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Abstract
Applying regulatory focus theory, this paper investigates the impact of both ‘initial confidence’ and ‘exactness of growth expectations’ on the financial performance of small and medium-sized firms in Latvia. Drawing on a data set based on repeated survey design, we explore the complexity of this relationship empirically. Our overall findings suggest that when controlling for other relevant factors, such as actual growth, entrepreneurs having higher growth expectations perform significantly better in terms of profitability. In addition, education has a strong modifying effect. The impact of high growth expectations on subsequent profit performance is stronger for entrepreneurs with a lower level of education. Moreover, these effects are amplified by ethnicity. They are much stronger for ethnic Russian entrepreneurs compared with ethnic Latvian entrepreneurs.
Notes
1. After Kazakhstan, the Russians living in Latvia constitute the largest percentage of ethnic Russians living outside of the Russian Federation (Pisarenko Citation2006).
2. An important point to note is that here we talk about a cognitive bias (i.e. the difference in perceptions of risk), not about a different level of risk tolerance, as in the traditional theory (see the discussion in Baron Citation2004; De Carolis and Saparito Citation2006; Wu and Knott Citation2006).
3. Though ‘entrepreneurial success’ can be conceptualized in a variety of ways, including subjective as well as objective measures, this paper analyzes ‘entrepreneurial success’ in terms of financial performance. See section 3.
4. Although in such a way we do not capture the richness of the term ‘overconfidence’; ‘overconfidence’ involves a broader range of processes than ‘high expectations’.
5. It is of importance to note that young entrepreneurs with less business management experience may also leave their business endeavour due to better access to alternative job opportunities in the market (Stam et al. Citation2007).
6. For further discussion of performance measures, see Chandler & Hanks (Citation1993); Robinson (Citation1999); Vesper (Citation1996); Watkins et al. (Citation2003).
7. In the questionnaire design, the key motivation behind using ordered categorical responses instead of asking for exact figures is that the former method leads to a higher response rate.
8. As a robustness check, we explored the possible determinants of expectations of change in sales. We found the estimated probit equations to have poor exploratory power regardless of specification (results available on request). That confirms the argument we made in section 2: psychological variables affecting the entrepreneurial outcomes cannot be easily reduced to observable objective characteristics of the entrepreneurs. The only variable that had a significant impact was the indicator of ‘opportunity entrepreneurship’, a dummy variable that indicates that ‘to respond to market opportunities’ is chosen as one of the three most important reasons why the business was started. Clearly, ‘entrepreneurial confidence’ and ‘opportunity entrepreneurship’ are closely related phenomena. The simple correlation coefficient between the two variables is 0.22, which is significant (at 5% level). However, we leave this theme for future research.
9. Available from the authors upon request.
10. Close to 30% of the population are ethnic Russians. About two-thirds of these have no citizenship status (Paalzow et al. Citation2007). See also Hazans (Citation2007b).