The Relationship Between Entrepreneurial
Intensity and Shareholder Value Creation
Pierre Erasmus
Retha Scheepers
Innovation and entrepreneurship have long been regarded as sources
of value and wealth creation. Previous research has shown that there is
a positive relationship between enterprises' levels of entrepreneurship
and their financial performance. Little research, however, has hitherto
focused on measuring the relationship between entrepreneurship and
shareholder value creation. In this study the relationship between the
entrepreneurial intensity and the shareholder value created by an en-
terprise is investigated. An adapted corporate entrepreneurship (ce)
measurement instrument is applied in order to gauge entrepreneurial
intensity, while shareholder value creation is measured by the market-
adjusted total share return (tsr) and the value based financial per-
formance measure Economic Value Added (eva). The study is con-
ducted for a sample of enterprises listed in the industrial sector of
the Johannesburg Securities Exchange (jse) for the period 2003-2005.
The contribution of the study is the focus on the relationship between
entrepreneurial intensity and shareholder value creation, rather than
purely on the accounting-based financial performance of an enterprise.
Key Words: entrepreneurial intensity, value based financial
performance measures, economic value added
jel Classification: L25, L26
Introduction
Innovation and entrepreneurship have been emphasised in recent years
by the popular business press, corporate leaders and academics (Hamel
and Breen 2007; Hof 2004; Planting 2004; Covin and Slevin 1991; Lump-
kin and Dess 1996; Leibold, Probst, and Gibbert 2002). The potential of
entrepreneurship to create value for various stakeholders (Morris 1998)
and value for shareholders (Vozikis et al. 1999) has heightened academic
Dr Pierre Erasmus is a Senior Lecturer at the Department of Business
Management, University of Stellenbosch, South Africa.
Dr Retha Scheepers is a Lecturer at the Department of Business
Management, University of Stellenbosch, South Africa.
Managing Global Transitions 6 (3): 229-256
interest in the field. A number of studies have investigated the relation-
ship between the level of corporate entrepreneurship (ce) of an enter-
prise and its financial performance (Wiklund 1999; Wiklund and Shep-
herd 2003; 2005; Zahra 1991; Zahra and Covin 1995). However, most
of these studies have concentrated on traditional accounting measures
adapted from previous studies. The measures used in many of these
studies did not build on a theoretical rationale of economic and en-
trepreneurship theory, despite the growing recognition of 'the impor-
tance of theory-based measures to entrepreneurship research' (Vozikis et
al. 1999,33).
Economic theory holds that firms exist to maximise value for share-
holders. Many authors agree that one of the motivations for starting a
business is the creation of wealth for the owner (Barringer and Ireland
2008; Longenecker et al. 2006). These two perspectives concur, in that
one of the reasons for the existence of an enterprise is to create value
for the owner, owners or shareholders. In the case of listed companies,
their equity typically consists of publicly traded shares. The value of these
shares changes over time, depending amongst others on the market's per-
ception of the value of the company. Efficient market theory argues that
these changes are based on the fact that 'investors continuously eval-
uate all information when valuing a share' (Fama 1974; 1991). Thus, if
the market incorporates all information, measures should be derivable
that allow for the evaluation and appraisal of the intensity of a firm's
entrepreneurial orientation. Although the applicability of this rationale
has received wide acceptance, the integration of entrepreneurship and fi-
nance theory remains limited (Brophy and Shulman 1992; Vozikis et al.
1999,33).
Little previous research has focused on assessing the relationship be-
tween ei and shareholder value creation and, therefore, this study aims
to focus on this research gap. The purpose of this study is twofold. Firstly,
the ei of listed companies is determined and secondly, the relationship
between the level of ei and the shareholder value created by a company,
as represented by economic value added (eva) and the market-adjusted
total share return (tsr), is investigated. The contribution of this study
is the focus on the relationship between ei and shareholder value cre-
ation, rather than merely on the financial performance of an enterprise.
The next section provides an overview of the importance of the study,
discusses the theoretical background of key concepts and highlights the
problems of traditional versus value based financial measures. Subse-
quently the methodology, results and managerial implications are pre-
sented and discussed.
