Company age was measured in years.

Three financial performance indicators were used: growth rate, return on assets (ROA), and liquidity. Growth rate was assessed by the company’s typical yearly trends in revenues over the past five years; the eight response options ranged from “decreased” to “increased 30% or more.” The second indicator, annual RQA over the past five years, had options from “less than 5%” to “50% or more.” Liquidity was assessed with the following question: “What is your company’s ratio of current assets to current liabilities?‘: less than 1.0, 1.0-1.24, 1.25-1.49, 1.5-1.99. 2.0-2.49, 2.5-2.99, 3.0 or more.

For the financial measures, categories were used rather than open-ended responses. This procedure was followed because 1) the convenience of categorical options may increase respondent participation; 2) respondents might be reluctant to reveal precise financial data that could compromise anonymity; and 3) a sufficient number of response options can approximate continuous measures. In an earlier survey of SBANE members, open-ended response options to financial questions resulted in a substantial number of blank responses.

Return on assets (ROA) was used as one measure of profit. Information was also sought on liquidity since some researchers hold that this measure is more relevant to smaller businesses than ROA. Response categories for the financial measures were recommended by the Small Business Administration and the Smaller Business Association of New England.

SAMPLE

The sample consists of randomly selected members of the Smaller Business Association of New England. Questionnaires were sent in the fall of 1985 to 730 chief executives. Re-


TABLE 1 Means and Standard Deviations for the Study’s Variables

Need for Achievement (max = 25) 21.25 2.22

Locus of Control (max = 10) 1.14 2.05

Risk-Taking (max = 40) 28.30 4.64

Tolerance of Ambiguity (max = 40) 29.66 3.61

Type A (max = 35) 27.99 3.66

Revenue Growth (5 = I I-15%: 6 = 16-20%) 5.42 2.1 I ROA (4 = 15-19%) 4.00 2.74

Liquidity (4 = 1.5-1.99; 5 = 2.0-2.49) 4.44 2.12

Revenue (3 = 500.000-999.999: 4 = I ,OOO,OoO-I ,999.999) 3.85 2.09

Company Age 20.98 23.91

Mean

Standard

Deviation

spondents were assured of anonymity. An accompanying letter from SBANE’s executive director urged participation in the study. Three follow-up reminders were sent. Completed forms were received from 239 members, a 33% response rate. Founders numbered 147, non founders 92.

The demographic profile of the typical executive in our sample resembles membership information compiled by SBANE. It also parallels the profile of this same membership obtained in an earlier study by the authors (Begley and Boyd 1986).

RESULTS

Table 1 presents means and standard deviations for the variables included in the article. It also lists values for some categories of ordinal-level variables. For the five psychological variables, the means are high. Mean scores on need for achievement, locus of control, and Type A, in particular, are located on the high side of the possible range.

Hypotheses l(a), 2(a), 3(a), 4(a), and 5(a) deal with psychological comparisons between founders and nonfounders. Table 2 presents the hypotheses and the results of difference of means tests between founder and nonfounder scores. The table also indicates whether these scores support or refute the hypotheses.

TABLE 2 Difference of Means Test of Psychological Attributes Between Founders (F: n = 147) and Nonfounders (NF: n = 92)

Attribute Hypothesis

n ach l(a) F > NF

2(a) F > NF

3(a) F > NF

4(a) F > NF

S(a) F > NF

control

ambiguity

tolerance

Type A

F

NF

F

NF

F NF

F NF

F

NF

Mean Standard Deviation

21.52 2.41 20.84 1.83

7.78 2.09 7.73 1.97

29.08 4.35 27.00 4.86 30.13 3.37 28.83 3.89

28.17 3.64 21.75 3.75

Probability

0.007”

0.863b

O.OOlb

0.004”

0.201”

Hypothesis

Status

Supported

Rejected

Supported

Supported

Rejected

“one-tailed significance test. %wo-tailed significance test.


