Presentation and report on: The entrepreneurial orientation -performance relationship in private family firm

The entrepreneurial orientation–performance relationship in private family firms: the moderating role of socioemotional wealth

Jelle Schepers • Wim Voordeckers •

Tensie Steijvers • Eddy Laveren

Accepted: 10 December 2013 / Published online: 22 December 2013

� Springer Science+Business Media New York 2013

Abstract Drawing on socioemotional wealth (SEW)

literature, this paper revisits the established entrepre-

neurial orientation (EO)–performance relationship in

a family business context. The main idea in entrepre-

neurship literature is that EO leads to increased firm

performance. We question this logic in a family

business context because family related non-financial

goals, like SEW, may prevent the firm to reap the fruits

of their entrepreneurial efforts. Specifically, we argue

that SEW engenders inefficiencies that place con-

straints on the realization of the benefits of entrepre-

neurship. Therefore, we propose that a high level of

SEW preservation hinders the transmission of the

family firm’s EO into positive performance effects. To

test this hypothesis, an empirical study was developed

using a sample of 232 Belgian private family firms.

Robust linear regression analysis reveals that the

positive effect of EO on financial performance

decreases as the level of SEW preservation increases.

Keywords Entrepreneurial orientation � Private family firms � Socioemotional wealth � Firm performance

JEL Classifications L21 � L25 � L26

1 Introduction

For many years, researchers have argued that firms

pursuing a high entrepreneurial orientation (i.e. a

strategic posture that involves a propensity to be

innovative, proactive and open to risk in exploring

new products, services and markets [Covin and Slevin

1991]) perform better (e.g. Su et al. 2011; Rauch et al.

2009; Wiklund and Shepherd 2005; Covin and Slevin

1989). The implicit logic behind this pervasive belief

seems to be that entrepreneurial firms will identify and

pursue lucrative product/market opportunities which

in turn will improve their company financial perfor-

mance (Zahra and Covin 1995). Although this idea is

widely accepted in the literature, empirical evidence

showed that there exists considerable variation in the

size and direction of reported relationships between

entrepreneurial orientation (EO) and firm performance

(Rauch et al. 2009). These observations inspired

researchers to apply a contingency framework incor-

porating moderating variables that may explain vari-

ations in the EO–performance relationship (Covin and

Slevin 1991; Lumpkin and Dess 1996), ranging from

J. Schepers � W. Voordeckers (&) � T. Steijvers Kizok Research Center, Hasselt University, Hasselt,

Belgium

e-mail: [email protected]

J. Schepers

e-mail: [email protected]

E. Laveren

University of Antwerp, Antwerp, Belgium

123

Small Bus Econ (2014) 43:39–55

DOI 10.1007/s11187-013-9533-5

external variables, such as environmental dynamism

(e.g., Wiklund and Shepherd 2005; Moreno and

Casillas 2008), to internal variables, such as strategic

process variables (Covin et al. 2006).

Recently, the EO–performance relationship has

been investigated in a family business context. Family

firms constitute an appropriate and unique context to

analyze EO and its relationship with performance

because of their distinctive set of ownership, manage-

ment and governance conditions vis-à-vis non-family

firms (e.g. Casillas and Moreno 2010; Huybrechts

et al. 2011). Moreover, the interaction between family

and business has a significant impact on the decision-

making process and entrepreneurial activities in

family firms (Nordqvist et al. 2008). However, family

firms are not a homogenous group as different ‘‘types’’

of family firms seem to exist, based on differences in

company ownership, management structures, and

company objectives (Westhead and Howorth 2007).

Therefore, several recent studies (e.g. Casillas and

Moreno 2010; Casillas et al. 2010; Chirico et al. 2011)

investigated family firm specific variables such as

family and generational involvement as moderators on

the EO–performance relationship. For example, Casi-

llas et al. (2010) found that EO has a positive effect on

firm growth in second-generation family firms. In

addition, Casillas and Moreno (2010) reported that

family involvement (in management and strategic

decision-making processes) has a boosting effect on

the relationship between the innovativeness dimension

of EO and firm growth and a reducing effect on the

relationship between the risk taking dimension of EO

and firm growth.

Although these studies provided significant contri-

butions to both the entrepreneurship and the family

business literature, they are subject to a threat that is

ubiquitous in family firm research. More specifically,

family business scholars often rely on reductionist

proxies (e.g. percentage of family members in man-

agement functions or composition of board of direc-

tors) to gauge the degree of family influence in these

firms (Gómez-Mejı́a et al. 2011). Although these

indicators are usually convenient, they only partly

capture the essence of family firms (Chua et al. 1999).

Recently, family firm scholars are attaching more and

more importance to this essence approach and call for

the inclusion of variables that relate to the noneco-

nomic aspects and emotions of family businesses

(Gómez-Mejı́a et al. 2011). Therefore, the aim of this

paper is to examine socioemotional wealth (SEW)

preservation as a moderator on the EO–performance

relationship. SEW refers to the nonfinancial aspects of

the firm that meet the family’s affective needs such as

identity, the ability to exercise family influence, and

the perpetuation of the family dynasty (Gómez-Mejı́a

et al. 2007) and may drive family business behavior to

a large extent. Because family firms are often loss

averse when it comes to their SEW, they will behave in

order to preserve these non-financial benefits which

may have a significant effect on the EO–performance

relationship. Recent literature has shown that SEW has

two sides, a bright side and a dark side (Kellermanns

et al. 2012). This means that SEW concerns can lead to

favorable (e.g. employee commitment, emotional

attachment, better environmental performance) and

unfavorable outcomes (e.g. altruism, incompetent

family managers, inefficient use of firm resources) in

family firms. In this paper we will argue that it is

especially the dark side of SEW that moderates the

relationship between EO and financial performance.

While EO is known to be a resource-consuming

strategic orientation (e.g. Covin and Slevin 1991; Su

et al. 2011), it involves making large resource

commitments in order to reach higher financial

performance. Hence, in private family firms, firm

resources play a crucial role in the performance

implications of EO. For that reason, we introduce

SEW as a moderator on the EO–performance

relationship because it provides insight into how

family firms exploit their resources (Gómez-Mejı́a

et al. 2011). Indeed, in private family firms, firm

resources are often used inefficiently due to SEW

considerations (Cruz et al. 2012). By their own

nature, family firms are characterized by a wide

range of emotions and interpersonal linkages which

may engender parental altruism (Schulze et al.

