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| Relationship between CEO Characteristics and Start-up's Strategic Inertia:Evidence from C4.5 Decision Tree |
| Chen Xiaolin1,Liu Yeshen2,Song Zhe2 |
| (1.School of Marketing & Logistics Management, Nanjing University of Finance & Economics, Nanjing 210023,China;2.Business School ,Nanjing University, Nanjing 210093,China) |
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Abstract The existing views generally argue that large companies have inertia, while small companies have flexibility. In reality, however, some start-ups suffer from rapid failure due to strategic inertia (e.g., OFO). Unlike the sources of strategic inertia in mature firms, start-ups are not constrained by resource stocks, structural constraints, routines, or experiences of success or failure. The multiple factors that have influenced mature firms to generate strategic inertia cannot explain why start-ups have strategic inertia. CEO characteristics may be an important source of strategic inertia in start-ups. According to the upper echelon theory, a firm's business decisions and daily actions are influenced by the CEO, and the CEO's characteristics influence the final decisions and execution of the firm's actions. Previous studies on CEO characteristics and strategic inertia have not distinguished between general firms and start-ups which have special properties. Moreover, unlike mature firms, start-ups suffer from higher uncertainty, information asymmetry and financial constraints, which limit the exercise of CEO initiative, and it is difficult for start-ups to bear the costs and risks of strategic change. Therefore, it needs further investigation if the findings of previous studies on CEO characteristics and strategic inertia in mature firms are equally appropriate to explain the strategic inertia of start-ups.#br#In terms of research methods, the regression methods commonly used in existing studies usually center around the "net effect" of CEO characteristics on strategic inertia, and pay insufficient attention to the "joint effect" between multiple independent variables. Therefore, this study applies the C4.5 decision tree algorithm to study the influence of the "joint effect" of CEO characteristics and the internal and external environmental factors on the strategic inertia of start-ups, which helps to form a macro and systematic understanding of the causes of strategic inertia in start-ups. Moreover, previous studies mostly adopt explanatory modeling focusing on the causal inference between CEO characteristics and strategic inertia. However, the predictive nature of CEO characteristics on strategic inertia can also be examined. First, predictive analysis facilitates deeper excavation of the complex linkages behind variables and promotes the advancement of explanatory models and theories. Second, the predictive effect offers a new perspective to evaluate explanatory models, and it can evaluate the relative importance of each variable and test the relevance of previous theories to practice by measuring the degree of each variable's contribution to prediction accuracy. Finally, the degree of predictive capability can reflect the capability of theories to explain practical problems, and the predictive accuracy of explanatory models is directly proportional to the reliability of the theories on which they are based. Thus, this paper applies the C4.5 decision tree algorithm in machine learning to investigate the predictability of CEO characteristics for the strategic inertia of start-ups and explores the importance of different CEO characteristics in predicting strategic inertia.#br#This paper uses samples between 2009 and 2019 from China's listed companies with operating periods less than 12 years, and applies the C4.5 decision tree based on multidimensional CEO features to predict strategic inertia and investigate the influence mechanism. It is confirmed that the C4.5 decision tree can predict the strategic inertia of start-ups with promising accuracy; among multiple CEO characteristics, CEO education,share ratio and income are the three most important predictors of strategic inertia in start-ups; interactions among CEO characteristics, and the internal and external environment of the companies contribute to six different scenarios of strategic inertia. This paper not only studies the strategic inertia of start-ups from a systematic perspective but also provides inspiration for strategic management practices for start-ups.#br#The following policy recommendations are proposed. First, in a competitive industry, to maintain the flexible turnaround ability of private start-ups, the CEO should hold no more than 44% of the share ratio to avoid the "trench defense effect". In the case of state-owned start-ups, the board of directors or government departments can give the CEO a higher salary to stimulate the CEO's "loss aversion" mentality and motivate the CEO to create value through strategic adjustments. Second, for new private start-ups in moderately competitive industries, in order to maintain the flexibility of enterprises, young CEOs can be given priority under the same conditions when selecting and hiring CEOs. Finally, for state-owned start-ups in industries with cutthroat competition, the government should give full trust to the CEO and encourage the CEO to rely more on themselves to make breakthroughs in a highly competitive industry.#br#
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Received: 08 October 2021
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