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Methods

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Strategies and Post-IPO Performance

Tim R. Holcomb, James G. Combs, David G. Sirmon and Jennifer Sexton

Organizational Research Methods 2010 13: 348 originally published online 19 November 2009

DOI: 10.1177/1094428109338401

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Entrepreneurship Research

Organizational

Research Methods

Volume 13 Number 2

April 2010 348-389

# 2010 SAGE Publications

10.1177/1094428109338401

http://orm.sagepub.com

hosted at

http://online.sagepub.com

Post-IPO Performance

Tim R. Holcomb

James G. Combs

Florida State University

David G. Sirmon

Texas A&M University

Jennifer Sexton

Florida State University

New ventures lack resources, are buffeted by environmental factors, and often experience rapid

growth and organizational transformations that can have profound effects on performance and

survival. This indicates that factors at multiple levels and across time affect new venture

outcomes. Research examining these outcomes often address relationships that cross

levels or time, but rarely both. Because scholars potentially can make rich theoretical

contributions by simultaneously investigating temporal relationships that cross levels, the

authors illustrate multiyear, multilevel model building with random coefficient modeling

(RCM) using language that is accessible to entrepreneurship scholars. Specifically, they

model the effects of strategic growth actions on new venture performance using a

longitudinal data set of young, IPO-stage firms. Their illustration demonstrates the statistical

advantages of modeling levels and time simultaneously and offers a roadmap for entrepreneurship scholars interested in examining these effects, including a step-by-step guide with SAS

code for working with these data. They also describe some specific research questions to help

advance theory development using RCM.

Keywords: entrepreneurship; multilevel methods; longitudinal data; random coefficient

modeling; new venture performance

rganizations are dynamic and complex. In comparison to established firms, new ventures face particular challenges stemming from a liability of newness that heightens

performance risks and makes them more strongly influenced by environmental change,

competitive threats, or shifting consumer preferences (Delmar, Davidsson, & Gartner,

2003; Stinchcombe, 1965). As a result, new ventures fail at an alarming rate, mostly due

Authors Note: We gratefully acknowledge the guidance that Jeremy Short provided in conjunction with the

feedback that we received from three anonymous reviewers. We are also thankful for the support that we

received from the Jim Moran Institute for Global Entrepreneurship at Florida State University. Please address

correspondence to Tim R. Holcomb, Department of Management, College of Business, Florida State University,

Tallahassee, FL 32306; e-mail: tholcomb@cob.fsu.edu.

348

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349

to resource constraints and intense competitive conditions, and many that do survive attain

only marginal performance (Acs & Armington, 2006; Barringer, Jones, & Neubaum, 2005).

At the same time, however, managers of new ventures have more control of their ventures growth than some macro theories suggest (Baum, Locke, & Smith, 2001, p. 301).

These firms are agile and flexible, and they can adapt their organizational strategies and

structure more quickly to changing resource and environmental conditions than their larger,

more established counterparts (Baker & Nelson, 2005; Garud & Karnoe, 2003). Indeed,

whereas firm- and industry-level factors influence key performance outcomes for all firms,

Short, McKelvie, Ketchen, and Chandler (2009) found that young firms experience substantially greater year-to-year changes in performance than established firms. Although such

irregularity may reflect sensitivity to changes in firm effects such as resources or

strategic choice, it may also suggest the influence of environmental contingencies on the

saliency of these relationships.

Extant research also provides evidence that time conditions new ventures ability to

adapt. Specifically, the liability of newness that imposes greater capacity for change upon

young firms declines over time (Bamford, Dean, & Douglas, 2004; Gresov, Haveman, &

Oliva, 1993; Venkataraman & Van de Ven, 1998). This suggests that cross-sectional and

longitudinal differences in firm- and industry-level conditions may create very different

performance expectations for new ventures. As a result, a better understanding of these

relationships requires investigations that cross levels and time simultaneously.

Methodologically, when conditions at multiple levels affect key organizational outcomes

or when conditions change over time, sample observations likely contain some degree of

dependence. Dependence occurs when knowledge about one observation provides meaningful insights about another (Cohen, Cohen, West, & Aiken, 2003).1 In samples containing

new ventures from different industries, for example, information about the industry in

which a venture resides provides knowledge about conditions shared by other members

of the same industry. This form of dependence is called nesting, and it occurs when lower

level units are members of (or nested in) a higher level group (Bliese & Hanges, 2004;

Kenny & Judd, 1986).

Time also creates dependence. Measures for observations located temporally close to one

another (i.e., measures in years 1 and 2) will be more strongly correlated than measures that

are temporally distant (i.e., measures in years 1 and 5; Bliese & Ployhart, 2002), and the rate

of change among measures can become more or less variable over time (Chan, 1998).

Dependence due to levels and time are related, yet distinct concepts. Depending on the

research context, neither, one, or both types of dependence may be relevant. Dependence

matters because failure to address it can adversely affect the accuracy of significance tests,

bias variance estimates, and leave important relationships undiscovered (Bliese & Hanges,

2004).

Unfortunately, research provides compelling evidence that these types of dependence are

common. While results vary, studies estimating the influence of firm and industry effects

among established firms show that industry membership explains between 10% and 20%

of the variance in firm performance (e.g., McGahan & Porter, 1997, 2002; Misangyi, Elms,

Greckhamer, & Lepine, 2006). Moreover, industry and firm effects vary over time, with

systematic change accounting for as much as 40% of the variation in firm performance

(Short, Ketchen, Bennett, & du Toit, 2006). New venture performance outcomes appear

particularly subject to dependence due to both levels and time (Short et al., 2009), which

makes assessing multilevel longitudinal data especially important in entrepreneurship

research.

Fortunately, recent advances have brought methodological techniques, broadly labeled

as random coefficient modeling (RCM), that allow for more accurate modeling of multilevel longitudinal data.2 These techniques provide the ability to perform regression-like analyses of relationships at lower levels alongside analyses depicting variation in lower levels

due to higher level effects and time. Several studies have adopted these techniques in an

effort to explain their usefulness and make them more accessible to scholars interested in

assessing the impact of either levels or time (e.g., Bliese & Ployhart, 2002; Raudenbush

& Bryk, 2002). More recently, important work by Misangyi et al. (2006) and by Short

et al. (2006) provide initial guidance on the use of RCM to model levels and time using

samples of established firms. Because newness introduces greater dynamism into entrepreneurship contexts and because some young firms can quickly adapt to organizational and

environmental contingencies, entrepreneurship scholars stand to benefit greatly from

developing and testing theories that explain the performance effects of these contingencies

across levels and time.

The purpose of this article, therefore, is to extend the discussion of RCM by demonstrating how to model levels and time simultaneously. Expanding from the work of Misangyi

et al. (2006) and Short et al. (2006), we show how scholars can use RCM to investigate

time-varying covariates across multiple levels in ways that potentially increase our understanding of relationships within and between nested levels over time, including important

cross-level interactions. We do so in a new venture setting and using language accessible

to entrepreneurship scholars. Relying on a longitudinal data set of 308 single-product, new

ventures in the United States that undertook an initial public offering (IPO) in 1996, we

illustrate the sequence of steps involved in analyzing IPO-stage new ventures nested in

industries over time (5 years, 1997 to 2001) using RCM. Specifically, we model the effects

of two strategic growth actionsresearch and development (R&D) and acquisitionson

measures of post-IPO performance.

Our central contributions are that we demonstrate, in an entrepreneurial context, how to

capitalize on the rich nature of multilevel longitudinal data using RCM, explain the advantages of doing so, and offer guidance to aid theory building that leverages RCM. Although

there are currently several excellent discussions of model building using multilevel or longitudinal data (e.g., Bliese & Ployhart, 2002; Chan, 1998; Littell, Milliken, Stroup, &

Wolfinger, 2004; Raudenbush & Bryk, 2002), only a small number of studies model both

levels and time (e.g., Hough, 2006; Misangyi et al., 2006; Short et al., 2006, 2009). Extending previous work, our demonstration takes two important steps forward by (1) illustrating

model building using random and stable covariates at three levels and (2) investigating

cross-level interactions that demonstrate how to model constructs at higher levels that act

together with constructs at lower levels to explain variation in venture performance and performance change over time. In doing so, we offer a roadmap designed to help entrepreneurship scholars address rich theoretical questions using RCMs unique analytical capabilities.

In an effort to make RCM more accessible, we also provide the syntax for the PROC

MIXED procedure in SAS for each step (see Appendix) and show how to test and compare

these complicated designs in the model-building process. This is not an entirely unique

351

approach. Previous discussions involving multilevel or longitudinal data have illustrated the

use of structural equation modeling (SEM) programs such as AMOS and LISREL (e.g.,

Chan, 1998; Wang & Bodner, 2007; Willett & Sayer, 1994), special-use programs such

as MLn (e.g., Kreft & de Leeuw, 1998), R and the NMLE package (e.g., Bliese & Ployhart,

2002), and hierarchical linear and nonlinear modeling (HLM) software (e.g., Raudenbush &

Bryk, 2002), and integrated data management and statistical programs such as STATA

(e.g., Rabe-Hesketh & Skrondal, 2008) and SAS PROC MIXED (e.g., Littell et al.,

2004; Singer, 1998). In this work, however, we extend Singers (1998) approach to fitting

two-level individual growth models with PROC MIXED by illustrating step-by-step model

building for three-level mixed models. The position of PROC MIXED as an integrated program within SAS makes it an ideal choice to illustrate model building to those scholars

seeking to perform data reduction, management, and analysis of multilevel longitudinal

data within a single statistical package.

We start by describing the challenges posed by levels and time in designs that model

within- and between-unit change over time and highlight the problems with current

approaches used to address these challenges. We then outline a general strategy for building

a mixed model to simultaneously model random and fixed effects within and between levels

to account for differences in performance and performance change at three levels: withinventures (over repeated annual measures), between ventures nested within industries, and

between industries.3 Finally, we offer practical guidance about how entrepreneurship scholars can construct theories that can be tested via RCM to answer new and important research

questions. We believe that doing so will help entrepreneurship scholars obtain the most

value from their data.

Organizational outcomes vary systematically over time, between firms, and among

industries. For example, ecology scholars use dynamic models of resource competition

to explain diversity in firm performance (e.g., Hannan & Carroll, 1992; Hannan & Freeman,

1989). Initial increases in the density of firms during the early stages of industry growth

enhance a markets institutional legitimacy and the ability of its members to attract

resources. Over time, legitimacy gains boost performance, reducing mortality among industry members as the market matures. As density in a market continues to grow, however,

competition for scarce resources adversely affects survival at an increasing rate (Carroll

& Hannan, 1989). Other research shows that firm-level factors such as resources firms control (e.g., George, 2005; Katila & Shane, 2005), the strategies they pursue (e.g., Chandler &

Hanks, 1994), and the knowledge they accumulate (e.g., Collins, Holcomb, Certo, Hitt, &

Lester, 2009; Haleblian & Finkelstein, 1999; Lu & Beamish, 2004) also impact

performance.

Research in entrepreneurship indicates that new venture performance may be particularly

subject to relationships that cross levels and time. Short and his colleagues (2009), for

example, found that year-to-year performance change was considerably larger for new

firms than for older, established firms. Other studies offer evidence that firm and industry

conditions exert a strong influence on performance that varies as firms age (e.g., Bruderl &

Schussler, 1990; Eisenhardt & Schoonhoven, 1990; Robinson & McDougall, 2001). Examining new bank foundings, for example, Bamford et al. (2004) found that resources and

decision choices at founding had a stronger impact on new venture growth than the same

factors did in later years. These findings confirm earlier empirical research that younger

firms are less restricted by developed structures, policies, and routines and, thus, have more

latitude for change, which suggest strategies set in the first few years become increasingly

difficult to change (see also Boeker, 1989; Bamford, Dean, & McDougall, 2000). Overall,

research suggests that conditions at multiple levels have direct and indirect influences on

new venture performance, that the rate of change in these relationships differs among levels

and over time, and that levels and time combine to shape venture performance and performance change in important ways.