2003a) or managerial entrenchment (Gomez-Meija

et al. 2001). We draw on family business literature

(e.g. Gómez-Mejı́a et al. 2011) to argue that family

firms often face inefficiencies (like parental altruism

and managerial entrenchment) as a result of their

SEW preservation. For example, employment of

incapable family members creates specific agency

costs (Lubatkin et al. 2005; Cruz et al. 2012) or may

enlarge rent extraction in the family firm (Gómez-

Mejı́a et al. 2011), leading to lower profitability.

Consequently, from a financial point of view, EO

may increase the family firm’s sales level (top line

40 J. Schepers et al.

123

in the profit and loss account) but it does not

automatically enhance their profitability (bottom line

in the profit and loss account).

Our paper contributes to the literature in several

ways. First, this study fits the call for incorporating

moderating variables that potentially affect the rela-

tionship between EO and performance (Covin and

Slevin 1991; Lumpkin and Dess 1996). More in

particular, we introduce SEW in the EO–performance

debate as a family-firm-specific variable that describes

family firm’s behavior, rather than simply looking at

the generational stage (e.g. Casillas et al. 2010;

Chirico et al. 2011) that controls the firm or the

proportion of family members involved in manage-

ment functions (e.g. Casillas and Moreno 2010). In

doing so, we expand Covin and Slevin’s (1991) and

Lumpkin and Dess’ (1996) contingency framework by

introducing a new category of moderating variables,

namely, behavioral moderators. Furthermore, this

paper contributes to the family business literature

because it introduces EO as a major determinant for a

family firm’s financial performance without ignoring

the importance of non-financial aspects in family

businesses.

The remainder of this article is divided into five

sections. First, we explore the appropriate theoretical

and empirical literature that relates to the EO–

performance relationship. Second, SEW is introduced

as a moderating variable in the EO–performance

relationship and our central hypothesis is derived. In

the third section, we elaborate our research method

where we build on Brambor et al. (2006) and Kam and

Franzese’s (2007) work to suggest that even if the

coefficient of the interaction term is not significant, it

is still possible that SEW may moderate the effect EO

has on financial performance. Fourth, the results of our

empirical study will be presented and discussed.

Finally, the paper ends with a discussion section

where the major conclusions are highlighted and

future research paths are presented.

2 Theoretical and empirical background

of the EO–performance relationship

In almost 30 years of research, the phenomenon of an

EO has become one of the major topics in the

entrepreneurship literature. The concept of EO stems

from Miller’s (1983) work, in which entrepreneurial

firms are defined as ‘‘those that are geared towards

innovation in the product-market field by carrying out

risky initiatives, and which are the first to develop

innovations in a proactive way in an attempt to defeat

their competitors’’ (p. 771). Although there have been

various conceptions about EO’s components, research

has converged on three core dimensions of EO (Miller

and Le Breton-Miller 2011): innovation, risk-taking,

and proactiveness. Therefore, the current paper defines

EO as a firm-level construct where innovativeness,

risk-taking, and proactiveness are assumed to covary,

in line with Miller (1983) and Covin and Slevin’s

(1991) conceptualization of EO. In this view, each

organization falls somewhere along a conceptual

continuum ranging from conservative (low EO) to

entrepreneurial (high EO) (Covin and Slevin 1988).

Although many different approaches and samples

have been used, researchers generally agree on the fact

that EO positively influences firm performance. This

widely accepted belief primarily stems from Scholl-

hammer (1982, p. 210) who stated that ‘‘Entrepre-

neurship is the key element for gaining competitive

advantage and consequently greater financial

rewards.’’ However, Lumpkin and Dess (1996) were

one of the first scholars to discuss the EO–perfor-

mance relationship by stressing the importance of

viewing this relationship in a contingency framework.

Contingency theory suggests that certain key vari-

ables, such as environmental or organizational vari-

ables, need to be configured to reach a fit in order to

obtain optimal performance. Current research aims at

finding such key variables in order to explain

additional performance variance. The possible exis-

tence of variables that moderate the relationship

between a firm’s entrepreneurial posture and firm

performance was already recognized in 1991 by Covin

and Slevin. They made a distinction between three

classes of moderating variables, namely, internal,

external, and strategic variables.

Several researchers are increasingly operationaliz-

ing Covin and Slevin’s (1991) model, which indicates

a tendency of incorporating moderating variables in

EO–performance research. Resource availability (e.g.

Frank et al. 2010; Moreno and Casillas 2008; Wiklund

and Shepherd 2005) and environmental characteristics

(e.g. Casillas et al. 2010; Frank et al. 2010; Van Doorn

and Volberda 2009; Moreno and Casillas 2008;

Wiklund and Shepherd 2005; Lumpkin and Dess

2001) are by far the most widely used moderators in

The moderating role of socioemotional wealth 41

123

EO–performance studies. Several other studies inves-

tigated additional moderating variables such as the

stage of industry life cycle (Lumpkin and Dess 2001),

strategic process variables (Covin et al. 2006),

longevity (Runyan et al. 2008), senior team attributes

(Van Doorn and Volberda 2009), and internal social

exchange processes (De Clercq et al. 2010). Within a

family business context, generational involvement

(Casillas et al. 2010; Chirico et al. 2011), and family

involvement (Casillas and Moreno 2010) have been

studied as moderating variables.

Recently, Miller (2011) stressed that the issue of

context may influence EO and its relationship to

performance. He stated that, ‘‘a good way of making

context precise is to investigate a particular organiza-

tion type’’ (Miller 2011, p. 9). In this paper, we meet

the needs of this call by investigating family busi-

nesses as a particular organizational type because we

believe the intersection between family business

literature and entrepreneurship literature (e.g. Uhlaner

et al. 2012) has the potential to explain extra perfor-

mance variance in family businesses. Family firms are

the most dominant organizational form in the world

(Dyer 2003), but in the meantime they are so diverse

that they cannot be treated as one single group of

organizations (Westhead and Howorth 2007). There-

fore, instead of making generalized assumptions about

their behavior, we add to current literature by directly

measuring a deeper underlying variable that drives

their behavior, namely, SEW. In the following section,

we introduce SEW as a moderating variable on the

EO–performance relationship in family businesses.