TABLE 3 Partial Correlations Between Psychological Attributes and Company Financial Performance Controlling for Company Size and Age Among Founders and Nonfounders

Need for Achievement

Locus of Control

Risk-Taking

Tolerance of Ambiguity

Type A

Growth

0.025

-0.014

0.090

0.064

0.001

Founders

ROA

- 0.038

0.026

- 0.08y

0.060”

-0.002

Liquidity

0.018

- 0.260**

-0.170*

- 0.075

-0.003

Grvwth

Nonfounde~

ROA Liquidity

Need for Achievement 0.041 0.133 0.274*

Locus of Control 0.02 I -0.003 0.005

Risk-Taking - 0.080 0.177 0.075

Tolerance of Ambiguity - 0.088” 0.341** 0.007

Type A 0.033 - 0.053 0.086

*P c .05; **P < .Ol

“A statistically significant curvilinear effect

Three hypotheses are supported. Hypothesis I(a) postulates that founders rank higher in need for achievement than do nonfounders. Hypothesis 3(a) predicts that founders score higher in risk-taking propensity. Hy~~esis 4(a) predicts that founders have higher tolerance of ambiguity than nonfounders. Two hypotheses are rejected. Hypothesis 2(a) predicts that founders are more internal on locus of control than nonfounders. The results show that the two groups are similar on this dimension. Hypothesis 5(a) predicts that founders will have higher Type A tendencies than nonfounders. No such difference emerges. Overall, founders have higher need for achievement, risk-taking propensity, and tolerance of ambiguity than nonfounders. The two groups do not differ in locus of control and Type A tendencies.

Hypotheses l(b), 2(b), 3(b), 4(b), and 5(b) postulate relationships between the psychological attributes of founders and the financial performance of their firms. The top half of Table 3 presents partial correlations to assess the nature of the relationships. Partial correlations are used to control for the effects that company size and age might have on the psychological variable-~nancial performance relationship. As the columns indicate, no statistically significant relationships emerge for growth and ROA variables. Two attributes associate with liquidity: locus of control and risk-taking. Risk-taking moves in the expected direction: lower risk-taking associates with higher liquidity. Locus of control, on the other hand, proceeds in an unpredicted direction: internality associates with lower levels of liquidity. To test the comparative contribution of the two psychological variables, the liquidity measure was regressed on these attributes by means of a simultaneous entry procedure. In the equation, the locus of control variable retained its statistical significance while the risk- taking variable did not. In summary, the “b” hypotheses are largely disconfirmed.

For comparative purposes, partial correlations were computed between the psycho- logicai attributes of nonfounders and the financial performance of their companies. This procedure tests whether the hypothesized relationships between psychological attributes and financial success might be more characteristic of small business managers than entrepreneurs. The bottom half of Table 3 presents the results. Again, no significant associations appear for growth. Tolerance of ambiguity associates with ROA. Need for achievement associates


with liquidity. These findings for nonfounders provide scant support for any relationship between psychological attributes and financial performance.

As noted in the hypothesis section, the dearth of expected relationships could result from curvilinearity in the data. Examination of residuals in the relevant regression equations showed evidence of possible curvilinearity in some relationships. We tested for this possibility by constructing polynomial equations (Kerlinger and Pedhauzur 1973, pp. 208-209). In each equation, a financial performance measure was regressed on a psychological variable and the squared value of that psychological variable. The significance of the increment in variance explained by the squared variable was assessed with an F ratio. A statistically significant increment indicated the presence of curvilinearity.

Results indicate two instances of cu~iIine~ effects among founders and one among nonfounders. For founders, ROA was predicted by polynomiaIs for ask-taking and tolerance of ambiguity. Risk-taking has a positive effect on ROA up to a point. Beyond that point, increases in risk-taking begin to exert a negative effect on ROA. Similarly, tolerance of ambiguity is positive for ROA up to a point and negative beyond it. For nonfounders, tolerance of ambiguity positively affects growth to a certain level and then negatively affects it. These instances of curvilinearity are indicated by an “a” in Table 3.

Is it possible that psychological attributes might associate with company size and experience rather than with financial performance? If so, earlier studies of entrepreneurial success may have confounded the effects of psychological and nonpsychological variables. Faster growing companies might have also been the largest ones, and the most profitable companies might also have been the oldest ones (in samples with limited ranges for both variables). To test this possibility, we correlated psychoIogica1 attributes with size and experience. The results are presented in Table 4. Among nonfounders, size and age have little relationship with psychological attributes. Among founders, however, several associations appear. Internal locus of control and higher risk-taking propensity associate with size. Internal locus of control, intolerance of ambiguity and low Type A tendencies associate with company age. These relationships suggest that size and experience might be more closely connected to psychological attributes than are growth and profits.