Examining these relationships entail the use of multilevel longitudinal data. Unfortunately, dependence in these data affects tests of statistical significance and the interpretation

of results from single-level regression techniques (Bliese & Hanges, 2004; Kenny & Judd,

1986). To understand how entrepreneurship scholars currently address levels and time, we

surveyed empirical entrepreneurship studies investigating the antecedents of new venture

performance. Specifically, we examined studies that modeled new venture performance

in leading management and entrepreneurship journals, including the Academy of Management Journal, Administrative Science Quarterly, Strategic Management Journal, Journal of

Management, Entrepreneurship Theory and Practice, and Journal of Business Venturing.

We limited our examination to articles published during the period beginning with 2002

through 2007 because RCM is relatively new to the management literature.

During this period, we found 32 articles that explicitly modeled new venture performance, applying a wide range of theoretical perspectives to test the influence of different

individual, group, organizational, and environmental factors on performance.4 Twentythree of these studies relied on employment or one or more accounting-based measures

of performance. Of these studies, 12 modeled year-to-year change (growth) in sales or

employment. Among the 32 empirical studies, 29 had nested structures implied in the data,

including 14 longitudinal designs and 26 with ventures from two or more industries.

Regression-based techniques such as ordinary least squares (OLS), logit, one-way analysis

of variance (ANOVA), and discriminant analysis were predominant; two studies used SEM.

We found no studies that used RCM. Of the studies with nested structures and/or longitudinal designs, 12 ignored levels and/or time altogether, analyzing the data as though the

effects of these structures were not present.

In the 17 entrepreneurship studies where scholars controlled for dependence, 4 studies

aggregated lower level predictors to higher levels, modeling relationships using means

on the predictor and dependent variables for each group (e.g., industry). Aggregation to

higher levels creates a loss of within-group information. For example, aggregating revenue

from different venturing actions to the firm level in a study of corporate venturing activity

dilutes the large and small impacts of different strategic actions through averaging. It also

obscures important temporal patterns at lower levels and has the practical implication of

ignoring dependence when hierarchically nested levels matter (Bliese, 2000).

We found 13 studies that controlled for dependence using k 1 dummy variables to

account for levels or time (where k is the number of higher level groups or time periods),

including one study that combined the use of dummy variables with aggregation.

353

Examining the relationship between guided preparation (i.e., research, planning, and other

activities that entrepreneurs consider prior to start-up) and venture growth, for example,

Chrisman, McMullan, and Hall (2005) controlled for variation among industries by including a series of industry dummy variables. Dummy variables, however, also pose a challenge

because while these variables account for average differences in the dependent variable

among groups or time periods, their use does not allow scholars to assess the extent to which

relationships vary among levels over time (Hofmann, Griffin, & Gavin, 2000). Furthermore, when many groups are present, this approach consumes substantial degrees of freedom and decreases statistical power (Brush, Bromiley, & Hendrickx, 1999).

Problems associated with these approaches and, consequently, the advantages of RCM

are described elsewhere (see Bliese & Hanges, 2004; Kenny & Judd, 1986). Generally, the

use of conventional regression techniques like OLS to model multilevel or longitudinal data

can lead to understated error terms in some cases; in others, it can inflate errors. Either bias

can increase the likelihood of incorrectly rejecting (not rejecting) a statistical effect where

one exists (does not exist) Heck & Thomas, 2000). Organizational scholars have been aware

of the problems caused by dependence for some time (Kenny & Judd, 1986), and there are

how to guides available for building multilevel models that account for levels or time

(see, Bliese & Ployhart, 2002; Raudenbush & Bryk, 2002).

We are aware of only four studies, however, that demonstrate the application of RCM to

test levels and time. These include Hough (2006), Misangyi et al. (2006), and Short et al.

(2006, 2009). Three of these studiesHough (2006), Misangyi et al. (2006), and Short et al.

(2006)model performance for established firms. Two of themHough (2006) and

Short et al. (2009)decompose firm performance by level over time but do not model the

types of substantive relationships of interest to entrepreneurship researchers (i.e., venture

strategy performance, industry performance, etc.). Short et al. (2006) investigated how

firm- and industry-level attributes impact performance trends for established firms. We

build upon Short et al. (2006) by showing how entrepreneurship scholars can separate the

performance effects of these attributes into their time-varying and stable components for

new ventures. Furthermore, we also build upon Misangyi et al. (2006) by modeling industry

as a level and adding random and stable covariates at three levels, which allows us to simultaneously model performance and performance change effects within and between industries. Finally, we build upon Misangyi et al. (2006), Short et al. (2006), and other work

in this area by explicitly modeling cross-level interactions. These additional steps are

important because they will allow entrepreneurship scholars to move beyond using RCM

to better control for the effects of level and instead develop testable theories that consider

the effects of cross-sectional and longitudinal differences in organizational and environmental contingencies on venture performance (see Step 4 in the step-by-step illustration

that follows). As such, we also suggest research domains in which scholars can exploit

RCMs capabilities to investigate new, theoretically rich research questions. Specifically,

we attempt to guide entrepreneurship research beyond simple estimates of the variance

explained at each level, toward more elaborate questions involving substantive constructs

of interest at multiple levels.

We offer our example in an entrepreneurship context. This is important because, as Short

and his colleagues (2009) demonstrate, firm and industry effects differ between new and

established firms in their influence on performance. Their findings are consistent with

this may be the case (e.g., Baker & Nelson, 2005; Boone, Carroll, & van Witteloostuijn,

2002; Florin, Lubatkin, & Schulze, 2003; Stuart, Hoang, & Hybels, 1999). Thus, whereas

efforts to explain how scholars can adapt RCM to deal with either levels or time are important first steps, the complexities involved in adapting RCM to deal with levels and time

simultaneously in a new venture context suggest the need to demonstrate model building

specifically to entrepreneurship scholars.

Random coefficient regression permits mathematical analysis of nested relationships

within a single model by incorporating a series of simultaneous within-group regressions

that iterate between estimation of fixed and random effects until a model converges. In

doing so, RCM partitions total variance into within- and between-group components and

thereby controls for dependence. Modeling effects in this way accounts for random variance

among levels and across time (see Kreft & de Leeuw, 1998). This approach partitions variance among levels, called variance components, which allows scholars to specify how

attributes at a higher level influence (moderate) the relationship between lower level predictors and a dependent variable. RCM accounts for the variance components among time

periods and sheds light on how individual units change over time and whether there are differences in the patterns of change among levels. In our example, we are interested in

whether there are identifiable differences in patterns of post-IPO performance change over

time (e.g., some experience growth, others contract, and still others experience little or no

growth) and the extent to which these patterns relate to ventures strategic growth actions

and resource slack, to industry conditions such as munificence, or to combined effects that

cross levels at different stages following an IPO.

To facilitate our discussion, we introduce notation to help illustrate model building using

RCM (Bryk & Raudenbush, 1992).5 In its simplest form, RCM provides estimations of variance components using an unconditional means (Raudenbush & Bryk, 2002) or null (Kreft &

de Leeuw, 1998) model that contains no predictors. We use the indices i, j, and k to denote

time, firm, and industry, respectively. In the case of our three-level mixed model example that

contains repeated measurements for ventures nested in industries, the unconditional means

model partitions variation in the dependent variable among three levels: within-ventures

(measures repeated at different points in time), between ventures nested within industries, and

between industries. At the first level of analysis (i.e., level 1, within-ventures), RCM models

performance at each time period as a function of an intercept plus a random error:

Yijk p0jk eijk ;

1a

where Yijk is the dependent variable for time period i of venture j in industry k; p0jk is mean

of Y for venture j in industry k (across time); and eijk is a random time effect, that is, the

deviation of Y for time period i of venture j in industry k.

In this case, there are i observations for j new ventures in k industries of a continuous

variable, Y, which are modeled as a function of the intercept for each venture (p0jk, the mean

of Y) and error (eijk), and the variance of eijk is the level 1 random variance. The model

355

assumes a normal distribution for eijk with a mean of zero and variance of s2. RCM assumes

variance is uniform for measures of venture j in industry k across 1 ijk time periods. At the

second level of analysis (i.e., level 2, between ventures nested within industries), RCM

models the mean performance p0jk as a dependent variable varying randomly around each

industrys mean performance. The level 2 equation is as follows:

p0jk b00k r0jk ;

1b

where b00k is the mean of Y for industry k in time period i and r0jk is a random firm effect,

that is, the deviation of Y for venture j in industry k over time.

This level 2 equation assumes a normal distribution for r0jk with a mean of zero and

variance of tp. In this case, RCM assumes the variance tp is uniform for measures for all

ventures in industry k. The third level (i.e., level 3, between industries) completes the

three-level RCM model with the intercept b00k of Equation 1b, and the level 2 equation

modeling variance among ventures within industries is simultaneously modeled as

a dependent variable varying randomly (in this case) around the grand mean of

performance.

b00k g000 u00k ;

1c

where g000 is the population mean of Y (i.e., the grand mean) and u00k is a random industry

effect, that is, the deviation of Y for industry k over time.

At level 3, RCM assumes the among-industries residual u00k is distributed normally with

a mean of zero and variance of tb. The unconditional means model illustrated in Equations

1a1c examines the amount of variance attributable to each level of analysis. In this

example, RCM partitions the variance in performance into three variance components:

within-ventures (across time periods) s2, among ventures within industries tp, and among

industries tb. As a result, Equations 1a1c provide initial estimates of the variance

components in Yijk at three levels: variance in Yijk within venture j over time (level 1),

s2; variance in Yijk among ventures within industry k (level 2), tp; and variance in Yijk

among industries (level 3), tb. RCM represents total variance in a three-level mixed model

by s2 tp tb. Based on the variance component estimates, we can compute the proportion of variance that is within ventures over time, among ventures within industries and

among industries as follows:

s2/(s2 tp tb) is the proportion of variance within ventures (across time periods);

tp/(s2 tp tb) is the proportion of variance among ventures within industries; and

tb/(s2 tp tb) is the proportion of variance among industries.

If variation across levels is statistically significant, RCM assumes that observations differ on the dependent variable among groups and/or across time periods. This approach is

equivalent to other variance components techniques such as ANOVA, with one important

caveatRCM differs in the method of estimation. Specifically, RCM uses iterative procedures, such as maximum likelihood or restricted maximum likelihood estimation, that are

more efficient and do not produce negative variances. Furthermore, RCM incorporates

additional error terms as it iterates across levels to estimate equations and is less restrictive

than OLS or ANOVA. By contrast, single-level approaches often require, for example,

equal group sizes, assume that errors due to time tp (between-venture variability) and group

tb (between-industry variability) are zero, and only provide an estimate for variability in

each observation, s2 (Snijders & Bosker, 1994). RCM, however, partitions variance

into within- and between-group components and thereby controls for dependence in data

(Raudenbush & Bryk, 2002).

Of note, the basic multilevel approach extends naturally to longitudinal research designs

using RCM with one important difference: the level 1 variable (time) has a chronological

ordering in multilevel longitudinal models, whereas level 1 variables typically have no

structure in multilevel models (Raudenbush & Bryk, 2002). Bliese and Ployhart (2002) note

that this critical difference raises two issues scholars should consider when estimating longitudinal models. First, scholars should carefully consider how to treat time as a predictor to

test different growth functions (linear, quadratic, etc.). Second, scholars must pay closer

attention to the error variancecovariance matrix, which typically displays much more complex patterns than do multilevel models (Littell et al., 2004; Wolfinger, 1996). For instance,

when fitting a model in which slopes vary over time, one can potentially introduce heteroscedasticity into the error variance-covariance matrix. In our example, this suggests that

residual within-venture observations (after controlling for the linear effect of time) may correlate with one another through the within-venture error-covariance matrix. Many different

types of error-covariance structures are possible. We describe our approach using SAS

PROC MIXED in the Appendix.

