Research Note: CEO Locus of Control and Small Firm Performance

Abstract

Boone et al. (1996) reported that Chief Executive Officer (CEO) locus of control was significantly associated with profitability in a cross-sectional study of 39 small firms. As the authors could not rule out the possibility that firm performance causes an internal locus of control rather than the other way around, a follow-up study was performed to provide us with a possible clarification of the direction of causation. We traced the life history of each of these 39 firms and analyzed the relationship between locus of control and long-run organizational survival. We found that 21 percent of the 39 firms studied in Boone et al. (1996) went bankrupt within 6 years. Among the CEOs classified as internals, only 1 company failed (1 out of 14), whereas among the external CEOs 45 percent did not survive (5 out of 11). We also found that the differences between internal and external CEOs were only observable for firms that were relatively unprofitable in 1990-1991, indicating that short-term performance shields the companies from subsequent bankruptcy. We conclude that our findings suggest that CEO locus of control is an important predictor of small firm performance.