Importance of the Study
The importance of entrepreneurial behaviour in developing countries,
such as South Africa, is emphasised by intensified competition in the
global economy, the need for economic growth and the impact of en-
trepreneurial behaviour on future growth and value creation in listed
companies.
Globalisation is transforming and integrating the world's economies
(Hough 2004). Developing countries, such as South Africa, are experi-
encing the need to become more competitive and to operate globally
(Gamble and Blackwell 2002) if sustainable economic growth and de-
velopment is to occur (Porter 2004, 31). The World Economic Forum
holds that the management of technology, innovation and information
have emerged as key requirements for success in the 21st century (Claros
et al. 2006). Therefore, South African companies need to become more
entrepreneurial to increase their competitiveness, on both an organisa-
tional and country level.
Entrepreneurship is an important element in organisational develop-
ment and economic growth (Antoncic and Hisrich 2001; Drucker 2002).
Entrepreneurial behaviours and attitudes are key determinants of the
ability of established firms to survive and prosper in turbulent envi-
ronments (Lumpkin and Dess 1996). Consequently, listed companies,
state-owned enterprises and small and medium-sized businesses are be-
ing urged to be more entrepreneurial. Several authors argue that tradi-
tional management methods that focused on control and efficiency no
longer suffice in the knowledge economy where adaptability and creativ-
ity drive business success (Hamel and Breen 2007; Leibold et al. 2002).
In South Africa entrepreneurship is also seen to be vital to address the
issues of job creation, economic growth and the exploitation of oppor-
tunities (Von Broembsen, Herrington, and Wood 2005). The pursuit and
exploitation of opportunities accentuate financial objectives for the firm,
such as profitable customer acquisitions and market growth. Thus the
creation of additional value, or wealth, for the owner-entrepreneur or
for a group of owners (shareholders) is one of the main objectives of en-
trepreneurial activities. Such an emphasis makes the use of value based
performance measures particularly relevant (Vozikis et al. 1999, 34).
The potential of entrepreneurial behaviour to create shareholder value
is implicit in the growth strategies companies pursue. When evaluating
the financial performance of a company, it is important to distinguish
between the value resulting from its current activities, and the value of
future growth activities. According to O'Byrne (2000) it is not sufficient
to merely maintain the current level of financial performance in order to
maximise the shareholder value of a firm. The expected future growth in
financial performance should also be considered, since it could signifi-
cantly contribute to the total value of the firm. Madden (1999) indicates
that firms which do not continuously act in an innovative way to increase
their economic lifetime will ultimately cease to create economic value
(the return on investment drops below the return required by investors).
Such firms will face financial failure as investors move their investments
to other firms that offer them acceptable levels of return.
To summarise, the importance of this study is emphasised by the
role entrepreneurship could play in developing countries, such as South
Africa; intensified competition in the global economy and the poten-
tial of entrepreneurial actions to create value for shareholders; and the
impact of entrepreneurial behaviour on future growth and shareholder
value creation in listed companies.
Theoretical Background
entrepreneurial intensity
Although there has been intense debate on how to define entrepreneur-
ship, many authors (Morris and Kuratko 2002; Barringer and Ireland
2008) concur with Stevenson, Roberts, and Grousbeck (1989) that en-
trepreneurship can be described as 'the process of creating value by
bringing together a unique combination of resources to exploit an op-
portunity'. This definition implies that (1) entrepreneurship may vary in
terms of the extent and number of times it occurs, (2) entrepreneurship
occurs in various contexts (start-up, corporate and others); (3) that it
is a process that can be managed; and (4) that it creates value and it is
opportunity-driven.