Sample and Data

Our sample consists of financial and operating data from 1997 through 2001 for U.S.

ventures that undertook an IPO in 1996. We identified these firms from the Thomson Financials Securities Data Company (SDC) New Issues database, which provides a comprehensive listing of U.S.-based IPOs. During 1996, approximately 830 ventures completed an

IPO. As with prior research involving IPO firms (e.g., Fischer & Pollock, 2004), we

restricted the sample to single-product firms, which limits extraneous variance and

increases the accuracy of measures and results (Morrow, Sirmon, Hitt, & Holcomb,

2007). Next, we excluded regulation A offerings (small issues raising less than U.S.$1.5

million), real estate investment trusts (REITS), spin-offs, savings banks and insurance companies experiencing a demutualization, closed-end mutual funds, and reverse leverage buyouts (LBOs; Ritter, 1991), leaving 631 ventures. We then restricted the sample to ventures

that were 6 years old or less at IPO. Research suggests that disruptive events associated with

an initial offering reset the liability of newness clock (e.g., Certo, 2003; Fischer &

Pollock, 2004), and a 6-year cutoff reflects a conservative definition of new venture applied

in previous entrepreneurship research (e.g., McDougall & Robinson, 1990; Zahra, Ireland,

& Hitt, 2000). The final sample contains 308 ventures representing 35 industries (using the

four-digit standard industrial classification (SIC) code).

We collected data from Standard & Poors (S&P) COMPUSTAT database, Thomson

Financials SDC Platinum Merger and Acquisitions database, Compact Disclosure, the

357

Investor Responsibility Research Center (IRRC) Directors database, the Center for

Research in Securities Prices (CRSP) database, and IPO prospectuses filed pursuant to the

Securities and Exchange Commissions (SEC) Rule 424(b)(1). We selected these sources

for their comprehensiveness and extensive use in entrepreneurship research.

Measures

We measured performance following the IPO in two ways: employment growth and

return-on-assets (ROA). Two of the most common measures of growth performance in new

ventures are sales and employment (Gilbert, McDougall, & Audretsch, 2006). Although

sales growth often generates cash that can be reinvested to fund expansion and development, this measure of growth assumes firms have products or services to sell, which in

industries such as biotechnology and pharmaceuticals, semiconductor and component

design, and prepackaged software, may take years to develop. As a result, many consider

annual employment growth a more relevant indicator of growth, particularly in hightechnology industries (Bruton & Rubanik, 2002). Given these advantages and the measures

strong correlation with sales growth (Baysinger, Meiners, & Zeithaml, 1982; Chrisman

et al., 2005; Murphy, Trailer, & Hill, 1996), we use employment growth via year-to-year

change in employment for the years 19972001. Prior research and reviews of

accounting-based performance constructs in entrepreneurship research suggest widespread

use of ROA as a measure of new venture performance (e.g., Murphy et al., 1996; Robinson,

1999). Therefore, we calculated ROA as the ratio of operating income to total assets. Importantly, our inclusion of this measure enables us to compare our results with results from

prior studies that examine industry, firm, and time effects on performance (e.g., McGahan

& Porter, 1997, 2002; Misangyi et al., 2006; Short et al., 2006).

Growth is a vital indicator of a new ventures viability and survival. As a result, the question of why some new ventures experience different growth performance than others has

generated an extensive literature (see Gilbert et al., 2006, for a review). Ventures produce

growth from both internal and external sources. Therefore, we model two strategic growth

actionsone internal and one externalcommonly pursued by new ventures: R&D intensity (internal) and acquisition investment (external). Growing through internal R&D occurs

when a venture uses innovative product development or marketing practices to produce new

products or services that capture incremental (new) market demand. R&D investments

ensure the ventures ownership and control of key knowledge and enable it to profitably

exploit technological developments and build proprietary research platforms that can lead

to future success (Zahra & Bogner, 1999). That is, R&D is important because the knowledge gained at any one point in time becomes a foundation for later R&D efforts. We

calculated R&D intensity as the ratio of total R&D spending to net sales during the year.

Because internal innovations require the allocation of significant resources that often

have uncertain outcomes, new ventures frequently rely on acquired growth. Acquisitions

enable young, entrepreneurial firms to quickly expand their product or service offerings

(Penrose, 1959), extending their reach into new markets without investing internally. For

each year, we operationalized acquisition investment by calculating the annual investment

(U.S. dollars) in acquisitions that represent at least 5% of the acquiring firms market

capitalization (Rosen, 2006). We obtained the acquisition history for each venture from

Thomson Financials SDC Platinum database. Acquired firms (target firms) were both

public and private. To measure the relative size of the target and the acquiring firm, we used

the ratio of the targets market value to the market value of the acquiring firm.6 We included

only those announced acquisitions that ventures completed. During the 5-year period,

ventures in our sample completed 670 acquisitions meeting the 5% restriction.

We also included two additional firm effects: financial slack and venture size. Even

among groups of otherwise similar ventures, evidence suggests that differences in financial

capital held by new firms can account for variations in strategies and performance (e.g.,

Lee, Lee, & Pennings, 2001; Shrader & Simon, 1997). Financial slack is a dynamic quantity that represents the difference between financial resources currently possessed by a firm

and expected (financial) demands of the current business. Slack impacts performance by

increasing the number of potentially positive-return strategic alternatives available (Tan

& Peng, 2003) and by funding experimentation and risk taking (Nohria & Gulati, 1996).

Thus, we included a measure of financial slack to account for the level of working capital

available to firms to meet growth needs following an IPO. Specifically, we measured financial slack as the ratio of working capital to net sales (Bourgeois, 1981). We included a measure of venture size, calculated as the natural logarithm (a linear transformation) of each

ventures net sales dollars for each year (Certo, Daily, Cannella, & Dalton, 2003). Empirical

findings suggest that performance varies as a function of size (e.g., Freeman, Carroll, &

Hannan, 1983). The advantages of size, for example, relate to greater market power (Bain,

1956), minimum efficient scale (Jovanovic, 1982; Jovanovic & MacDonald, 1994), and

legitimacy with stakeholders (Zimmerman & Zeitz, 2002) and are known to change over

time as industry conditions change (Agarwal, Sarkar, & Echambadi, 2002).

To model industry-level conditions, we included a measure of industry munificence,

which reflects environments capacity to support growth given the abundance (or lack)

of available resources (Dess & Beard, 1984). We expect a positive association between

munificence and venture performance, as competition for resources tends to be less intense

in high growth industries (Porter, 1980). We summed the sales for firms operating in each

industry (with four-digit SIC codes) for each year in our sample and logged each value to

reduce skewness (Keats & Hitt, 1988). We calculated munificence for each year by first

regressing the annual average industry sales over 5 years with the focal year as a midpoint

(i.e., munificence for 1996 is based on a regression of sales from 1994 to 1998; Keats &

Hitt, 1988; Misangyi et al., 2006). As a final step, we divided the resulting slope coefficient

by the mean value of industry sales for those years to adjust for absolute industry size (Dess

& Beard, 1984).

Data Set-Up

Importantly, our three-level mixed model contains some covariates that remain fixed

over time, such as a ventures primary SIC industry membership, and others that vary with

time across different levels. Following this approach, some higher level factors such as

industry munificence may differentially influence lower level effects (i.e., R&D intensity,

acquisition investment) on venture performance. In an effort to be clear about how we organized these data prior to the analysis, Table 1 contains a subgroup of ventures in our sample

from three industries.

599902

599902

599902

599902

599902

92276H

92276H

92276H

92276H

92276H

131347

131347

131347

131347

131347

902951

902951

902951

902951

902951

46612K

46612K

46612K

46612K

46612K

826170

826170

826170

826170

826170

1997

1998

1999

2000

2001

1997

1998

1999

2000

2001

1997

1998

1999

2000

2001

1997

1998

1999

2000

2001

1997

1998

1999

2000

2001

1997

1998

1999

2000

2001

JDA Software Group

JDA Software Group

JDA Software Group

JDA Software Group

Siebel Systems Inc

Siebel Systems Inc

Siebel Systems Inc

Siebel Systems Inc

Siebel Systems Inc

Calpine Corp

Calpine Corp

Calpine Corp

Calpine Corp

Calpine Corp

U S Energy Systems

U S Energy Systems

U S Energy Systems

U S Energy Systems

U S Energy Systems

Inc

Inc

Inc

Inc

Inc

Inc

Inc

Inc

Inc

Inc

Millennium Pharmaceuticals

Millennium Pharmaceuticals

Millennium Pharmaceuticals

Millennium Pharmaceuticals

Millennium Pharmaceuticals

Ventana Medical System Inc

Ventana Medical System Inc

Ventana Medical System Inc

Ventana Medical System Inc

Ventana Medical System Inc

Company Name

CNUM

Year

7372

7372

7372

7372

7372

7372

7372

7372

7372

7372

4991

4991

4991

4991

4991

4991

4991

4991

4991

4991

2835

2835

2835

2835

2835

2835

2835

2835

2835

2835

SIC

0.0872

0.0576

0.1182

0.1113

0.0992

0.2163

0.1673

0.1899

0.1740

0.1054

0.1130

0.0683

0.0752

0.0689

0.0500

0.0078

0.0724

0.0700

0.0969

0.0228

0.0336

0.0148

0.0544

0.1056

0.0807

0.1164

0.1554

0.0172

0.0697

0.0994

ROA

0.6135

0.0327

0.0704

0.2121

0.1070

1.9979

1.2588

1.3069

0.0019

0.2018

0.2865

0.8886

1.1769

0.9750

0.0984

0.0000

0.1429

0.3750

2.3636

0.5676

0.4038

0.3493

0.3503

0.4286

0.0942

0.6682

0.1705

0.2500

0.0544

0.0258

Empl_Growth

39.1710

25.0000

29.0400

36.7670

42.6190

42.6980

72.8530

145.5140

198.6290

366.2300

7.1650

10.7120

27.5560

35.8600

79.3480

0.0000

0.0000

0.0000

0.0000

0.0000

114.1900

510.3800

268.7400

400.5750

579.5100

7.9570

7.0780

11.1160

14.9290

16.3590

RD_Intense

0.0000

44.0000

0.0000

20.5000

51.8500

15.7600

490.6610

259.0000

1942.5140

0.0000

331.0000

157.7999

572.1670

1209.8540

2466.4510

3.3000

0.0000

0.0000

2.7190

17.9950

4.0000

0.0000

577.3350

86.0000

2416.8300

0.0000

10.5000

0.0000

0.0000

0.0000

Acq_Invest

Table 1

Multilevel Longitudinal Data from a Subgroup of Sample Firms

4.2202

4.5035

5.8907

4.5009

2.7439

3.7017

2.5344

4.4994

3.1676

3.5978

0.9328

1.7091

1.9120

1.1492

1.2412

0.8868

1.6003

0.8964

4.2478

1.6470

6.2308

8.3529

4.8427

10.9094

7.4552

6.2417

3.6967

3.6757

3.6185

3.3645

Slack

4.5301

4.9378

4.9675

5.1517

5.3371

4.7856

5.9726

6.6745

7.4935

7.6253

5.5664

6.2761

6.6997

7.7227

8.9336

1.1734

1.6477

1.7431

2.2329

3.6770

4.5101

4.9029

5.2186

5.2846

5.5103

3.5011

3.8858

4.2543

4.2787

4.4865

Ln_Sales

49.3244

48.2348

38.2370

25.9734

23.7284

49.3244

48.2348

38.2370

25.9734

23.7284

3.1259

4.1884

4.2079

2.5031

1.4176

3.1259

4.1884

4.2079

2.5031

1.4176

8.4512

16.8988

22.0645

13.9558

12.6291

8.4512

16.8988

22.0645

13.9558

12.6291

Ind_Munif

359

Each row contains a unique venture-year observation. Although our sample contains 308

ventures in 35 four-digit SIC industries, the longitudinal design includes 5 years of data;

therefore, the data set contains 1,540 rows (observations). Furthermore, as previously noted,

we coded time such that Year 0 represents the first year following a new ventures IPO,

Year 1 is 2 years following the year of its IPO, and so forth. The four-digit SIC representing

industry membership remains fixed over the period. However, transient firm and industry

effects, such as R&D intensity, acquisition investment, and industry munificence, vary over

time.