3 Socioemotional wealth as a moderator

on the EO–performance relationship in family

businesses

3.1 Socioemotional wealth

Family firms are an important and prevalent type of firm

that is often characterized by the family’s large undi-

versified equity position and its control of leadership.

The interplay between the family and the business is

often represented in Tagiuri and Davis’s (1996) three-

circle model that makes a clear distinction between three

subsystems, namely, the business-, the ownership-, and

the family subsystem, each having its own goals and

ambitions. In family firms, the business and the family

are often so intertwined that it is hard to distinguish

where one ends and the other begins, with business goals

often embraced by family goals (Sharma et al. 1997).

When making business decisions, family firms combine

a mix of family-oriented goals and business-oriented

goals (Mahto et al. 2010). Therefore, we introduce

SEW, as an essential construct in family business

literature, in order to analyze family business behavior.

Gómez-Mejı́a et al. (2007, p. 106) define SEW as ‘‘non-

financial aspects of the firm that meet the family’s

affective needs’’, and state that SEW preservation is

often a goal in itself because family firms are loss averse

when it comes to their SEW. Stated differently, family

business owners, consciously or unconsciously, value

non-financial aspects that result from their family

control such as identity, the perpetuation of the family

dynasty, and the ability to exercise family influence

(Gómez-Mejı́a et al. 2007; Berrone et al. 2010). To

safeguard these non-financial benefits, family firms are

willing to accept an increased risk of poor firm

performance (Gómez-Mejı́a et al. 2007), as opposed to

publicly traded firms where decisions are largely made

based on financial goals in order to maximize share-

holder value (Mahto et al. 2010). As a consequence,

managerial decisions in family firms can be driven by a

desire to preserve and enhance the family’s SEW

because they are likely to see potential gains or losses in

SEW as a key criterion in managing the firm (Gómez-

Mejı́a et al. 2011; Berrone et al. 2012).

One can argue that all types of firms may exhibit non-

financial goals (such as corporate social responsibility or

customer satisfaction), but only family firms show signs

of family-centered nonfinancial goals, which often

relate to the family’s identity and reputation concerns

(Zellweger et al. 2010). Moreover, when the family

member’s self-concept is strongly tied to the firm’s

identity—where the firm often bears the person’s

name—the individual derives considerable non-eco-

nomic benefits from membership in such an organiza-

tion (Gómez-Mejı́a et al. 2007). According to social

identity theory (e.g. Stets and Burke 2000), people

classify themselves and others into various social

groups. Family membership is one of the most important

social groups, and accordingly, the family business is

directly tied to the family member identity. Therefore,

family members will strive to portray a positive image of

their firm in order to enhance their self-esteem and

accomplish their need for acknowledgment and

achievement (Mahto et al. 2010). In line with this idea,

42 J. Schepers et al.

123

family business owners are highly concerned with the

firm’s reputation because they want the business to

endure several family generations (Ward and Aronoff

1991), and to perpetuate the family dynasty. In addition,

Zellweger and Astrachan (2008) state that family

business owners subjectively value their ownership

stake in monetary terms, indicating that the family’s

perceived value of the firm may differ from the financial

value of their ownership stake and the private financial

benefits of their control. Stated differently, the more

importance the family attaches to the preservation of

their SEW through their firm, the higher their perceived

value of the firm will be. Again, these findings are in line

with the proposition of Gómez-Mejı́a et al. (2007) that

family firms are loss averse when it comes to decisions

that affect their SEW because they are unwilling to sell

the firm for only its financial value.

3.2 The EO–performance relationship in family

firms revisited

In line with Miller (1983) and Covin and Slevin

(1991), we see EO as the concurrent exhibition of

innovativeness, proactiveness, and risk taking. A

behavioral model of EO is suggested because behav-

iors rather than attributes are what give meaning to the

entrepreneurial process (Covin and Slevin 1991;

Covin and Lumpkin 2011). Consequently, firms with

a high degree of EO are characterized by a set of

distinct but related behaviors that have the qualities of

innovativeness, proactiveness, and risk taking. The

primary tenet in entrepreneurship literature is that EO

leads to improved performance (Lumpkin and Dess

1996). We question this basic supposition in a family

business context. More specifically, we question the

logic that entrepreneurial activities (e.g. be the first to

introduce new products or services; dramatically

change product or service lines) automatically

enhance financial performance since family firms

often face inefficiencies as a result of their SEW

preservation. Thus, the relationship between EO and

increased financial performance might be less straight-

forward than often proposed.

As mentioned before, SEW is a relatively new

concept which means that its relationship with financial

performance and EO remains to be studied (Berrone

et al. 2012). However, there are some studies that tried to

link SEW to firm performance (e.g. Berrone et al. 2010;

Cruz et al. 2012), but results are mixed. Also, the

entrepreneurship literature has already linked some of

the proposed SEW dimensions to entrepreneurial out-

comes (e.g. Aldrich and Cliff 2003; Lumpkin et al.

2010; Zahra et al. 2004), but again with inconclusive

results. When it comes to the EO–performance rela-

tionship in private family firms, the extent to which

SEW influences this relationship has not yet been

studied. In what follows, we illustrate how the ‘dark

side’ of SEW (Kellermanns et al. 2012) stifles the

transmission of EO into good financial performance.

Since gains or losses in SEW represent the pivotal

frame of reference that family firms use to make major

decisions (Gómez-Mejı́a et al. 2007; Berrone et al.