DISCUSSION

The article’s two main objectives were to test for differences between entrepreneurs (founders) and small business managers (nonfounders) on psychological attributes and to examine connections between these psychological attributes and financial performance. Results indicate that founders score higher than nonfounders in need for achievement, risk-taking propensity, and tolerance of ambiguity. While the two groups differ on these psychological

TABLE 4 Pearson Correlations Between Psychological Attributes and Company Size and Age Among Founders and Nonfounders

Size Founders

Age

Nonfounders Size Age

Need for Achievement -0.048 - 0.026 0.128 0.050

Locus of Control 0.174* 0. t49* 0.055 - 0.096 Risk-Taking 0.285*** -0.009 0. IO8 -0.OOt

Tolerance of Ambiguity -0.124 -0.210** 0.043 - 0.039 TYK A 0.015 -0.1.55* 0.152 -0.028

*P < .05. **P < .OI: ***p < ,001


dimensions, the absolute differences are not large. Results also indicate few connections between psychological attributes and corporate performance. The chief connection for founders is between internal locus of control and low liquidity. This unexpected relationship may indicate that internals feel in control of their asset to liability ratio, and therefore are less concerned about building a high ratio to protect themselves.

Why is there so little relationship between psychological attributes and financial performance? A number of previous studies, reviewed in the Hypothesis section, led us to predict relationships. The psychological variables used are ones that recur in the literature about entrepreneurs. Our results run counter to these earlier studies.

Several explanations are possible. Methodological concerns deserve consideration. Since results are based on a mailed questionnaire, poorly performing firms may be under- represented. CEOs of such firms may lack both the time and inclination to record perceived shortcomings. The nature of SBANE itself may have affected the results. SBANE firms tend to be well established or at least sufficiently solvent to sustain membership in a fee- paying organization. Since our sample is comprised of relatively mature firms, the characteristics of the chief executive may not affect performance as acutely as in the formative stages.

The nature of the questionnaire itself may generate difficulties. Need for achievement is viewed as a deeply embedded dimension. Controversy has arisen over the efficacy of paper-and-pencil measures to assess this need; some researchers prefer projective techniques. Debate also surrounds the use of paper-and-pencil instruments to assess the Type A behavior pattern. Many authors claim that the original interview format is the most valid assessor (Rosenman 1978). Moreover, our shortened and amended versions of standard scales may introduce distortion. On the other hand, our alterations rendered the instruments more relevant to business situations. Focused modifications of this nature might reduce the distortion in earlier versions. Finally, subject scores on the psychological attributes tend to be skewed toward the high end of the scales. This uniform response pattern lessens the likelihood of differential associations.

Another explanation is that the curvilinear nature of some relationships is not detected by linear regression. Indeed, when we tested for curvilinear effects, three statistically significant curves appeared. When added to the significant linear relationships shown in Table 3, these three curves somewhat mitigate the paucity of results. In fact, these findings lead us to wonder if many studies of entrepreneurial characteristics might have reached different conclusions, had they tested for curvilinear effects.

Although methodological and statistical limitations may have influenced study findings, an alternative explanation is that the paper accurately reflects the negligible impact of psychological attributes on financial performance. As stated earlier, the restricted size and age ranges of previous studies may have confounded growth with size and profits with experience. Further, while the psychological variables included in this study are often used to describe entrepreneurs, various studies contest their prevalence. Even if one accepts the widespread existence of such “entrepreneurial” attributes, their effectiveness remains con- jectural (see Brockhaus 1982; Gasse 1982, for reviews).

An intriguing possibility is that the characteristics contributing to success among the relatively experienced entrepreneurs in this sample may differ from success factors for early stage entrepreneurs. For example, achievement motivation and risk-taking propensity may be crucial for success only in the early stage companies. If this is so, it is apparent that more is known about early stage than later stage entrepreneurship. Among nonfounders, too, psychological predisposition has no appreciable bearing on financial performance. Non-


founding small business managers and entrepreneurs in maturing firms constitute a considerable proportion of the small business population. Yet success factors associated with these two groups have received almost no attention in the literature. This article indicates that psychological features commonly linked to successful venture creation do not generalize to success in ongoing small business management. If this observation receives further support, the need to identify performance predictors in post-start-up stages will become compelling.

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