In the following section, we conduct a step-by-step illustration of RCM to examine

multilevel, longitudinal data. With each step, we illustrate the model, summarize output

produced by the estimation procedure, and explain how to interpret the results. We offer

syntax for the PROC MIXED procedure in the Appendix. We begin with the unconditional

means (null) model and successively add complexity by adding factors until we reach the

complete model.

Step 1: Unconditional Means Model. The first step is to partition the variance components (i.e., s2, tp, tb) into their within-ventures (i.e., over time), between ventures nested

within industries and between industries components as described by Equations 1a1c. This

model provides an initial estimate of the variance components for Yijk. In our example, Yijk

represents venture performance at time i for venture j in industry k. p0jk in Equation 1b represents mean performance across time for venture j in industry k. The intercept for Equation

1b, b00k (estimated in Equation 1c), represents the mean performance of all ventures in

industry k, and g000 is the overall (grand) mean for all new ventures. We estimate iteratively

via full maximum likelihood estimation to ensure comparability across nested models

(Raudenbush & Bryk, 2002).

We report the results of the unconditional means models in Table 2. From these results,

we can compute the percentage of variance that is within ventures over time (level 1),

between ventures within industries (level 2), and between industries (level 3). If industries

do not differ with respect to mean performance, then the among-industries variance component (i.e., [tb]/[s2 tp tb]) will equal 0. Our analysis finds the proportion of the total

variance in employment growth that occurs within ventures over time is 89.9% (p < .001),

variance among ventures within industries is 9.8% (p < .001), and the variance among

industries is 1.3% (p < .05). The proportion of the total variance in ROA that occurs within

ventures over time is 58.3% (p < .001), variance among ventures within industries is 32.2%

(p < .001), and the variance among industries is 9.5% (p < .01). These estimates suggest

that industries do differ with respect to mean performance following an IPO and that the

variation within ventures over time and among ventures within industries is even greater.

However, whereas the amount of variance in ROA explained by industry membership parallels the size of effects found elsewhere (e.g., McGahan & Porter, 1997; Short et al., 2006),

we find greater variability within ventures over time, which suggests that new ventures may

be more vulnerable to environmental conditions following their transition from private to

public capital markets.

361

Table 2

Unconditional Means Model

Results for Venture Employment Growth

Fixed Effect

Coefficient

SE

t Value

0.1590***

0.0202

7.86

Variance

Component

SE

Z Value

Pr > |t|

0.6293***

0.0173

36.29

<.0001

0.0698***

0.0122

5.75

<.0001

0.0094*

0.0057

1.65

.0500

Random Effect

Temporal variation (within-firm variation in

employment growth over time), eijk

Firm initial variation (variation in initial

employment growth among ventures within

industries), r0jk

Industry initial variation (variation in industry

mean employment growth among industries), u00k

Variance Decomposition (by Level)

% by Level

Level 2 (among ventures within industries)

Level 3 (among industries)

89.9

9.8

1.3

D 2LL

Fixed Effect

Coefficient

SE

t Value

0.1064*

0.0512

2.08

Variance

Component

SE

Z Value

Pr > |t|

over time), eijk

Firm initial variation (variation in initial ROA

among ventures within industries), r0jk

Industry initial variation (variation in industry

mean ROA among industries), u00k

0.2707***

0.0152

17.82

<.0001

0.1498***

0.0224

6.69

<.0001

0.0442**

0.0171

2.58

.0050

% by Level

Random Effect

Level 2 (among ventures within industries)

Level 3 (among industries)

58.3

32.2

9.5

D 2LL

** p < .01;

* p < .05

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Step 2: Linear change model with fixed effects at all levels. In Step 1, we used the unconditional means model (Equations 1a1c) to examine the amount of variance attributable to

each type of effect. In the second step, we examine the total variance explained by year

effects by adding a covariate to the model to determine whether patterns of change vary

among ventures over time. Specifically, we extend Equations 1a1c by adding the covariate

YEARijk and its slope coefficient p1jk to the level 1 equation (see Equation 2a) to represent

the rate of performance change for venture i in industry k for each period. We coded YEARijk such that Year 0 is the first full year following the IPO, Year 1 is second full year following the IPO, Year 2 is the third full year, and so forth (for more details, see Bliese &

Ployhart, 2002). By coding the first year as zero, the intercept represents the measure of

performance in the initial period following the IPO. In this step, p0jk in Equation 2a represents the mean performance for venture j in industry k. The intercept for Equation 2b, b00k,

represents the mean performance of all ventures in industry k, whereas g000 is the overall

initial mean performance for all ventures (when YEAR 0). These changes produce the

following equations:

Yijk p0jk p1jk YEARijk eijk

2a

2b

p1jk b10k

2c

2d

b10k g100

2e

We report the results of the linear change model with random intercepts in Table 3. Importantly, PROC MIXED produces a variety of statistics useful for comparing the goodness-of-fit

of multiple models using the degrees of freedom (df) associated with the number of model differences between the contrasted models. Of particular relevance are the 2 log likelihood

(2LL, also referred to as the deviance statistic) and Akaikes information criterion (AIC).

In both cases, models that fit better produce smaller values. The 2LL depicts difference scores

between nested modelsfor example, comparing one model containing n predictors with

another containing n 1 predictorsand follows an approximate w2 distribution. Thus, unlike

AIC, it offers a w2 significance test. For model comparison purposes and for consistency with

previous studies, we report the 2LL and evaluate goodness-of-fit using the w2 test.

Comparison of the goodness-of-fit w2 for the model in Step 2 with the unconditional

means (null) model from Step 1 returns a statistically significant difference (D 2LL

13.20; p < .001; df 1), suggesting that the model with the random slope for time fits the

data significantly better than the unconditional means model. The total variance explained

by year is determined by comparing the time period variance estimated in this model with

that estimated in the unconditional model. As reported in Table 3, differences in the trajectories (slopes) of individual ventures account for approximately 3.1% and 4.4% of the

htotal variance in employment growth

i. and ROA, respectively (calculated as

s2linear change model with fixed effects s2unconditional means model

363

Table 3

Linear Change Model With Fixed Effects at All Levels

Results for Venture Employment Growth

Fixed Effect

Coefficient

SE

Average linear change rate for employment

growth, g100

0.3357***

0.0883***

0.0279

0.0096

SE

Z Value

Pr > |t|

Variance

Component

Random Effect

Level 1

Temporal variation, eijk

Level 2

Firm initial variation, r0jk

Level 3

Industry initial variation, u00k

Model Fit Statistics

D 2LL

t Value

0.6098***

0.0168

36.29

<.0001

0.0737***

0.0121

6.08

<.0001

0.0095*

0.0058

1.65

.0500

82.90***

3.1%

Fixed Effect

Coefficient

SE

t Value

Average linear change rate for ROA, g100

0.1444*

0.0239**

0.0554

0.0087

2.60

2.93

Variance

Component

SE

Z Value

Pr > |t|

0.2695***

0.0151

17.83

<.0001

0.1497***

0.0224

6.70

<.0001

0.0445**

0.0172

2.59

.0050

Random Effect

Level 1

Temporal variation, eijk

Level 2

Firm initial variation, r0jk

Level 3

Industry initial variation, u00k

Model Fit Statistics

D 2LL

13.20***

4.4%

*** p < .01;

*** p < .05

Step 3: Linear change model with random effects at all levels. In the third step, we allow

YEARijk to vary randomly at level 2 and level 3 by extending Equations 2a2e to specify a

basic three-level growth model that considers the extent to which significant slope variation

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exists across time at each level. First, we add the residual, r1jk, to Equation 2c, to produce a

slope coefficient for YEARijk (i.e., a linear trend) that varies randomly among ventures

within industries. In this equation, b10k is the mean rate of change in performance for ventures within industry k. Next, we add a residual (u10k) to Equation 2e to estimate the intercept in the level 2 equation that allows the slope coefficient for YEARijk to vary among

industries. The g100 term in this equation is the overall (grand) mean rate of change in performance for all ventures. These changes produce the following equations:

Yijk p0jk p1jk YEARijk eijk

3a

3b

3c

3d

3e

Table 4 contains the results of the linear change model with random intercepts that

allows the linear trend to vary randomly by level. In equations modeling ROA, the variance

component for the firm initial variation, r0jk, and the firm linear change rate within industries, r1jk, are statistically significant (both p < .001), suggesting performance change parameters using ROA vary among ventures within industries. This provides empirical support

for the idea that ventures differ in their average performance following an IPO and follow

different rates of adaptation over time (Singh, House, & Tucker, 1986), which highlights

again the importance of considering differences in the rate of performance change in samples containing ventures nested within industries. Comparison of the goodness-of-fit

deviance statistics in Step 3 with fixed effects from Step 2 using ROA returns a statistically

significant difference (D 2LL 26.30; p < .001; df 4), suggesting that the model with

random slopes for time is a better fit.

Step 4: Linear change model with level 2 direct (Step 4a) and moderating (Step 4b)

effects. Broadly speaking, we designed the models in Step 2 and Step 3 to understand the nature

of the relationship between new venture performance and time among ventures within industries and among industries. From the results, we conclude (a) the linear trend in employment

growth and ROA following an IPO is negative and statistically significant, (b) ventures nested

within industries differ in terms of their initial performance levels, (c) the linear rate of performance change among ventures within industries following an IPO is statistically significant for

ROA but not for employment growth, and (d) differences in the linear rate of performance

change among industries are not significant for either measure of post-IPO performance.

To examine the effects of our independent variables (i.e., R&D intensity, acquisition

investment, slack, size, and munificence), we need to first determine the appropriate level

at which each predictor should enter the model. Theory should drive this decision (House,

Rousseau, & Thomas-Hunt, 1995; Klein, Dansereau, & Hall, 1994; Mitchell & James,

2001). Fortunately, many constructs in entrepreneurship research are global, meaning

one measures them at the same level where they have theoretical meaning. In our case,

R&D intensity, acquisition investments, slack, and size clearly represents theoretical

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365

Table 4

Linear Change Model With Random Effects at All Levels

Results for Venture Employment Growth

Fixed Effect

Coefficient

SE

t Value

Average linear change rate for

employment growth, g100

0.3357***

0.0883***

0.0279

0.0096

12.02

9.18

Variance

Component

SE

Z Value

Pr > |t|

0.6098***

0.0168

36.29

<.0001

0.0737***

0.0089

0.0121

0.0064

6.08

1.39

<.0001

n.s.

0.0093*

0.0009

0.0056

0.0017

1.66

0.55

.0500

n.s.

Fixed Effect

Coefficient

SE

Average linear change rate for ROA, g100

0.1464*

0.0209*

0.0644

0.0104

Variance

Component

SE

Z Value

0.1648***

0.0139

11.82

<.0001

0.3483***

0.0289***

0.0526

0.0064

6.62

4.50

<.0001

<.0001

0.0571**

0.0095

0.0254

0.0102

2.25

0.93

.0100

n.s.