2012), its impact on the EO–performance relationship

cannot be underestimated. Fundamental to this theory

is the notion that family firms frame problems in terms

of assessing how actions will affect socioemotional

endowment. When this endowment is threatened, the

firm is willing to make decisions that are not driven by

an economic logic (Berrone et al. 2012). For example,

family firms who place high importance on the

preservation of their SEW tend to create or save jobs

for family members in order to perpetuate the family

dynasty (Gómez-Mejı́a et al. 2007). Furthermore,

founder CEOs often have the possibility to be

unusually generous to their children and relatives

(Schulze et al. 2001). Once the family has sufficient

ownership for undisputed control, it can begin to free

ride by exploiting the firm’s resources for personal

benefits and for privileges of family members (Schu-

lze et al. 2003a). Consequently, family employees are

often given perquisites and privileges that they would

not otherwise receive (Gersick et al. 1997; Ward

1987). Even more, Kirchhoff and Kirchhoff (1987)

found that when family member participation

increases, wage and salary expenses increase as a

percentage of revenue. So, our argument is that family

firms are often saddled with additional costs as a result

of their SEW preservation. Moreover, family firms

which place high importance on maintaining family

control and exercising family influence, are often

reluctant to professionalize (Gómez-Mejı́a et al.

2011). That is, hiring outside managers and delegating

authority are likely to reduce family control over

strategic decisions (e.g. Gómez-Mejı́a et al. 2011).

Clearly, limiting executive management positions to

family members (managerial entrenchment) can be

problematic as the risk of employing low quality

managers increases (e.g. Anderson and Reeb 2003;

The moderating role of socioemotional wealth 43

123

Lubatkin et al. 2005) which may compromise the

pecuniary realization of entrepreneurship efforts.

Hence, we argue that even though a family firm is

entrepreneurially oriented, the transmission of EO into

good financial performance can be hampered by SEW

preservation because EO—as a resource consuming

orientation—requires different resources in order to

reach better financial performance (e.g. Covin and

Slevin 1991; Su et al. 2011). Free riding behavior,

perquisites and privileges can lead to inefficient use of

resources and additional costs (Cruz et al. 2012), which

prevent the family firm to translate EO into profits. More

specifically, entrepreneurial activity such as, for exam-

ple, the introduction of new products, may increase the

firm’s sales level (top line in the profit and loss account)

(e.g. Casillas and Moreno 2010; Casillas et al. 2010), but

due to inefficiencies related to SEW preservation, this is

not fully translated into higher profits (bottom line in the

profit and loss account). Thus, SEW has a price tag

which constrains the family firm in realizing the benefits

of entrepreneurship and reaching higher profitability

levels. Therefore, we argue that SEW plays a crucial

moderating role in the EO–performance relationship as

SEW preservation has an impact on the mechanism that

translates entrepreneurial efforts into profits. Thus, to

understand how EO relates to financial performance in a

family business context, it is warranted to take into

account the importance family members attach to the

preservation of their SEW. Therefore we propose the

following hypothesis:

Hypothesis The level of socioemotional wealth

preservation will moderate the relationship between

EO and a family firm’s financial performance, in such

a way that a family firm’s EO will have a less positive

effect on financial performance when the level of

socioemotional wealth preservation increases.

4 Research method

4.1 Sample

The sampling frame was taken in the 2002–2003

period 1

from a wider study investigating firm

characteristics, strategic and environmental issues,

board and management composition, succession,

governance and performance issues in family busi-

nesses in Flanders, which is the northern region of

Belgium. In family business literature, there is a wide

assortment of proxies that have been used in the

empirical literature to define family firms (e.g. Ruth-

erford et al. 2008; Gómez-Mejı́a et al. 2011). In this

study, we made use of commonly selected criteria of

ownership and management control (Chua et al. 1999)

and CEO’s perception of being a family firm (West-

head and Cowling 1998) to select an operational

definition of family firms. As a consequence, in this

paper, a firm is classified as a family firm if: (1) at least

50 % of the shares are owned by the family, and the

family is responsible for the management of the

company, or (2) at least 50 % of the shares are owned

by the family, the company is not family-managed, but

the CEO perceives the firm as a family firm. All family

firms included in the sample were privately-owned. A

total number of 3,400 firms were randomly selected

from a family business database and a survey was

mailed to the CEO. A response rate of 9.2 % resulted

in 311 surveys, of which 295 were retained due to the

deletion of non-family firms and incomplete cases. To

run our own regression analysis, we deleted cases with

missing values on relevant variables, resulting in a

final sample of 232 cases. Potential nonresponse bias

was tested using two separate procedures. First,

following the argument that late respondents are

expected to be comparable to nonrespondents (Kanuk

and Berenson 1975), we differentiated between the

20 % earliest respondents and the 20 % latest respon-

dents and performed several t tests and chi-square tests

on the variables included in the analyses. The results

revealed no significant differences on any of the

variables, suggesting that there is no nonresponse bias

in the results. Robustness checks with cut-off points at

10 and 30 % showed exactly the same results. In

addition, performance indicators (dependent variable)

were drawn from the Belfirst database of Bureau Van

Dijk, covering 1.2 million Belgian companies. In

Belgium, all firms are obliged to file their financial

statements to the National Bank of Belgium which is

the primary source where Bureau Van Dijk retrieves

its data from. We were able to match the data of our

survey with the financial records of the Bureau Van

Dijk database using the company name. Furthermore,

by using two different sources of data, common

1 The sample was taken in the 2002–2003 period but our data is

still appropriate to test our model since there is no indication to

believe the EO–performance relationship is not stable over time

(Rauch et al. 2009).

44 J. Schepers et al.

123

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The moderating role of socioemotional wealth 45

123

method bias concerns are mitigated (Podsakoff et al.

2003). Sample characteristics of the data used in the

regression analysis are specified in Table 1.

4.2 Variables and measures

Financial performance is the most commonly used

performance indicator when studying family busi-

nesses (Rutherford et al. 2008). Return on assets

(ROA) was selected as the dependent variable because

it is a well-understood and widely used accounting

measure of financial performance. We calculated each

firm’s ROA as income before non cash items, interests

and taxes divided by total assets as reported in the

financial statements, multiplied by 100. To fully

capture the effect of EO on financial performance,

we measure performance in 2004 because it is often

assumed that EO has a lagged effect on performance

(Wiklund 1999; Zahra 1991).