Implicit in the definition provided by Stevenson, Roberts, and Grous-
beck (1989), entrepreneurship may vary in terms of extent and the num-
ber of times it occurs. Morris and Sexton (1998) refer to the varying levels
of entrepreneurship as Entrepreneurial Intensity (ei). They view ei as a
function of the degree and frequency of entrepreneurship as shown in
figure 1 (Morris and Sexton 1996). The notion of entrepreneurial inten-
sity is derived from the conjecture that entrepreneurial behaviour may
figure 1 Entrepreneurial Intensity (adapted from Morris and Sexton 1996)
differ in terms of its levels of innovativeness, pro-activeness and risk-
taking characteristics. This variation may be visualised as opposites on
a conceptual continuum, where one extreme would represent conser-
vative behaviour and another extreme would represent entrepreneurial
behaviour (Barringer and Ireland 2008). Frequency of entrepreneurship
refers to the number of times an enterprise acts entrepreneurially (for
example, develops new products or processes), while the degree of en-
trepreneurship (also referred to as entrepreneurial orientation) could
be assessed by three dimensions: innovativeness, risk-taking, and pro-
activeness.
Innovativeness, the first dimension of the degree of entrepreneurship,
refers to the ability to generate ideas that will culminate in the produc-
tion of new products, services and technologies. Risk-taking, the second
dimension, involves the determination and courage to make resources
available for projects that have uncertain outcomes, in other words in-
volve risk. Attempts are made to manage these risks by researching a
market, recruiting and employing skilled staff or other strategies. Pro-
activeness, the third dimension, indicates top management's stance to-
wards opportunities, encouragement of initiative, competitive aggres-
siveness and confidence in pursuing enhanced competitiveness (Morris
1998). In the view of Morris and Sexton (1996) ei is a function of the de-
gree and frequency of entrepreneurship. This is supported by Antoncic
and Hisrich (2001). Conversely, Lumpkin and Dess (1996) argue that not
three, but five dimensions should be used to measure entrepreneurship,
namely autonomy, competitive aggressiveness, pro-activeness, innova-
tiveness and risk-taking. In contrast with these views, this study argues
for a view of autonomy as an internal condition that influences the or-
ganisational climate. Competitive aggressiveness forms part of the pro-
activeness sub-dimension. Other researchers support this view (Morris
et al. 2006; Kreiser, Marino, and Weaver 2002).
The term Entrepreneurial Intensity ( ei ), therefore, refers to the variable
nature of entrepreneurship within an established enterprise. As shown in
figure 1, various positions of ei are possible, since different scores can be
obtained on the frequency axis and degree of entrepreneurship axis. Al-
though Morris and Sexton (1996) assessed entrepreneurial intensity in
a corporate context, entrepreneurship can indeed occur in various con-
texts.
These organisational contexts may range from start-up firms, grow-
ing independent businesses, multinationals, even to non-profit organ-
isations, such as semi-state institutions or organisations with a social
purpose. Within these different contexts the definition of Stevenson,
Roberts, and Grousbeck (1989) applies, since the process and required
inputs are similar, even if the outputs differ. Although authors distin-
guish between corporate entrepreneurship, intrapreneurship and en-
trepreneurship (Birkinshaw 2003; Sharma and Chrisman 1999), the sim-
ilarities between these contexts are generally greater than the differences
(Morris and Sexton 1996). Corporate Entrepreneurship (ce), generally,
refers to the development of new business ideas and opportunities within
large and established corporations (Birkenshaw 2003). In most cases, ce
describes the total process whereby established enterprises act in an in-
novative, risk-taking and pro-active manner (Zahra 1993; Dess, Lump-
kin, and McGee 1999; Bouchard 2001), where intrapreneurship is gener-
ally used to refer to the behaviour of the individual. Guth and Ginsberg
(1990) argued that ce is any effort to combine resources in new ways
in order to create value for the firm. In all the different contexts en-
trepreneurship can be seen as a process with different stages.
Even though entrepreneurship and innovation are inherently unpre-
dictable, chaotic and creating ambiguity, the entrepreneurial process can
nevertheless be managed. Entrepreneurial events are characterised by
different stages, such as opportunity identification, business concept
definition, assessment of the resource requirements, acquisition of the
needed resources, and then management and harvesting of the business
(Morris and Kuratko 2002). The ability to act entrepreneurially is linked
to the perception of opportunity.