Random Effect

Level 1

Temporal variation, eijk

Level 2

Firm initial variation, r0jk

Firm linear change rate for employment

growth, r1jk

Level 3

Industry initial variation, u00k

Industry linear change rate for

employment growth, u10k

Model Fit Statistics

D 2LL

1.30

Random Effect

Level 1

Temporal variation, eijk

Level 2

Firm initial variation, r0jk

Firm linear change rate for ROA, r1jk

Level 3

Industry initial variation, u00k

Industry linear change rate for ROA, u10k

Model Fit Statistics

D 2LL

26.30***

*** p < .01;

*** p < .05

t Value

2.26

2.01

Pr > |t|

constructs that describe firms, whereas scholars commonly use munificence to characterize

industries. Entrepreneurship scholars are less likely to confront shared constructs

wherein they aggregate information about lower level units to higher level constructs. This

might occur in entrepreneurship research, for example, if one takes measures of entrepreneurial orientation from individuals within an organization to depict the organizations

overall entrepreneurial orientation (Lumpkin & Dess, 1996; Stam & Elfring, 2008). Shared

constructs require that scholars examine consistency among lower level responses to insure

that aggregation is appropriate as dictated by theory (Bliese, 2000). Thus, when modeling

levels in entrepreneurship, selecting the correct level should be straightforward except in

cases of shared constructs. Introducing chronological ordering (time), however, introduces

a new level of complexity. Time occupies level 1 in the model, so a theoretical question

becomes whether a measure changes enough that it conceptually belongs to time more

so than to hierarchically nested levels such as firm or industry. One can view a measure such

as industry growth rate, for example, as characterizing changes to industry life-cycle conditions and thus a candidate for entering the model as a time-level construct.

With our focus on new ventures, firm size is a likely candidate to model at level 1 (within

venture); it can theoretically move on a trajectory that is not fully under managers (firmlevel) control. However, strategic growth actions and financial slack, while exhibiting

certain path dependencies over time, can be manipulated by managers and theory and

evidence suggests although there are effects at different levels that may change them systematically over time, they are largely idiosyncratic decisions that are based on firm

resources and competitive opportunities (Haleblian & Finkelstein, 1999; Holcomb, Holmes,

& Connelly, 2009). Industry munificence characterizes environmental contingencies that

may account for within-venture performance change to the extent firms fit or align strategies with these contingencies (Zajac, Kraatz, & Bresser, 2000) as well as betweenindustry differences in performance over time (Scherer & Ross, 1990). If correct, these are

shared constructs that emerge at lower levels (i.e., points in time) and manifest at higher

levels, and the lower level measures should show substantial consistency before aggregation to the higher level is justified empirically.

A common way to test whether the data are consistent with theory regarding aggregation

is with the intraclass correlation (ICC; Bliese, 2000). In this case, we use ICC to examine

the amount of variance in each variable that occurs within versus between levels (Hofmann

et al., 2000). We used a one-way ANOVA with each variable as the dependent variable and

level (e.g., year, venture, or industry) as the independent variable. Consistent with our reasoning above, the ICC showed that 84.4% of the variance in venture size is attributed to

time, whereas more than 90% of the variance in slack, R&D intensity, and acquisition

investment occur between ventures (i.e., they are reasonably stable over time). In all,

8.4% and 82.4% of the variance in munificence is a function of transient and betweenindustry factors, respectively; hence, we model industry munificence at level 1 and level

3 (in Step 4b). Thus, in Step 4a, we include measures for venture size, financial slack,

R&D intensity, and acquisition investment (industry munificence will be added in Step 5).

These changes produce the following equations:

Yijk p0jk p1jk YEARijk p2jk SIZEijk eijk

4a

367

4b

4c

p2jk b20k

4d

4e

b01k g010

4f

b02k g020

4g

b03k g030

4h

4i

b20k g200

4j

RCM also allows scholars to model how time moderates (or changes) relationships

between predictors and the dependent variable. We chose to demonstrate moderation using

three different interaction terms. Specifically, we create separate terms for R&D intensity,

acquisition investment, and financial slack with YEARijk.8 One can also examine interactions at other levels and there may well be theoretical reasons for doing so. In addition

to theoretically specifying the level of each construct in the model, a key decision in RCM

is how to scale effects at lower levels to investigate moderation from higher level covariates

(see Hofmann & Gavin, 1998; Kreft, de Leeuw, & Aiken, 1995). With RCM, the intercept

and slopes at the lower level (i.e., level 1) become outcome variables at the next higher level

(i.e., dependent variables in level 2 regressions). The meaning and interpretation of these

parameters is critical and the choice regarding centering of lower level effects influences

the interpretation of the intercept term as well as the variance in the intercept across groups.

We considered three different scaling options: (a) no centering where the lower level effects

are used in their original metric, (b) grand mean centering where the grand mean of the

lower level effect is subtracted from each measure (i.e., Xijk X . . ., where X is the measure

for a lower predictor), or (c) group mean centering where the relevant group mean of the

lower level effect is subtracted from each measure. Under these scaling options, the intercept term takes on a different meaning. We used grand mean centering yielding an intercept

equal to the expected value of Yijk for an observation whose value Xijk is equal to the grand

mean, X . . . (Raudenbush & Bryk, 2002). This approach reduces correlation between parameter estimates for the intercepts and slopes among levels, which can alleviate potential

estimation problems due to multicollinearity (Hofmann & Gavin, 1998).

Tables 5 and 6 contain the results for Steps 4 and 5 using employment growth and ROA,

respectively. We present the results for the model containing the level 2 predictors (Step 4a)

in Model 1 (Tables 5 and 6). Size (p < .10 using employment growth; p < .001 using ROA),

slack (p < .10 using employment growth; p < .001 using ROA), and acquisition investment

(p < .05 using employment growth; p < .10 using ROA) are significant predictors in equations that separately model the two measures. R&D intensity (p < .01) significantly predicted

Table 5

RCM Estimates of Level 2 and Level 3 Effects on Venture Employment Growth

Model

0.4367***

(0.0696)

0.1002***

(0.0145)

0.3837***

(0.0714)

0.0711***

(0.0160)

0.2879***

(0.0750)

0.0583***

(0.0158)

0.2975***

(0.0751)

0.0581***

(0.0150)

0.0217y

(0.0139)

0.0059

(0.0216)

0.0041y

(0.0023)

0.0261*

(0.0118)

0.0220y

(0.0141)

0.0108

(0.0234)

0.0011

(0.0010)

0.0836***

(0.0117)

0.0015

(0.0068)

0.0007

(0.0006)

0.0406***

(0.0081)

0.0237y

(0.0142)

0.0081

(0.0239)

0.0013

(0.0010)

0.0792***

(0.0184)

0.0203**

(0.0081)

0.0023

(0.0067)

0.0008y

(0.0005)

0.0423***

(0.0082)

0.0235y

(0.0142)

0.0084

(0.0238)

0.0008

(0.0012)

0.0783***

(0.0186)

0.0204**

(0.0080)

0.0027

(0.0067)

0.0003y

(0.0002)

0.0435***

(0.0088)

0.0001

(0.0002)

0.0008y

(0.0005)

0.0017**

(0.0008)

0.8279***

(0.0294)

0.8034***

(0.0288)

0.7404***

(0.0270)

0.7398***

(0.0264)

0.0609**

(0.0211)

0.0058

(0.0064)

0.0098**

(0.0045)

0.0629

(0.1337)

0.0031**

(0.0013)

0.0705***

(0.0216)

0.0061

(0.0063)

0.0099**

(0.0045)

0.0316

0.1326

0.0058***

(0.0018)

0.0465**

(0.0180)

0.0056

(0.0064)

0.0117**

(0.0050)

0.0437

(0.1074)

0.0085***

(0.0024)

0.0465**

(0.0180)

0.0058

(0.0059)

0.0118**

(0.0051)

0.0426

(0.1068)

0.0085***

(0.0025)

Fixed Effect

Average initial employment growth, g000

Average linear change rate for employment

growth, g100

Venture size

Financial slack

R&D intensity

Acquisition investment

Industry munificence

Financial slack (moderating linear D rate)

R&D intensity (moderating linear D rate)

Acquisition investment (moderating linear D rate)

Industry munificence (moderating the effect of

financial slack on linear D rate)

Industry munificence (moderating the effect of

R&D intensity on linear D rate)

Industry munificence (moderating the effect of

acquisition investment on linear D rate)

Random Effect

Level 1

Temporal variation, eijk

Level 2

Firm initial variation, r0jk

Firm linear change rate for employment

growth, r1jk

Financial slack

R&D intensity

Acquisition investment

(continued)

369

Table 5. (continued)

Model

0.0157y

(0.0097)

0.0008

(0.0017)

0.0019***

(0.0005)

25.30***

0.0174y

(0.0109)

0.0008

(0.0015)

0.0019***

(0.0005)

13.80***

Random Effect

Level 3

Industry initial variation, u00k

Industry linear change rate for employment

growth, r1jk

Industry munificence

Deviance (2ResLogLik)

0.0142y

(0.0095)

0.0009

(0.0017)

0.0145y

(0.0099)

0.0009

(0.0016)

194.20***

22.20***

*** p < .001;

*** p < .01;

*** p < .05;

y p < .10

ROA but not employment growth. In addition, by examining the random effects for level 2

(that is, the extent to which predictors at this level explain variation in mean performance

among ventures within industries), we find that slack (p < .01) and acquisition investment

(p < .01) are statistically significant predictors of variation in employment growth among ventures within industries, r0jk (the level 1 intercept in Equation 4b), while R&D intensity (p <

.05) and slack (p < .10) are statistically significant predictors of ROA at level 2.

We present these results for Step 4b that includes the moderating influence of R&D

intensity, acquisition investment, and slack by time in Model 2 on Table 5. Only the moderating linear change rate effect of acquisition investment on employment growth (p < .001)

is statistically significant. However, all three moderating effects are statistically significant

predictors of ROA (see Model 2 on Table 6). R&D intensity (p < .001) has a positive effect

on ROA that increases over time, whereas the negative effects of slack (p < .001) and acquisitions (p < .01) on venture performance (see Model 1) increase with time following an IPO.

Step 5: Linear change model with level 2 and level 3 direct (Step 5a) and moderating

(Step 5b) effects. In the final step, we add industry munificence as a level 3 effect to the

previous model to determine the extent to which munificence explains variation in

between-industry performance, u00k. Equations 5a5k illustrate the model containing level 2

and level 3 effects.9

Yijk p0jk p1jk YEARijk p2jk SIZEijk p3jk INDMUNIFijk eijk

5a

5b

5c

p2jk b20k

5d

Table 6

RCM Estimates of Level 2 and Level 3 Effects on Venture ROA

Model

Fixed Effect

Average initial return on assets, g000

Average linear change rate for ROA, g100

Venture size

Financial slack

R&D intensity

Acquisition investment

0.2483***

(0.0515)

0.0143**

(0.0061)

0.0447***

(0.0101)

0.0037***

(0.0006)

0.0052**

(0.0020)

0.0032y

(0.0017)

0.2786***

(0.0529)

0.0074*

(0.0041)

0.0486***

(0.0102)

0.0120

(0.0139)

0.0011

(0.0021)

0.0088y

(0.0051)

Industry munificence

0.0011***

(0.0001)

0.0023***

(0.0004)

0.0053**

(0.0021)

R&D intensity (moderating linear D rate)

Acquisition investment (moderating linear

D rate)

0.2614***

(0.0514)

0.0036y

(0.0020)

0.0482***

(0.0100)

0.0086

(0.0142)

0.0019

(0.0023)

0.0090y

(0.0050)

0.0011

(0.0024)

0.0012***

(0.0002)

0.0024***

(0.0005)

0.0052**

(0.0021)

effect of financial slack on linear D rate)

Industry munificence (moderating the

effect of R&D intensity on linear D rate)

Industry munificence (moderating the

effect of acquisition investment on

linear D rate)

0.2656***

(0.05207)

0.0038y

(0.0021)

0.0486***

(0.0100)

0.0126

(0.0155)

0.0011

(0.0021)