For entrepreneurial orientation we use the nine-

item scale validated by Miller/Covin and Slevin

(1989) to gauge EO, capturing the firm’s innovation,

proactiveness, and risk taking. Each individual sub-

dimension includes three separate items. Recent

studies have accentuated the need of consistency

between the measurement model and the conceptual-

ization of the EO construct (e.g. Covin and Wales

2011). Taking into account the consistency condition,

we use the Miller/Covin and Slevin (1989) scale

because this measure assesses combinations of EO’s

elements via a composite dimension and is thus most

consistent with our conceptualization of EO. Further-

more, according to Covin and Wales (2011) and

George (2011), the nine-item Miller/Covin and Slevin

(1989) scale is the most commonly employed EO

measure and has exhibited high levels of validity and

reliability in numerous studies. In our study, the

underlying EO dimensions were highly correlated and

the alpha level for EO was found to be quite high

(0.84). The correlation between the underlying EO

dimensions allowed us to combine the three compo-

nents and relate the composite EO-index to perfor-

mance (Miller 2011).

Socioemotional wealth preservation (SEW) can be

defined as ‘‘non-financial aspects of the firm that meet

the family’s affective needs’’ such as the ability to

exercise family influence, maintaining family control

and the perpetuation of the family dynasty (Gómez-

Mejı́a et al. 2007). In this study, SEW was measured

using four questions taken from the Strategic Orien-

tations of Small and Medium-Sized Enterprises

(STRATOS) questionnaire (Bamberger 1994, p. 399;

Bamberger and Weir 1990, p. 109): (1) maintaining

family traditions/family character of the business, (2)

creating/saving jobs for the family (both may be

considered as proxies for the perpetuation of the

family dynasty), (3) independence in ownership, and

(4) independence in management (both may be

considered as proxies for the ability to exercise family

influence and maintaining family control) (Gómez-

Mejı́a et al. 2007; Goel et al. 2013; Vandekerkhof et al.

forthcoming). The respondents were asked to indicate

the importance they attach to each item on a 5-point

Likert scale (1 = totally unimportant, 5 = very

important). The first item ‘‘maintaining family tradi-

tions/family character of the business’’ refers to the

role of affection and emotions in the family firm. SEW

comes in a wide variety of related forms but the

perpetuation of family values and traditions through

the business is one important aspect of SEW (Gómez-

Mejı́a et al. 2007). Hence, the family is loss averse

when it comes to maintaining the family character of

the business, even if this reduces efficient exploitation

(Cruz et al. 2012). The second item ‘‘creating/saving

jobs for the family’’ is related to ‘‘perpetuation of the

family dynasty’’ from Gómez-Mejı́a et al. (2007).

Also, creating or saving jobs for other family members

is an essential part of the SEW construct because

evidence has shown that passing the firm to the next

generation (Zellweger et al. 2012) and creating

employment for family members (Cruz et al. 2012)

are both key goals for family firms. Since family firms

are loss averse when it comes to handling their SEW

(Gómez-Mejı́a et al. 2007), they will often limit

vacancies to family members even if this confines the

size and the quality of the pool of potential employees.

The third item ‘‘independence in ownership’’ is also an

important premise in the SEW debate and can be

linked to Gómez-Mejı́a et al.’s (2007) ‘‘family influ-

ence’’. Zellweger et al. (2012, p. 851) state that:

‘‘Conceptually, the family’s control of the firm

through ownership is critical to creating and preserv-

ing socioemotional wealth since such control is what

allows the family to pursue their interests through the

firm. In other words, control is a necessary condition

and plays a critical role in the theory of socioemotional

wealth.’’ Independence in ownership by definition

implies that the family controls the firm and therefore

46 J. Schepers et al.

123

it is highly relevant in measuring SEW. The fourth

item ‘‘independence in management’’ refers to the

family’s ability to exercise family influence in the

management of the firm. Family members can exert

direct control over strategic decisions by appointing

family members in the management team or selecting

a family CEO. Basically, having the opportunity to be

altruistic to other family members (e.g. providing

management positions) adds to the family’s SEW

(Gómez-Mejı́a et al. 2007; Schulze et al. 2003b). The

variables included in the scale are loaded on one single

factor and capture the main elements of the SEW

construct because they relate to the family’s affective

bond and their psychological ownership over the

business (Gómez-Mejı́a et al. 2007). The questions

were summed into one single index, and the Cron-

bach’s alpha reliability coefficient of the SEW scale

was found to be 0.7, which is acceptable for explor-

atory research (Hair et al. 1998). Next, we validated

our SEW measure using convergent validity and

predictive validity. First, ‘convergent validity’ refers

to the degree to which multiple endeavors to measure

the same concept with different methods are in

agreement (Venkatraman and Grant 1986). Given that

generation has been previously used as a proxy for

SEW (Stockmans et al. 2010), we look at the

correlation between our measure of SEW and gener-

ation by creating a dummy variable that equals zero if

the family founder serves as CEO and 1 if a descendant

serves as CEO. Here, we find a negative correlation

(-0.1696, p \ 0.01), which is in line with our expectations because SEW tends to decrease over

generations (Gómez-Mejı́a et al. 2007). The negative

correlation between SEW and generation provides

evidence for convergent validity of our SEW measure.

Next, ‘predictive validity’ refers to the extent to which

two measures that theoretically should be related, are

in fact related (Venkatraman and Grant 1986). In

family business literature, SEW has been theoretically

linked to (-) firm size (Gómez-Mejı́a et al. 2011;

Gómez-Mejı́a et al. 2007), (-) firm age (Gómez-Mejı́a

et al. 2007), (?) the proportion of family members on

the board (Gómez-Mejı́a et al. 2011), and (?) the

proportion of family members in the management

team (Gómez-Mejı́a et al. 2011). Correlating these

variables to our SEW measure provides the following

results: firm size (-0.1606, p \ 0.05), firm age (-0.1379, p \ 0.05), proportion of family members on the board (?0.1672, p \ 0.01), and proportion of

family members in the management team (?0.3020,

p \ 0.01). Again, these correlations are in line with theory, providing support for predictive validity of our

SEW variable.