The pursuit of opportunities also emphasises that those opportuni-
ties, which create the greatest value, should be exploited. Schumpeter
(1934) pioneered the theory of economic development and value creation
through the process of technological change and innovation. He intro-
duced the notion of'creative destruction' (Schumpeter 1942) noting that,
following a technological change, certain rents become available to entre-
preneurs, which later diminish as innovations are adopted. These rents
were later named Schumpeterian rents, defined as rents stemming from
risky initiatives and entrepreneurial insights in uncertain and complex
environments. Corporate entrepreneurship should not only focus on
seeking new markets, but also create new opportunities in existing mar-
kets (Block and MacMillan 1993). Thus the creation of value or wealth
for the owner-entrepreneur or for a group of owners (shareholder) is the
objective of entrepreneurial activities. Such an emphasis makes the use of
shareholder value creation (or destruction) particularly relevant (Vozikis
et al. 1999).
To conclude, firms may vary in terms of the intensity of their en-
trepreneurial actions. Actions could be regarded as entrepreneurial if
they are focused on opportunities and create value, regardless of the
resources that firms control. The focus of this study is on the en-
trepreneurial intensity in established firms and the value that is created
for shareholders.
shareholder value creation
Since the purpose of any enterprise is defined as long-term value cre-
ation, its corporate performance should be measured by considering
the value it created (Monks and Minnow 2001). Value Based Manage-
ment (vbm) could be defined as the process of continuously maximising
shareholder value (Copeland, Koller, and Murin 1994). When applying
vbm techniques, shareholder value creation becomes the main objective
of all employees and the management of the enterprise.
According to Copeland et al. (1994), vbm is a combination of two el-
ements. On the one hand it consists of adopting a value-creation mind-
set throughout an enterprise. All employees should understand that all
their actions should be directed towards achieving this objective. Fur-
thermore, this value-creation mindset needs to be combined with the
necessary management processes and systems to ensure that the employ-
ees actually behave in a manner that creates value (Copeland et al. 1994).
problems with traditional financial measures
During the last three decades, a number of studies empirically analysed
the relationship between ce and organisational performance (Goosen,
DeConing and Smit 2002; Kreiser, Marino and Weaver 2002; Zahra and
Garvis 2000; Lumpkin and Dess 1996; Singh 1990). Although many of
these report a positive relationship, most call for longitudinal designs
since entrepreneurial activities contribute to the long-term performance
of the enterprise (Goosen et al. 2002; Antoncic and Hisrich 2001). For ex-
ample, the cost of implementing entrepreneurial initiatives may be high
in the initial year of implementation, especially in the areas of product
and process innovations. The returns on such investments may only be
realised two to three years in the future, since radical product innova-
tions may take time to diffuse through the market. Processes and busi-
ness innovations need to be understood and used by employees to yield
economies of scale or scope (Barringer and Ireland 2008; Schilling 2008).
Zahra (1993) argues that the strength of the relationship between ce and
organisational performance will increase over time. In contrast, other
authors indicate that the existence of such a relationship depends on the
circumstances in the external environment, and the perceptions of man-
agement (Zahra, Nielsen, and Bogner 1999).
The majority of the studies investigating the relationship between ce
and financial performance utilised traditional accounting-based mea-
sures to evaluate financial performance. These traditional financial per-
formance measures predominantly focus on the short-term financial
performance of an enterprise (the measures are usually calculated for
a fiscal year). The benefits of entrepreneurial activities are, however, usu-
ally experienced over the long-term, and this casts some doubt on the
suitability of using the traditional measures to quantify financial perfor-
mance (Vozikis et al. 1999,35-36).