0.0081y

(0.0050)

0.0011

(0.0022)

0.0015**

(0.0005)

0.0032***

(0.0005)

0.0065**

(0.0021)

0.0003

(0.0004)

0.0006**

(0.0001)

0.0002**

(0.0001)

Random Effect

Level 1

Temporal variation, eijk

Level 2

Firm initial variation, r0jk

Firm linear change rate for ROA, r1jk

Financial slack

R&D intensity

Acquisition investment

0.0100***

(0.0009)

0.0092**

(0.0009)

0.0089***

(0.0009)

0.0085***

(0.0009)

0.0805***

(0.1146)

0.0038***

(0.0007)

0.0028y

(0.0020)

0.0004*

(0.0002)

0.0004

(0.0008)

0.0835***

(0.0117)

0.0039***

(0.0007)

0.0041

(0.0037)

0.0003*

(0.0002)

0.0001

(0.0007)

0.0809***

(0.0114)

0.0038***

(0.0007)

0.0043

(0.0041)

0.0004*

(0.0003)

0.0001

(0.0007)

0.0812***

(0.0115)

0.0041***

(0.0008)

0.0055

(0.0048)

0.0004*

(0.0003)

0.0003

(0.0006)

(continued)

371

Table 6. (continued)

Model

Random Effect

Level 3

Industry initial variation, u00k

0.0189**

(0.0082)

0.0088

(0.0097)

0.0174**

(0.0079)

0.0087

(0.0098)

Industry munificence

354.7***

Deviance (2ResLogLik)

374.5***

0.0088y

(0.0060)

0.0079

(0.0098)

0.0047*

(0.0030)

403.5***

0.0098y

(0.0070)

0.0081

(0.0098)

0.0036y

(0.0027)

35.4***

*** p < .001;

*** p < .01;

*** p < .05;

y

p < .10

5e

5f

b01k g010

5g

b02k g020

5h

b03k g030

5i

5j

b20k g200

5k

5l

As noted previously, a benefit of using RCM to model slopes as outcomes is the ability to

investigate whether specific factors explain variance in the slopes among higher levels. For

instance, in Steps 4a and 4b, we modeled p0jk simultaneously as the intercept in Equation

4a, representing the average initial performance for venture j in industry k when time and

venture size equal zero, and as the outcome in Equation 4b, representing the effect of R&D

intensity and acquisition investment on variance in post-IPO performance among ventures

within industries. In Step 5a (and following the results of the intraclass correlation

completed in Step 4), we add industry munificence as a level 1 predictor to explain variation

within ventures over time and simultaneously model industry munificence at level 3 to

explain variation in mean venture performance across industries (the level 2 intercept in

Equation 5f).

Munificence refers to an environments support for organizational growth (Dess &

Beard, 1984). High munificence enables firms to cope with challenges by obtaining outside

resources, an issue that is particularly important for new ventures (McDougall, Robinson, &

DeNisi, 1992). We summarize the results for this step in Tables 5 and 6 (see Model 3). For

equations using employment growth, the coefficient for industry munificence is statistically

significant at level 1 (p < .01) and at level 3 (p < .001), suggesting changes in levels of

industry resources account for variation in within-venture over time and among-industry

growth. However, munificence only appears to affect ROA at the industry level (p <

.05). These results lend some support to theories and empirical findings that suggest that

environments directly affect organizational outcomes (Aldrich & Wiedenmayer, 1993).

In Step 5b, we included interaction terms containing industry munificence to examine the

extent to which industry conditions account for differences in the influence of firm effects

on performance and the rate of performance change following the IPO. Specifically, we created terms using industry munificence with the two strategic growth actions (e.g., R&D and

acquisition) and our firm measurement of slack, and with the linear change rate, YEARijk, to

assess the moderating influence of industry membership on these firm effects over time.

We summarize the results for this final step regressing employment growth and ROA in

Model 4 of Tables 5 and 6, respectively. In this case, industry munificence had a significant

and meaningful influence on the relationship between several firm-level variables and our

two measures of post-IPO performance over time, including the performance effect of our

two strategic growth actions. The coefficient for the interaction terms containing industry

munificence and the moderating effect of R&D intensity and acquisition investments are

statistically significant for equations using employment growth (p < .10 and p < .01, respectively) and using ROA (p < .01 and p < .01, respectively). This suggests changes in the environmental context over time not only have a direct influence on post-IPO performance but

also moderates the efficacy of firm competitive strategies and resources on measures of

venture performance over time. Our findings are consistent with the views of economists

(Scherer & Ross, 1990) and strategic management theorists (Bourgeois, 1980) and with

empirical work by entrepreneurship researchers (Sandberg & Hofer, 1987). For example,

the entire structure (environment)-conduct (strategy)-performance paradigm in industrial

organization (IO) economics rests on the premise that industry structure influences strategy

(conduct), which in turn affects performance (Scherer & Ross, 1990). Furthermore, because

strategic decision making is a human behavior, social cognitive theory (Bandura, 1986)

points to the determination of behavior by environmental (and personal) forces. Finally,

entrepreneurship research has found that new venture strategies form in response to environmental forces (McDougall et al., 1992; Sandberg, 1986).

Discussion

Our purpose was to demonstrate how to model levels and time simultaneously in a contextthe field of entrepreneurship researchthat is particularly sensitive to nested and

longitudinal data. For the reasons noted previously, levels and time effects can have a meaningful influence on relationships of interest to entrepreneurship scholars, perhaps more so

than many other areas of organizational research. Adopting a multilevel longitudinal view

provides a powerful way to conceptualize and test entrepreneurship theory. Doing so

enables us to answer new and potentially important questions as we explore nuances in

373

relationships nested between levels across time while at the same time avoiding the biases

that occur when data violate independence assumptions.

To substantiate these points and to provide a road map for entrepreneurship scholars,

we used RCM to assess the context in which internal and external growth actions affect

post-IPO performance for a sample of entrepreneurial firms. Our results illustrate the following: (a) post-IPO performance varies significantly among industries, among ventures

within industries, and within ventures over time (see Table 2), (b) the linear performance

trend increases at a decreasing rate (i.e., rate of growth slows) over time (see Table 3),

(c) strategic growth actions and financial slack have a direct effect on within-venture performance (see Model 1, Tables 5 and 6) that changes over time (see Model 2, Tables 5 and

6), and (d) industry conditions explain stable performance differences among industries

(see level 3 effects in Model 3, Tables 5 and 6) and moderate the efficacy of venture behaviors and slack on venture performance.

In prior studies, entrepreneurship scholars have studied attributes of individual (e.g.,

Baum & Locke, 2004; Begley & Boyd, 1987; Katz & Shepherd, 2003), ecological and evolutionary conditions (e.g., Aldrich & Wiedenmayer, 1993; Boone et al., 2002; Carroll &

Hannan, 1989), strategy formulation (e.g., McDougall et al., 1992), and resource-based

conditions (e.g., Baker & Nelson, 2005; Katila & Shane, 2005; Lichtenstein & Brush,

2001) often as isolated causes of venture performance. More recently, some scholars have

proposed that individual, organizational, and environmental dimensions combine to provide

a more comprehensive prediction of venture development and growth than any one dimension in isolation (e.g., Baum et al., 2001; Chrisman, Bauerschmidt, & Hofer, 1998). Others

note the importance of considering the conditioning effect of time (e.g., Agarwal et al.,

2002). Nevertheless, there have been few attempts to conceptualize and test theory

involving relationships that cross levels and time in this field. We think that efforts to build

multilevel and crosslevel entrepreneurship theory will be crucial for the fields future

development.

We offer four broad areas where RCM might advance research involving hierarchically

nested levels and time. One set of questions involve whether and how a ventures competitive and environmental context shapes strategic choices and to what extent those choices

enable or constrain sustainable performance advantages over time. Empirical research in

organizational ecology and evolutionary economics has shown that industries exert strong

selection processes that change substantively over time (Hannan & Carroll, 1992; Nelson

& Winter, 1982). Because of high environmental uncertainty and varying degrees of

resource munificence, realizing a performance advantage over time can be difficult for

young firms (Lichtenstein & Brush, 2001). Uncertainty created by environmental instability

produces information deficits, making cause-and-effect relationships difficult to identify

and interpret (Carpenter & Fredrickson, 2001). As a result, firms often seek a series of temporary advantages (Holcomb, Holmes, & Hitt, 2006). This raises important questions about

the sources of temporary or dynamic advantages. For example, are controllable (i.e., strategy) or uncontrollable (i.e., munificence) sources more (less) important? How important is

fit? In our example, we illustrated that internal and external growth actions and slack have

a direct and meaningful influence on post-IPO performance that changes over time and as

a function of higher level industry effects. We also found that industry munificence has a

significant direct effect on within firm variation as well for growth but not for ROA, which

suggests certain industry conditions may be of greater value to firms seeking growth over

profitability. Moreover, these results suggest the important trade-offs ventures face when

making decisions that involve selecting strategic actions that align the venture with its

competitive conditions (Holcomb, Holmes, & Connelly, 2009; Siggelkow, 2001). Investigating these questions might reveal additional contingencies, including time, surrounding

important firm and industry effects on the advantages new ventures achieve at different

stages in their evolution.

A second area of inquiry using levels and time is to better understand the many resourcebased obstacles that confront young entrepreneurial firms and how those obstacles interact

with firm-specific characteristics to affect performance over time. New ventures often lack

financial resources, knowledge of their competitive environment, legitimacy, and mature

operate routines (Sorensen & Stuart, 2000). Furthermore, they encounter numerous potential hazards that evolve and change rapidly over time. Nevertheless, some research finds

that despite resource constraints new ventures often make do and even flourish by applying differing combinations of resources to exploit environmental opportunities (e.g., Baker

& Nelson, 2005), showing that the answer to the question of whether firms or industries

matter most is contingent upon the quality of their combination. That is, the value of a

firm-specific resource cannot be determined in a vacuum, but depends on the context in

which it is used (Holcomb, Holmes, & Connelly, 2009; Sirmon, Gove, & Hitt, 2008). Does

time condition these effects? If so, what level (industry or firm) exerts the strongest influence? Future research capitalizing on levels and time could build and test theory to explain

the extent to which time-varying firm and industry effects constrain or complement each

other.

Future research could also pursue questions involving interactions among strategic

choice and obstacles that new ventures face. For example, Morrow and his colleagues

(2007) found that valuable and difficult-to-implement strategic actions that bundle and

deploy existing resources in new ways increase shareholder returns of firms in crisis more

than actions that involve acquisitions or alliances, and such actions were more likely to lead

to recovery. In an entrepreneurial setting, strategic decision options often compete for

scarce resources. As a result, new ventures make explicit and implicit choices between

them. Some research suggests that new ventures may be more vulnerable to actions that

consume rather than conserve resources, especially in uncertain or rapidly changing environments (e.g., Agarwal et al., 2002). It may well be that industry characteristics condition

the underlying selection mechanism at work in the environment. For example, under what

conditions is it more important to rebundle existing resources than to acquire new ones?

How do industry life-cycle changes affect the performance prospects of these actions over

time? Understanding the performance effects of different strategic actions for given industry contexts and how those relationships evolve with changes to firm and industry attributes

over time would be particularly informative to research in this area. Moreover, future

research also needs to further explore the contingent impact of time on how strategic

choices affect growth, and other measures of performance, such as sales, market share,

profitability, and survival (Schoonhoven, Eisenhardt, & Lyman, 1990).

375

Third, RCM might be useful to investigating emerging concepts in strategic entrepreneurship. Ireland, Hitt, and Sirmon (2003) argue that new ventures are more opportunityseeking; opportunity-seeking action entails recognizing and sorting potential opportunities.

As new ventures age, however, they often shift their focus to sustaining advantages they

accrued through prior opportunity-seeking actions. These advantage-seeking actions are

particularly important when the goal is to exploit established positions in the market.

