The nexus of top executives' attributes, firm strategies, and outcomes: Large firms versus SMEs

The research question revolves around the influence of top executives' attributes on strategic decision-making and firm performance, particularly examining the variation of this influence across firm sizes. The Upper Echelons Theory (UET) provides the theoretical foundation, positing that top executives' values and cognitive bases shape organizational outcomes. While previous research has demonstrated the impact of top managers, it often relies on demographic factors that may not fully capture executive behavior. This "black box" problem motivates the use of psychological data to provide a more nuanced understanding. However, most studies using psychological data have focused on large firms, neglecting the potentially significant differences in the role of top executives in SMEs. The study also considers managerial discretion, acknowledging that the extent of a CEO's impact varies based on the environment, organization, and executive characteristics. Japanese firms, often characterized by lower CEO impact than Western firms, present a particularly interesting context for this comparative study. Existing literature suggests that cultural context and firm size affect managerial discretion, highlighting the need to explore heterogeneity between large firms and SMEs. This study aims to address these gaps by analyzing a unique dataset of Japanese firms, spanning a wide range of sizes and including multidimensional measures of top executives' attributes to investigate their impact on firm performance via strategic choices concerning financial leverage and R&D investment.

The literature review examines Upper Echelons Theory (UET) and research on managerial discretion. UET suggests that top executives' characteristics directly or indirectly affect firm performance through their strategic choices. Studies have used various indicators of top executive attributes, including fixed effects, demographic factors (age, education, experience), and psychological measures (overconfidence, narcissism, personality traits). However, using demographic factors faces the "black box problem" of limited explanatory power. The study of managerial discretion highlights how a CEO's influence varies across different contexts. Macro-level factors like national culture (as demonstrated in cross-national comparisons of managerial discretion) and micro-level factors like firm size and strategic choices influence the degree of managerial discretion. Prior studies on SMEs suggest a stronger mediating role of strategic change and flexibility in the relationship between CEO attributes and firm outcomes, compared to large firms. The literature lacks comparative studies on large firms and SMEs in this regard, particularly within a culturally specific context like Japan.

The study utilizes a unique dataset from Teikoku Databank Ltd., containing information on over 970,000 top executives in Japanese firms from 1985 to 2014. Twenty-five indicators of top executives' characteristics were collected, based on interviews and on-site research. Exploratory factor analysis, using parallel analysis to determine the optimal number of factors, reduced these 25 indicators into nine primary factors: the Big Five personality traits (conscientiousness, extraversion, neuroticism, openness, agreeableness) and four additional attributes (uniqueness, execution skills, decisiveness, financial prudence). The study employs a structural equation model (SEM) to analyze the relationship between these executive attributes, strategic choices (financial leverage and R&D investment), and firm performance (ROA). The dataset included a representative sample of Japanese firms, allowing for a comparison between large, medium, and small firms. The SEM includes control variables for sector, financial year, firm location, listed status, firm size, age, historical revenue growth, profitability, tangibility, and capital intensity, as appropriate for each equation. The model examines the direct effects of executive attributes on ROA and the indirect effects through financial leverage and R&D intensity. Diagonally weighted least squares (DWLS) estimation was used due to non-normality of the observed variables. Model fit was assessed using CFI, TLI, RMSEA, and SRMR. Finally, a multigroup analysis was conducted to test for path coefficient invariance across different firm sizes.

The study's key findings reveal significant differences in the relationships between executive attributes, strategic choices, and performance across firm sizes. First, the influence of executive attributes on strategic choices was significantly stronger in SMEs than in large firms. In SMEs, conscientiousness, decisiveness, and financial prudence were associated with conservative financial strategies, while neuroticism, openness, and agreeableness were linked to riskier and more innovative strategies. These relationships were significantly weaker for large firms. Second, strategic choices, primarily financial leverage, significantly mediated the relationship between executive attributes and firm performance. The indirect effects through financial leverage were stronger than those through R&D intensity. Third, significant variations in the effects of several executive attributes on strategic choices were found across firm types. Small firms demonstrated the strongest relationships, highlighting the amplified impact of executive attributes on strategic actions in smaller organizations. Openness was a particularly influential factor, significantly affecting both financial leverage and R&D intensity across firm sizes. Fourth, while direct effects of executive attributes on firm performance were generally weaker, most attributes exhibited significant indirect effects, especially in SMEs. These indirect effects, often mediated by financial leverage, were stronger in smaller firms. Fifth, inconsistent mediation (where direct and indirect effects oppose each other) was common, leading to attenuated or non-significant total effects in many cases. Sixth, multigroup analysis confirmed significant differences in path coefficients across firm types, particularly in the relationships between executive attributes and strategic choices. Inconsistent mediation may explain the previously documented low performance effects of CEOs in Japanese firms. Finally, the inauguration types of top executives suggest that a significant proportion of SMEs have founder CEOs or family successors, which could explain their increased managerial discretion compared to large firms where internal promotion is more prevalent.

The findings address the research question by showing that the impact of top executives on firm performance is mediated by their strategic choices, and that this mediation is significantly stronger in SMEs. The greater influence of executive attributes in SMEs aligns with the concept of managerial discretion, where executives in smaller organizations have more autonomy. The results challenge the notion of low CEO impact in Japanese firms, suggesting that the impact is significant but often obscured by inconsistent mediation. The study highlights the importance of considering both direct and indirect effects when evaluating CEO influence and emphasizes the role of firm size as a critical contextual factor. The significant indirect effects, particularly through financial leverage, indicate that CEOs' personal characteristics can significantly shape a firm's financial risk profile. The results support the need for further research exploring the relationship between personality traits, strategic decision-making, and firm performance in diverse cultural contexts.

This study contributes to the literature by providing a multidimensional assessment of top executive attributes across large firms and SMEs in Japan. It highlights the stronger mediating role of strategic choices in SMEs, suggesting that CEO influence on performance is indirect and significantly impacted by firm size. The findings suggest that inconsistent mediation may explain previous research showing low CEO effects in Japan. Future research could extend this study to other countries to examine cross-cultural variations and incorporate longitudinal data to assess the long-term impact of CEO attributes and strategies. The inclusion of multi-dimensional contextual factors and analysis of industrial networks could further enrich our understanding of managerial discretion.

The study is limited by its focus on Japanese firms, potentially limiting the generalizability of findings to other cultural contexts. The cross-sectional nature of the data prevents causal inferences and limits the analysis of long-term performance. The one-dimensional contextual factor (firm size) may not fully capture the complexity of managerial discretion, as suggested by the opposing effects of decisiveness in large and small firms. Future research could use more comprehensive contextual typologies to address this limitation. Data limitations also affected the study's sample size after accounting for missing values.