Furthermore, the accounting treatment of items such as research and
development (r&d) and goodwill negatively influences the short-term
financial performance of an enterprise. Although these expenses are ex-
pected to generate profits in future, the full amounts are usually allo-
cated during the financial year in which they were incurred. This may
have a negative effect on innovation, since management and divisions
may postpone or decrease expenditure and efforts on r&d to maintain
current profit levels. Value based measures aim to overcome some of the
limitations of traditional financial measures.
traditional vs. value based financial measures
The major financial objective of an enterprise is the maximisation of
shareholder value (Brigham and Houston 2001). All management deci-
sions and strategies should contribute towards this objective. Manage-
ment, however, faces the problem of determining what the effect of its ac-
tions would be on the future financial performance of the enterprise. In
order to quantify and manage financial performance, a significant num-
ber of traditional financial measures have been developed. These mea-
sures, however, are exposed to numerous weaknesses. Amongst others,
the measures are exposed to accounting distortions (Stewart 1991; Ehrbar
1998), they exclude the enterprise's cost of capital (Young and O'Byrne
2001), and they are based on historic cost information rather than cur-
rent replacement values (Peterson and Peterson 1996). In the majority of
previous studies where the relationship between ce and financial per-
formance were investigated, these traditional measures are applied as
measures of financial performance (Goosen, DeConing, and Smit 2002;
Kreiser, Marino, and Weawer 2002; Lumpkin and Dess 1996; Zahra 1993).
With a view to overcome some of the limitations associated with the
traditional measures, a number of vb financial performance measures
were developed. Proponents of the vb measures report high correlations
between the measures and the creation of shareholder value (Stewart
1994; Walbert 1994; O'Byrne 1996) and they are considered to be a ma-
jor improvement over the traditional financial performance measures.
These measures attempt to remove some of the accounting distortions
contained in the traditional measures. The most important improve-
ment, however, is that the value based measures include the enterprise's
cost of capital in their calculation. An enterprise's cost of capital is in-
fluenced by the market's perception of its risk and its expected future
returns. By incorporating the cost of capital, the value based measures
evaluate the market's perception of the current, as well as the expected
future financial performance of the enterprise.
According to Brophy and Shulman (1992), these vb measures should
more accurately reflect the financial performance of a company. In the
case of listed companies, share prices reflect the market's perception of
the risk and future return of the companies. Since their share prices are
readily available, it should be easier to quantify cost of capital figures for
listed enterprises than for smaller delisted or newer firms. They argue
that by considering these vb measures, researchers are able to evaluate
not only the current market valuation of a company, but also changes in
this valuation.
One of the most well-known and widely applied vb measures is Eco-
nomic Value Added (eva®). This measure, which was developed and
trademarked by the New York consulting firm Stern Stewart, calculates
the difference between an enterprise's Net Operating Profit after Tax
(nopat) and a capital charge (Young and O'Byrne 2001). The capital
charge is determined by multiplying the enterprise's Weighted Average
Cost of Capital (wacc) with the invested capital at the beginning of the
financial year. The eva value represents the enterprise's economic, rather
than accounting profit (Peterson and Peterson 1996), and makes provi-
sion not only for the cost of debt capital, but also the cost of all other
forms of capital (Grant 2003). Maximising an enterprise's eva should
result in an increase in the shareholder value created (Stewart 1991).
In terms of the prerequisites identified in Goosen et al. (2002), eva
offers a number of improvements over the traditional financial perfor-
mance measures. Most importantly, the implementation of a vbm sys-
tem based on eva should ensure an increased focus on the creation of
shareholder value not only at the corporate level, but also at divisional
levels (Young and O'Byrne 2001). Since eva can be calculated and in-
terpreted at the divisional level, employees are able to understand their
influence on the enterprise's overall value creating ability. Alternatively,
eva can be translated into divisional value drivers in those cases where
the calculation of the measure proves problematic, or where the value
drivers are more directly linked and controlled by the division (Young
and O'Byrne 2001). Translating eva into these value drivers and com-
bining it with EvA-based bonuses could enhance innovation (Young and
O'Byrne 2001).
entrepreneurial intensity and value creation
A significant benefit from the measures eva and tsr is that such an ap-
praisal of the firm reflects not only the company's expected financial per-
formance, but also the market's evaluation of the firm's entrepreneurial
posture. This is a reflection of a company's current actions, including
the company's pursuit of opportunities, and how such pursuits change
a company's future competitiveness when valuing a share. Additionally
the market evaluates the characteristics of a firm that may impact on the
pursuit of future opportunities, such as new product, process, service or
business developments in response to changes in the environment.