Because firms rarely maintain effectiveness at both opportunity- and advantage-seeking

actions, embedded within strategic entrepreneurship are issues of transition and change.

Future research might explore whether, for example, an important boundary condition to

this transition is the level of environmental uncertainty or dynamism. In a highly placid

or stable environment, it may be that although a baseline of opportunity seeking is necessary, new ventures with the highest level of advantage-seeking aimed at exploiting established positions are the best performers. Moreover, there may well be different paths in

the transition between the two. Depending on the conditions at founding, characteristics

of the industry as it evolves, the administrative heritage of the venture, and the values and

abilities of its leaders, firms can follow equally valid, but slightly different organizational

transitions. With RCM, scholars can investigate factors that might account for increases in

the rate of change from opportunity- to advantage-seeking. They could also investigate how

factors from multiple levels affect this change. Without RCM, dynamic theories pertaining

to rates of change may be more difficult to model.

Thus far, we have treated dependence as a statistical nuisance that scholars should

avoid because of the bias it introduces even when scholars have no interest in understanding

the role of higher level effects (Bliese & Hanges, 2004). However, as a final example, there

may be occasions where dependence among individual observations (ventures) is the substantive phenomenon that entrepreneurship scholars should attempt to better understand. In

new venture research, for example, a commonly asked question concerns legitimacy attainment. Legitimacy is a critical resource for new venturesone that reduces the chronic

effects of uncertainty and provides a means for them to overcome the liability of newness

that contributes to the high percentage of new venture failure (Aldrich & Fiol, 1994; Stinchcombe, 1965). Theoretically speaking, legitimacy represents a perception of acceptance,

appropriateness, and/or desirability socially constructed by the system of norms, values,

and beliefs of members in a market (Zimmerman & Zeitz, 2002, p. 416). In the face of

uncertainty and changing environmental conditions, perceptions change. These changes can

produce new rules, norms, and values that become socially reinforced and that others come

to view as legitimate. To the extent that members share these perceptions and judgments,

consideration of the social context in which a new venture operates implies some level

of dependence. To study social interactions that produce norms that legitimize a business,

then we should be interested in dependence not simply as a statistical problem but as a substantive phenomena that scholars should conceptualize and study.

Scholars

Our example demonstrates the use of RCM to investigate entrepreneurial relationships

that cross levels and time, and we suggested four broad areas of new venture inquiry that

Table 7

Practical Guidance to Model Specification Involving Levels and Time

Steps

What to Consider

hierarchy (aggregation, fixed vs. random, and so

forth).

Key questions:

Do unit (or firm)-level attributes influence

performance change over time?

To what degree do the effects of unit-level

measures vary across groups?

Do properties of higher level groups

modify relationships at a lower level in the

hierarchy?

3. Evaluate scaling (centering) options and select

approach.

No centering (lower level effects remain in

their original metric).

Grand mean centering (grand mean of the

lower level effect is subtracted from each

measure).

Group mean centering (where the group

mean of the lower level effect is subtracted

from each measure).

Proportion of total variance from the unconditional

means model (null model).

Tests of statistical power to assess the number of

groups and group sizes (see Barcikowski, 1981;

Scherbaum & Ferreter, 2009).

correlation estimates.Significance tests of the

interactions.Tests of statistical power to assess the

number of groups and group sizes.

relationships and interpretation of the intercept (see

Hofmann & Gavin, 1998; Kreft et al., 1995).

might benefit from analysis using RCM. Although RCM addresses methodological concerns involving dependencies, an underused strength is its ability to understand differences

and patterns of change within and across levels (Bliese & Ployhart, 2002). Because these

methods are relatively new, however, many theories that might benefit from multilevel

longitudinal designs remain limited in their scope or scholars have yet to conceptualize

them altogether.

In putting theory and method together to model levels and time, perhaps the most important consideration is the specification of the model (see Kozlowski & Klein, 2000, for a

detailed review of principles for model specification). We briefly describe three important

steps that relate broadly to specifying multilevel longitudinal models using RCM: (a) decide

what levels have theoretical importance, (b) determine the placement of the constructs and

relationships that comprise the theoretical system at the correct level, and (c) select the

scaling (centering) approach that ensures appropriate testing and interpretation of the

theoretical system. We provide a summary of these considerations in Table 7.

The first step is to determine the levels in the hierarchy, and here, theory should be the

first guide. For example, when studying the role of affect (Baron, 2008) or learning

377

(Holcomb, Ireland, Holmes, & Hitt, 2009) in the entrepreneurial process, one should consider specifying a level that contains individual entrepreneurs nested within groups or

teams. However, a level that contains individual entrepreneurs nested within groups or

teams may not be necessary to test resource-based theory in work that examines the value

creation potential of new ventures resource stocks (Barney, 1991) or strategic actions

involving their use (Holcomb et al., 2009; Morrow et al., 2007; Sirmon et al., 2008).

Conceptualizing the specific levels also has practical importance because it avoids bias

in variance estimates that might leave important relationships undiscovered (Kenny & Judd,

1986). Thus, it is critical to conduct statistical tests to determine whether the variability one

observes between groups at each level is evidence of random fluctuation or meaningful

differences. In our example, we modeled measures of strategic growth actions over time

(level 1) for new ventures (level 2) that were members of industry groups (level 3). Placing

time at level 1 might seem counter-intuitive because the march of time conceptually has

a broad impact on all other levels. However, the firm-year observation is the smallest unit

and thus constitutes level 1 in repeated measures designs.

Another factor that affects the choice of levels is consideration of the number of groups and

the number of members in each group, which effects statistical power (Scherbaum & Ferreter,

2009). Opinions on the minimum number of groups and minimum group size vary. As a rule,

if the number of members within a higher level group is small, regression coefficients estimated by the model may include larger error terms, which can adversely affect the power

to detect relationships (Hofmann et al., 2000). Our data set contained 308 IPO-stage new ventures, and the analysis are based on 35 groups (four-digit SIC industry segments) that average

approximately 9 members (new ventures) measured annually over 5 years. Although some

scholars suggest a group size of at least 5 with 20 or more groups for adequate power to detect

a moderate effect size (Kreft & de Leeuw, 1998), others suggest that group sizes of at least 10

with at least 30 groups are needed (LaHuis & Ferguson, 2009; Snijders & Bosker, 1993). If

the number of groups is small, then dummy variables may be the safest way to assess that

level. Illustrations of approaches to approximate power computations for fixed effects, variance components, and cross-level interactions are available elsewhere (for tests of statistical

power, see Barcikowski, 1981; Scherbaum & Ferreter, 2009).

Once the levels are established, the second step is to determine the placement of constructs (and their relationships) within the system. Specifically, in a mixed model such as

the one in our example, it is important to consider whether a construct should enter the

analysis as a random effect (i.e., repeated measures to explain variation over time), as

a stable or fixed effect (i.e., measures averaged over time to explain cross-sectional variance between ventures or industry segments), or both. Again, where possible, theory

should drive this decision (House et al., 1995). In addition, it may also be helpful to consider three questions.

First, do unit (or firm)-level attributes influence performance change over time? This is

an important first question for longitudinal designs because it considers whether (and if so,

to what extent) change in the outcome variable is related to differences in measures of the

same predictors at different points in time, which can be examined by viewing unit-level

significance tests of the correlates of interest. In our example, we addressed this question

by modeling ROA and employment growth on our two strategic growth actions (see Tables

5 and 6) and found that differences in growth actions produced different growth trajectories

(i.e., rate of performance change) between ventures that varied among industries. Because

these measures vary over time, we entered them as time-varying effects at level 1.

Second, to what degree do the effects of unit-level measures vary across groups? Here,

the question concerns the nature of relationships between units in the same group. As we

discussed in the model-building section, this question involves constructs that might manifest at a higher level in the hierarchy. Measures of lower level constructs that manifest at

higher levels should show consistency across lower level units before aggregation to the

higher level is justified (Bliese, 2000). The ICC, an ANOVA-based measure, is a particularly useful way to test the consistency of data with theory about aggregation. When ICC

values are greater than zero, higher level contextual effects are present and measures

aggregated to a higher level are no longer directly equivalent to measures allowed to vary

at lower levels (Bliese, 2002). In our example, we had theoretical reasons to expect that

financial slack would affect performance among firms within an industry (i.e., level 2) in

similar ways (e.g., IO economics; Porter, 1980) but also that its impact on venture performance would vary over time (e.g., resource-based theory; Barney, 1991). These theoretical

ideas were consistent with the ICC in our case, and we entered financial slack as a random

variable at two levels: within-ventures (level 1) and between ventures nested within industry (level 2).

Third, do properties of higher level groups modify relationships at a lower level in the

hierarchy? In the language of RCM, we are interested in the relationship between a level

1 slope and a predictor at a higher level in the hierarchy. In multilevel longitudinal

models, a cross level interaction appears in the final model whenever group-specific

estimates of the effect of a lower level variable are modeled as a function of higher level

(group level) variables. Consistent with theory predicting that environmental conditions

influence the efficacy of competitive strategies on venture performance (McDougall

et al., 1992; Sandberg & Hofer, 1987), we modeled the relationship between strategic

growth actions and performance over time (level 1) as a function of industry munificence

(see model 4 in Tables 5 and 6). The results provide evidence that industry munificence

moderates the efficacy of R&D intensity and acquisition investment behaviors on venture

performance. To date, little theory has been developed that takes advantage of the crosslevel modeling capabilities in RCM. Beyond practical theoretical considerations, entrepreneurship scholars must also consider statistical power when designing RCM models to

account for cross level interactions. To detect cross-level interactions, some scholars

advocate a minimum of 30 groups and 30 observations within each group to achieve

sufficient power (e.g., Bedeian, Kemery, Mossholder, 1989; Tate, 1985; van der Leeden

& Busing, 1994). However, with a larger numbers of groups, smaller member sizes at the

lower level may still produce high levels of statistical power (Scherbaum & Ferreter, 2009).

The last step in specifying the model is to consider scaling (centering) of predictors.

Under various scaling options, an intercept term can assume a different meaning, which has

implications not only for interpretation of the intercept but also for the variance in the intercept term across groups and for the covariance of the intercept term with other parameters

(Hofmann & Gavin, 1998; Raudenbush & Bryk, 2002). As indicated previously, we considered three different scaling options and selected grand mean centering. Grand mean and

raw-metric approaches (no centering) yield equivalent models (Kreft et al., 1995) wherein

the variance in the intercept term (for example, at level 2) represents the adjusted between-

379

group variance in the dependent variable after controlling for lower level predictors. In our

example using grand mean centering, the variance in the intercept term over time represents

the within-venture variance in performance after controlling for strategic growth actions

and slack. Alternatively, in using group-mean centering, the level 1 intercept variance

reflects unadjusted between-group variance. In our example, the level 2 intercept would

merely reflect the within-venture (over time) variance in performance (without controlling

for the effects of strategic growth actions).

Conclusion

The purpose of this article has been to extend the discussion of RCM to an entrepreneurial context where levels and time jointly matter. Practically speaking, the use of RCM

allows for regression-like modeling of relationships at the firm-level alongside

regression-like models that describe how relationships vary among groups over time. Our

hope is that this demonstration will help make RCM more accessible to entrepreneurship

scholars and that RCM will increasingly help answer new and important questions about

entrepreneurs, the opportunities they pursue, and what contributes to their success.

Notes

1. Dependence stems from autocorrelation, which occurs when a variable measured at one point in time correlates with that same variable measured at a different point for a given observation and from contemporaneous

correlation, which occurs when observations are correlated because of some shared omitted factor such as group

membership (Beck & Katz, 1995). Both cause heteroscedasticity where the variances of correlated error terms

are not equal (Certo & Semadeni, 2006). Unless one models dependence in observations in the data analysis, it

can remain in the residuals and bias the resulting inferential statistics (Kenny & Judd, 1986).