Control variables, similar to those in other EO–

performance studies, were used to ensure proper

model specification. In particular, we included numer-

ous firm-level variables such as firm size (e.g. De

Clercq et al. 2010; Casillas et al. 2010; Casillas and

Moreno 2010), measured as the natural logarithm of

the number of full-time employees; firm age (e.g. De

Clercq et al. 2010; Casillas et al. 2010; Casillas and

Moreno 2010), measured as the natural logarithm of

the number of years the firm had been in business; firm

industry (e.g. De Clercq et al. 2010; Casillas et al.

2010; Casillas and Moreno 2010), measured through

four dummy variables that allow for five major

business lines to be differentiated: manufacturing,

construction, wholesale, retail, and services; and the

firm’s life-cycle stage, because it is stated that

corporate life cycle may influence the relationship

between EO and performance (Miller and Le Breton-

Miller 2011). We created two dummy variables that

allow for three main phases to be differentiated:

growth, maturity, and consolidation. This is a gener-

ally accepted classification in the literature (Gray and

Ariss 1985) and simplifying a firm’s growth process

into reduced categories is also standard practice

(Phelps et al. 2007). All control variables are derived

from questions in the 2002–2003 survey or from the

Belfirst database of Bureau Van Dijk.

5 Analysis and results

We present the correlations and descriptive statistics

for the variables in Table 1, and supplementary

descriptives are presented in Table 2. In our sample,

the mean value for a family firm’s EO, on a scale from

9 (low EO) to 45 (high EO), was found to be 24.2 with

a standard deviation of 6.6. These findings support the

notion that the average family firm exhibits a moderate

level of EO (e.g. Uhlaner et al. 2012; Short et al. 2009;

Naldi et al. 2007). In addition, the average firm

included in our sample places relatively high impor-

tance on the preservation of their SEW. On a scale

from 4 (low SEW concerns) to 20 (the firm attaches

high importance to the preservation of their SEW), a

The moderating role of socioemotional wealth 47

123

mean value of 14.8 was found with a standard

deviation of 3.3. Also, the correlation table shows

that SEW decreases with firm age and firm size, which

is in line with prior literature (e.g. Gómez-Mejı́a et al.

2007, 2011). Besides this, an average firm in our

sample is 41 years old and employs approximately 26

employees. A large amount of the firms are currently

in the maturity stage of their life-cycle (47.4 %). In

most cases, firms operate in the manufacturing

(34.9 %) and the wholesale sector (20.3 %). Linear

regression analysis was used to test our hypothesis.

In Table 3, we provide the regression results for

different models. The first model, in which only

control variables and the direct effect of EO on

financial performance were taken into account, pro-

vides an R 2

value of 0.0869 (p \ 0.05). Results indicate that EO is positively associated with a family

firm’s financial performance (b = 0.22, p \ 0.05), which is in line with previous literature. The second

model includes the interaction effect of SEW

(EO*SEW) to test our central hypothesis. We use

robust linear regression analysis to test this interaction

effect, after mean centering EO and SEW to reduce

multicollinearity concerns. At this point, the following

regression model was used: financial perfor-

mance = a ? b1 EO ? b2 SEW ? b3 EO*SEW ? d

controls ? e. Here, we proposed that EO will have a less strong positive effect on financial performance

when the level of SEW increases. At first glance, it

appears that the results do not confirm our hypothesis

because the interaction term is not significant.

There are however some important side notes that

need to be taken into account. First, Brambor et al.

(2006; p. 70) note that ‘‘The coefficients in interaction

models no longer indicate the average effect of a

variable as they do in an additive model. Even more

important to remember is that the analyst is not

directly interested in the significance or insignificance

of the model parameters per se anyway. Instead, the

analyst who employs a multiplicative interaction

model is typically interested in the marginal effect of

X on Y’’. The marginal effect of X (EO) on Y

(financial performance) can be expressed by the

following equation: ofinancial performance

oEO ¼ b1 þ b3SEW.

Therefore, we look at the marginal effect of X (EO) on

Y (financial performance) by taking into account the

relevant elements of the variance–covariance matrix

and recalculate the standard errors (Brambor et al.

2006). In doing so, SEW can turn out to have a

significant moderating impact on the relationship

between EO and performance for a certain range of

Table 2 Supplementary descriptives

Descriptive Minimum Maximum Mean Standard error

Entrepreneurial orientation (9–45) 9 42 24.18534 6.608741

Socioemotional wealth (4–20) 4 20 14.82759 3.334915

Financial performance -13 72 14.35345 10.32482

Number of employees 1 372 25.93533 43.71006

Firm age 3 362 40.68103 39.2241

Descriptive Percentage of observations

The firm’s life-cycle stage

Growth stage 38.8

Maturity stage 47.4

Consolidation stage 13.8

Firm industry

Manufacturing 34.9

Construction 13.3

Wholesale 20.3

Retail 15.5

Services 16.0

48 J. Schepers et al.

123

values even though Table 3 reveals an insignificant

moderating effect. 2

The solid line in Fig. 1 presents

the marginal effect of EO on financial performance.

The dotted lines surrounding the solid line present the

95 % confidence interval, which allows us to deter-

mine the conditions under which EO has a statistically

significant effect on financial performance. Thus, the

EO–performance relationship is significant when both

the upper and lower bounds of the confidence interval

are above (or below) the zero line. The figure shows

that a firm’s EO has a significant positive effect on a

firm’s financial performance when the level of SEW is

situated between 12 and 17. Looking at our sample, we

see that 59.1 % of the family firms are characterized

by a level of SEW situated in this range. Within this

interval, the positive effect declines as the level of

SEW increases. For extremely large (18–20) values of

SEW, it seems that EO no longer affects performance.

This means that when the family attaches too much

importance on the preservation of their SEW, the dark

side of SEW becomes too dominant and prevents that

entrepreneurial efforts are successfully converted into

good financial performance, which is exactly in line

with our hypothesis. Since 25.4 % of the family firms

in our sample are characterized by SEW values

between 18 and 20, our hypothesis is supported by

almost 85 % of our data. Only a small proportion of

our sample, namely 15.5 %, is characterized by

extremely small SEW values (4–11). Here, we find

no support for our hypothesis which is probably due to

the rather substantial range of values for which we

only have very few cases available.

