“Entrepreneurial Transition: How Does Founder Exit Affect Firm Innovation Trajectory?”

Bo Zhao, The University of Hong Kong

Qiang Li, The Hong Kong University of Science and Technology

Sam Garg, The Hong Kong University of Science and Technology

We examine how founder’s exit affects a firm’s innovation trajectory (i.e., exploration and exploitation). Specifically, we find that after founder’ exit, a firm’ innovation is more exploration and less exploitation. Drawing on the path dependency literature and contingency theory, our results suggest that a firm’s innovation trajectory relies more on path dependency when the important influence sources, such as the founder, is present. After the founder exit, a firm deviates from its original path by exploiting less of their prior technologies and exploring more new technologies. Our study offers a richer understanding of how firms’ innovation trajectory evolves around one important entrepreneurial transition, founder’s exit that many firms experience at some point in time. We construct a matched sample, adopt difference-in-differences approach in the context of U.S. newly public high-technology companies, and find that the results generally support our hypotheses.