2. Scholars also refer to RCM as hierarchical linear modeling, multilevel modeling, random coefficient

regression, and growth modeling (e.g., Bliese & Ployhart, 2002; Kreft & de Leeuw, 1998; Raudenbush & Bryk,

2002). Although discussions of RCM often associate RCM with multilevel analyses (e.g., Hofmann, Griffin, &

Gavin, 2000), RCM extends naturally to longitudinal designs (Bliese & Ployhart, 2002). For simplicity, we use

RCM throughout this article to refer to multilevel and longitudinal designs.

3. The distinction between random versus fixed effects is important in RCM (and multilevel) regression. A fixed effect is one in which the parameter estimate is assumed to be the same among observations across

groups and is therefore generalized to values of the predictor across a population (Littell et al., 2004). Fixed

effects have a predetermined set of values, such as gender for individuals or primary SIC industry code for firms.

By contrast, a random effect represents variance associated with differences in parameter estimates among

groups or over time for variables whose values are selected at random from a normal population of effects

(Cohen et al., 2003). For example, in a three-level mixed model, predictors specified at each level are assumed

to be fixed at the level specified (i.e., generalize only to level 1, level 2, or level 3), but intercepts and slopes

produced at levels 1 and 2 vary randomly among groups and over time. Because of the assumptions about their

error distributions, we call the variance of intercepts and slopes, respectively, random coefficients. A goal of

RCM, then, is to explain the variances in intercepts and slopes among groups modeled at one level using one

or more higher level predictors.

4. A complete list of the articles is available upon request, including data descriptions, operationalization of

key variables, estimation method, and treatment of nested structures and/or time.

5. Our notation pertaining to model-building using RCM also follows that of Singer (1998) and Snijders and

Bosker (1994) and is very closely related to that of Cohen et al. (2003) and Kreft and de Leeuw (1998).

6. Because most targets are not publicly traded, we use the price paid in the acquisition as a proxy for the

targets market value when the market value is not otherwise available. When the value of the acquisition is not

available, we use the book values of equity for both the target and the acquiring firm to estimate relative size.

7. Although prior work popularizes the analysis of the explained or modeled proportion of variance, we

encourage scholars to use caution when making such evaluations, especially when modeling random slopes for

predictors (Snijders & Bosker, 1994). This is because explained or modeled variance depends not only on the

regression coefficients and the residual variance but also on the variances and covariance of the predictor variables. In cases where group sizes differ, for example, it is possible for the addition of a predictor variable to the

model to increase rather than decrease variance components, which sometimes occurs in designs with differing

group sizes. This is especially true in instances when scholars estimate random slopes. For example, it is possible to add a significant predictor to an RCM equation and see a drop in variance accounted for in these

formulas.

8. Due to space constraints, we do not present the equations used to model the cross-level interactions. A

copy is available upon request from the authors.

9. We excluded the interaction terms for the three firm-level predictors (slack, R&D intensity, and acquisition investment) and YEARijk from these equations to reduce the complexity of the model for illustrative purposes only. However, we did include the interaction terms in the PROC MIXED code (see Appendix) and

present the results for models containing the interaction terms in Table 5.

10. We limit our description of SAS programming and PROC MIXED procedural options to the scope of our

illustration. For a more complete explanation of the PROC MIXED procedure, its syntax, and additional options

that are available, see Littell et al. (2004) and the PROC MIXED documentation from SAS (SAS Institute,

2001).

Appendix

Sample SAS PROC MIXED Syntax

The following contains the SAS PROC MIXED procedural syntax for specifying the equations

described in Steps 15.

In Step 1, we fit an unconditional means model without effects at any level represented in Equations 1a1c. This model uses the three levels of analysis specified in the mixed model to represent

individual changes in post-IPO performance for ventures (level 1), the variation in performance

change parameters between ventures within an industry (level 2), and the variation between industries (level 3). This leads to the following specification in PROC MIXED:

proc mixed dataIPO_DATA methodml noclprint covtest;

class FIRM INDUSTRY;

model PERFORMANCE / solution ddfmbw;

random intercept

/ subjectINDUSTRY typeun;

random intercept

/ subjectFIRM(INDUSTRY)

typeun;

run;

The METHOD ML option on the PROC MIXED statement specifies maximum likelihood estimation. The NOCLPRINT suppresses printing of CLASS level information. The COVTEST option

produces the hypotheses tests for whether the variance and covariance components differ from zero.

381

The CLASS statement indicates that FIRM (a unique six-digit firm identifier) and INDUSTRY (a

unique four-digit SIC code for each industry segment) are the grouping variables. The MODEL statement indicates that PERFORMANCE is the dependent variable, which we run separately for

employment growth and ROA; any fixed effects are listed to the right of the equal sign (). The

SOLUTION option tells SAS to print the fixed effects estimates. The DDFM BW option instructs

SAS to use the between/within method for computing the denominator degrees of freedom for

tests of fixed effects. Finally, RANDOM statements indicate the random effects to be modeled at

each level. By default, there is always at least one random effect for each RANDOM statement. The

SUBJECT option on each RANDOM statement specifies the multilevel structure, indicating how

nested units are divided into higher ordered units in the hierarchy. In this analyses, the SUBJECT

option indicates that the data set is composed of a set of different groups. Groups are assumed to

be independent of each other; hence, the SUBJECT ID command indicates that the variance

covariance matrix for the random effects is to be block diagonal, with identical blocks.

The TYPE option specifies the structure of these diagonal blocks. Specifying TYPE UN indicates that you would like to treat the variance-covariance matrix for the intercepts and slopes as

unstructured, with a separate variance (or covariance) component for each of the elements. The

unstructured option indicates that you would not like to place any structure on the variances for intercepts and variances for slopes and that you would not like to impose any structure on the covariance

between these two either. As we explain, many different error-covariance structures are possible and

a detailed discussion of the alternative structures is beyond the scope of this paper. For more

information about different treatments of the covariance structure of the R matrix in SAS,

scholars are encouraged to refer to Littell et al. (2004, pp. 92-102) and Wolfinger (1996). For the

within-industry level (level 2), this effect is the residual from the level 1 model, eijk. For level 3, the

default effect is the residual from the within-industry level (level 2), rijk. By specifying the INTERCEPT on the RANDOM statement, we are indicating the presence of a second random effect. As

illustrated by Equation 4a, the unconditional means model has no predictor, but it does have an intercept, which PROC MIXED includes in the MODEL statement by default.10

Estimating the linear model with a random slope for YEAR, the PROC MIXED syntax is:

proc mixed dataIPO_DATA methodml noclprint covtest;

class FIRM INDUSTRY;

model PERFORMANCE YEAR / solution ddfmbw notest;

random intercept

/ subjectINDUSTRY typeun;

random intercept

/ subjectFIRM(INDUSTRY)

typeun;

run;

In this syntax, YEAR is a simple count measure representing successive years corresponding to

1997 to 2001. We centered this variable, which allowed us to interpret the intercept as an average

level of performance (see Bliese & Ployhart, 2002). Again, by modeling a randomly varying linear

trend for YEAR, we test the extent to which the variation in performance is due to differences in the

trajectories (slopes) of individual ventures.

The PROC MIXED syntax for a linear change model with random effects at three levels of analysis is as follows:

proc mixed dataIPO_DATA methodml noclprint covtest;

class FIRM INDUSTRY;

model PERFORMANCE YEAR / solution ddfmbw notest;

random intercept YEAR

/ subjectINDUSTRY typeun;

random interceptYEAR

/ subjectFIRM(INDUSTRY)

typeun;

run;

The linear change rates for the firm and industry levels enter the model following the

RANDOM statements for SUBJECT FIRM(INDUSTRY) and SUBJECT INDUSTRY,

respectively.

In Step 4, we added the level 2 (between ventures nested within industries) effects for the two

strategic growth actions (and slack) in the model by adding the terms following the RANDOM statement for SUBJECT FIRM(INDUSTRY). Fixed effects for the two strategic actions and the firm

controls (firm size and resource slack) enter the model following the MODEL statement. This produced the following PROC MIXED syntax:

proc mixed dataIPO_DATA methodml noclprint covtest;

class FIRM INDUSTRY;

model PERFORMANCE YEAR

LN_SALES

SLACK

RD_INTENSE

ACQ_INVEST

/ solution ddfmbw notest;

random intercept YEAR / subjectINDUSTRY typeun;

random intercept YEAR

SLACK

RD_INTENSE

ACQ_INVEST

/ subjectFIRM(INDUSTRY) typeun;

run;

With the PROC MIXED procedure, scholars can specify interaction terms by adding an asterisk

(*) between the terms. Adding the interaction terms to assess the moderating effects of the two strategic growth actions and resource slack over time produces the following syntax, which we use to

model the cross-level effects in Step 4b.

proc mixed dataIPO_DATA methodml noclprint covtest;

class FIRM INDUSTRY;

model PERFORMANCE YEAR

LN_SALES

SLACK

RD_INTENSE

383

ACQ_INVEST

SLACK*YEAR

RD_INTENSE*YEAR

ACQ_INVEST*YEAR

/ solution ddfmbw notest;

random intercept YEAR / subjectINDUSTRY typeun;

random intercept YEAR

SLACK

RD_INTENSE

ACQ_INVEST

/ subjectFIRM(INDUSTRY) typeun;

run;

In the final step (Step 5), we added our level 3 effect (industry munificence) and the

cross level interactions between-industry munificence, our two strategic growth actions,

and slack with the linear change rate. To do so, we used the following syntax in PROC

MIXED:

proc mixed dataIPO_DATA methodml noclprint covtest;

class FIRM INDUSTRY;

model PERFORMANCE YEAR

LN_SALES

SLACK

RD_INTENSE

ACQ_INVEST

IND_MUNIFICENCE

SLACK*YEAR

RD_INTENSE*YEAR

ACQ_INVEST*YEAR

IND_MUNIFICENCE*SLACK*YEAR

IND_MUNIFICENCE*RD_INTENSE*YEAR

IND_MUNIFICENCE*ACQ_INVEST*YEAR

/ solution ddfmbw notest;

random intercept

YEAR

IND_MUNIFICENCE

/ subjectINDUSTRY typeun;

random intercept

YEAR

SLACK

RD_INTENSE

ACQ_INVEST

/ subjectFIRM(INDUSTRY) typeun;

run;

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389

Tim R. Holcomb (Ph.D., Texas A&M University) is an assistant professor of strategic management and entrepreneurship in the Department of Management and faculty member in the Jim Moran Institute for Global Entrepreneurship at Florida State University. His research focuses on multilevel determinants of performance,

resource-based theory, new venture performance and growth, and initial public offerings (IPOs) and has

appeared in Strategic Management Journal, Journal of Management, Entrepreneurship: Theory & Practice,

Journal of Business Research, and Journal of Operations Management.

James G. Combs (Ph.D., Louisiana State University) is a Jim Moran Professor of Management and Executive

Director of the Jim Moran Institute for Global Entrepreneurship at Florida State University. His research interests are primarily in the areas of franchising, research synthesis, and corporate governance. His research appears

in journals such as the Academy of Management Journal, Strategic Management Journal, Journal of Management, Journal of Business Venturing, and Entrepreneurship: Theory & Practice.

David G. Sirmon (Ph.D., Arizona State University) is an assistant professor of management in the Mays

School of Business at Texas A&M University. His research, which focuses on resource management, firm governance, family business, and strategic entrepreneurship, has appeared in journals such as Academy of Management Journal, Academy of Management Review, Strategic Management Journal, Journal of International

Business, Journal of Management, and Entrepreneurship: Theory & Practice, among others.

Jennifer C. Sexton is a doctoral candidate in strategic management at Florida State University. Her research

interests include innovation, strategic leadership, knowledge-based perspectives, entrepreneurship, and merger

and acquisition integration.

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