Table 3 Linear regression analysis: three models

Variable Model 1 Model 2 Model 3

b SE b SE b SE

Controls

Life-cycle stage a

Maturity stage -2.0271 1.6502 -2.0484 1.6517 -1.8834 1.5033

Consolidation stage -3.6540 2.5435 -3.5820 2.5574 -3.6368 2.1953

Firm characteristcs

Firm age 0.8890 1.0096 0.9027 1.0368 0.7409 0.8330

Firm size -1.4765** 0.7387 -1.4523** 0.7141 -1.5402** 0.7188

Industry b

Manufacturing -3.7206 2.6491 -3.7597 2.6833 -3.7356* 2.0735

Construction -4.6804 3.3587 -4.6583 3.3633 -4.8401* 2.5326

Wholesale -5.0219* 2.5888 -4.9968* 2.5910 -5.1173** 2.2216

Retail -6.9979** 2.7372 -6.9413** 2.7394 -6.8271** 2.3674

Hypothesis

EO 0.2203** 0.0944 0.2180** 0.0960

SEW 0.0442 0.2061

EO*SEW -0.0134 0.0306

EO*SEWhigh 0.1765 0.1125

EO*(1 - SEWhigh) 0.2561** 0.1108

R 2

0.0869 0.0879 0.0940

F 1.99** 1.61* 2.29**

N = 232

*,**,*** Significance at 0.10, 0.05 and 0.01, respectively a

Suppressed category for the firm’s life-cycle stage is ‘‘growth stage’’ b

Suppressed category for the firm’s industry is ‘‘services’’

2 In general, researchers should always calculate marginal

effects even if the interaction coefficient is significant (Brambor

et al. 2006; Kam and Franzese 2007).

The moderating role of socioemotional wealth 49

123

To confirm our central hypothesis, we performed a

more straightforward post hoc regression analysis.

Namely, we created a dummy variable ‘SEWhigh’ that

equals one when the level of SEW is situated between

the range of 18 and 20. This cut-off value follows from

our Brambor analysis and coincides with the SEW

values where the marginal effect of EO on firm

performance becomes insignificant. At this point, the

following estimated regression model was used (Yip

and Tsang 2007): financial performance = a ? b1 EO*SEWhigh ? b2 EO*(1 - SEWhigh) ? d con- trols ? e. The results from model 3 in Table 3 indicate that EO has a significant positive effect (b = 0.2561, p \ 0.05) on financial performance when SEW is lower than 18 (EO*[1 - SEWhigh]). On the other

hand, when SEW is higher than 18, EO no longer

affects financial performance (EO*SEWhigh). These

results are in line with our previous findings. Taken

together, our results indicate that the marginal effect of

EO on firm performance decreases when the family

attaches more importance to the preservation of their

SEW which provides support for our hypothesis. The

moderating role of SEW becomes even more domi-

nant for extremely large values of SEW because our

results indicate that higher EO is no longer translated

in better financial performance when the family

attaches too much importance on the preservation of

their SEW.

Although most EO–performance studies have

found a positive linear relationship between EO and

performance, there is some empirical evidence that an

inverse curvilinear relationship may exist due to

differences in market context (e.g. Tang et al. 2008).

In our study, a post hoc analysis supported a linear

relationship between EO and performance. The

inclusion of EO-square in our regression model did

not change our results, suggesting that there is no

curvilinear relationship between EO and performance.

6 Discussion and conclusion

EO is a corollary concept that emerged primarily from

the strategic management literature (Lumpkin and

Dess 1996) while SEW can be seen as a ‘‘homegrown’’

(Berrone et al. 2010, p. 2) theoretical formulation

within the family business field. Nevertheless, our

study shows that both concepts influence the behavior

of private family firms and ultimately helps explain

performance variance in these firms. Indeed, prior

literature shows that EO must be seen as a resource

consuming strategic orientation (e.g. Covin and Slevin

1991) since it requires different types of resources in

order to reach better financial performance. For

example, access to financial resources (e.g. Frank

et al. 2010; Wiklund and Shepherd 2005) and physical

resources (Moreno and Casillas 2008) are found to be

important moderating variables in the EO–perfor-

mance relationship. SEW, as a dominant paradigm in

the family business field, provides insight into how

family firms exploit their resources (Gómez-Mejı́a

et al. 2011) and consequently adds to our

Fig. 1 Marginal effect of EO on a firm’s financial

performance as SEW

changes. Percentage

distribution of the SEW

variable: SEW values

4–11 = 15.5 % of the

sample; SEW values

12–17 = 59.1 % of the

sample; SEW values

18–20 = 25.4 % of the

sample

50 J. Schepers et al.

123

understanding of the EO–performance relationship in

private family firms.

Results show that EO positively influences finan-

cial performance. These findings are in line with

previous research (e.g. De Clercq et al. 2010; Rauch

et al. 2009; Wiklund and Shepherd 2005; Covin and

Slevin 1989) and indicate that the positive EO–

performance link also applies to a family business

context. This demonstrates the importance of having

an EO in family firms because it helps to create or

sustain a higher level of financial performance.

Consistent with our central hypothesis, the level of a

firm’s EO is less positively related to firm performance

when the level of SEW preservation is high and even

becomes insignificant when SEW is extremely high.

These findings are in line with our central reasoning

and contribute to the literature on the dark side of SEW

(Kellermanns et al. 2012). We demonstrated how

SEW hampers the transmission of EO into financial

performance gains. For firms with extremely high

SEW values, it seems that a higher entrepreneurial

orientation does not affect financial performance.

These findings can be interpreted as an extension of

our central reasoning. Namely, it might mean that

when family firms place too much importance on the

preservation of their SEW, firm resources will be used

inefficiently (Cruz et al. 2012). Thus, even if the firm

demonstrates high EO, they won’t be able to reap the

financial benefits.

It is straightforward to see what happens in a profit

and loss account. For example, the introduction of a

new product can increase the firm’s sales level (top

line), but when the family places too much importance

on the preservation of their SEW, excessive costs (e.g.

free riding costs, perquisites) will prevent the firm

from translating entrepreneurial efforts into higher

profit figures (bottom line). Especially in entrepre-

neurship literature, there has been a tendency to equate

sales growth with business success. However, sales

growth is only one step towards business success

(profitability) because other factors, like SEW, need to

be taken into account. Therefore, while EO is essen-

tially a growth orientation (Lumpkin and Dess 1996),

which is almost universally portrayed as a good thing,

we believe it does not automatically make the firm

profitable. These findings seem to be tantamount to an

ongoing discussion in growth literature where growth

without profitability is not always seen as a sign of

sound development (Davidsson et al. 2009).

Next, while the importance of the EO–performance

relationship has been frequently recognized, only a

small number of scholars has discussed this phenom-

enon in a family business context (e.g. Cruz and

Nordqvist 2012; Zellweger and Sieger 2012), which is

rather distinct from other organizational contexts due

to the combination of family and business systems.

Thus, family firm specific variables that may affect the

EO–performance relationship remain largely unex-

plored. We examine family firm behavior and its

impact on the EO–performance relationship by taking

into account a variable that drives their behavior,

namely, SEW. In doing so, we aim to contribute to the

literature in at least two ways. First, by theoretically

and empirically investigating the repercussions of

family firm behavior on the EO–performance rela-

tionship, we illustrate how SEW preservation changes

the effect EO has on a firm’s financial performance

without ignoring the heterogeneous character of

family firms. Generally speaking, we develop Covin

and Slevin’s (1991) and Lumpkin and Dess’ (1996)

works by introducing a behavioral variable into their

contingency framework. This behavioral approach is a

relatively new attempt to shed light on the black box

between EO and performance and is not limited to the

family business context only. Behavioral moderators,

like SEW, have the potential to explain additional

performance variance in all kinds of firms, over and

above the traditional environmental and organiza-

tional contingencies, because they will certainly

influence the implementation of a firm’s EO. We

believe our results are inspiring and hope future

research will build on our train of thought.

Furthermore, we want to point out that our results

can be interpreted not only in light of EO–performance

studies, but also are complementary to other research

fields. More specific, disentangling the black box

between an input variable and an output variable is

attracting increased attention from researchers of

different research fields (e.g. Fey et al. 2009; Daily

et al. 2003). In this study, we contribute to the attempt

to partially open up the black box of the EO–

performance link in family firms. Investigating this

black box is especially relevant in the context of

private family firms because they are often seen as

complex systems (Tagiuri and Davis 1996) that

continuously need to configure certain variables in

order to be successful (Miller and Le Breton-Miller

2006). Thus, simply having an EO is not a sufficient

The moderating role of socioemotional wealth 51

123

condition for a family business to be successful

because the transmission of EO into higher financial

performance can be hampered by certain (family

related) variables. We contributed to the literature in

partially opening up the black box by means of

presenting SEW as a variable that impedes the

transmission of EO into good financial performance.

Moreover, our findings are complementary to other

recent arguments in the family firm literature such as

family firm heterogeneity. In particular, family busi-

ness literature can be divided into two major streams

of literature that describe the diversity in family firms

(Sharma and Nordqvist 2007). The first stream can be

described as the ‘components of family involvement’

(e.g. Klein et al. 2005; Westhead and Cowling 1998),

which simply captures the extent and mode of family

involvement in ownership, management, governance,

and succession. The second stream, known as the

‘essence approach’ (Chua et al. 1999), focuses on the

repercussions of family involvement on the behavior

and decision making styles in these firms. In this

context, our paper adds to the essence approach in a

way that it underlines the giant diversity in family

firms by accentuating an underlying variable that

drives their behavior. Although we did not explicitly

hypothesize, our findings reveal that family firms

attach varying importance to the preservation of their

SEW, which seems to determine their behavior. This

suggests that simply defining a family business by its

components does not necessarily capture its essence,

because the variability in SEW preservation entails

differences in their actual behavior. Indeed, some

firms are highly attached to the preservation of their

SEW whereas others attach rather moderate impor-

tance to the preservation of these noneconomic

factors. Nevertheless, it is acknowledged that SEW

plays a pivotal role in the behavior of family firms

(Gómez-Mejı́a et al. 2011), but the way in which it

influences organization outcomes is a highly desired

future research area since SEW has two sides, a dark

side and a bright side (Kellermanns et al. 2012).

Depending on the research model, we encourage

scholars to reflect on this ambidextrous feature of

SEW and decide whichever side of SEW is dominant

in the context of their study. For example, SEW can

increase the commitment and trustworthiness of

family employees (bright side) but at the same time

SEW may lead to inefficient use of firm resources and

incompetent family management (dark side). We

believe the concept of SEW can only prosper if

researchers bear in mind its two faces because a

unified view of SEW might be too straightforward.

Our study also has some limitations which may

provide interesting avenues for future research. First,

it would be interesting to expand the model by

incorporating other moderating variables that help to

gain a more profound understanding of family busi-

ness performance. In particular, other variables relat-

ing to family firm behavior, such as family orientation

(Lumpkin et al. 2008) or long-term orientation (Le

Breton-Miller and Miller 2006), can be used as

supplementary variables to build more complex mod-

els which might improve researcher’s knowledge

concerning the family firm’s EO–performance rela-

tionship. Second, our work has used the Miller/Covin

and Slevin (1989) scale to capture a firm’s EO.

Although this scale is the most commonly employed

EO measure in the literature (Covin and Wales 2011;

George 2011; George and Marino 2011), other scales

exist which may provide interesting additional

insights. Similar reasoning applies for the SEW scale

where more refinements can be made in future

research.

Although there is no indication to believe the EO–

performance relationship is not stable over time, it

might be an interesting avenue for future research to

replicate our study with data from a period of

economic crisis, such as experienced in recent years,

to test whether these extreme circumstances affect the

relationship between EO and performance in private

family firms.

Acknowledgments This research was partially funded by the National Bank of Belgium.

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