Furthermore, value based measures could provide greater insight than
accounting measures alone. For example, the economic value added and
created represents more than growth in a single accounting measure or
in the size of the company. Rather, additional value creation occurs when
the market place confers a positive judgment on the overall actions of the
firm. This is critical since it is possible for a firm to experience growth in
accounting or size variables, without the creation of additional value.
The measure of eva has the benefit of being based on the firm's out-
puts, i. e., cash flows resulting from the intensity of entrepreneurial ac-
tions (Bruton et al. 1996). Since the long-term view of the benefits of ce
are taken into consideration and the timing (and risk) of the benefits are
considered, eva and tsr do not exhibit the problems associated with the
traditional accounting-based measures.
Finally eva has practical applicability, because there is evidence that it
may provide insightful differentiation among various firms' ei positions,
since all firms are not equally entrepreneurial. The differences between
firms should be reflected in the value creation measure. Firms that cre-
ate additional value over time should have a higher ei over time, as they
have been the best at creating and pursuing opportunities in the environ-
ment. Those firms that destroy value over time should have the lowest
ei. Therefore, it could be argued that value based measures, such as eva
(internal measure) and tsr (external measure), should show a positive
relationship with increased ei.
Methodology
The objective of this study is firstly to determine the entrepreneurial in-
tensity of listed companies and secondly to investigate the relationship
between ei and eva and ei and tsr respectively. The sample and mea-
suring instruments will subsequently be discussed.
sample and data collection
Data regarding the ei of companies were collected by a cross-section tele-
phone survey between August and October 2005. The key respondent
was the relevant Chief Information Officer (cio). A total of 82 compa-
nies participated in this survey, and were included in the initial sample.
In order to calculate the eva and tsr values, the enterprises had to be
listed on the Industrial Sector of the jse Securities Exchange for the pe-
riod 2003 to 2005. Since the industrial sector is the second largest sector
in the South African economy and accounts for just over 16 percent of
the country's gdp (Mboweni 2006), this is a legitimate sample for this
type of study. Linked to the innovation imperative of established busi-
nesses and the fact that listed companies incorporate market perceptions
of their cost of capital, this sample is well suited to the type of analysis
conducted in this study. Because of the nature of their operations, enter-
prises listed in the Financial and Mining sectors were excluded from the
study. When considering the initial sample, a total of 79 enterprises pro-
vided complete eva values for the period under investigation. In order
to be included in this study, enterprises had to provide complete eva,
tsr and ei data. A total of 55 enterprises provided the necessary values,
and are thus analysed in the remainder of the study.
measuring instruments
A measurement instrument was adapted to assess ei within South
African enterprises. In order to ensure its validity and reliability, items
from existing measuring instruments that have proved to be reliable and
valid in previous research studies were used where possible, such as the
Entrepreneurial Performance Index (epi) of Morris and Sexton (1996)
and the entrescale (Kwandwalla 1977; Miller and Friesen 1978; Covin
and Slevin 1989; Knight 1997). These were enhanced by questions for-
mulated by the researchers (based on the literature) to ensure that each
variable in the measurement instrument was represented by at least three
items. Respondents needed to indicate their answers on a 9-point Likert
scale, since it is easier for a respondent to visualise a 9-point scale, as op-
posed to a 7-point scale, when participating in a telephone interview. ei
consists of the degree and frequency of entrepreneurship. Degree of en-
trepreneurship consists of three dimensions: innovativeness, risk-taking
and proactiveness.
•	Innovativeness: Three items measure the relative innovativeness of
a company: emphasis on r & d or marketing of existing products,
the number of new products and degree of change in product lines
over the last two years. Respondents were asked to indicate to what
extent their companies reflect these types of behaviour. The mean
score, calculated as the average of three items, was used to assess a
company's relative innovativeness.
•	Risk-taking: Three items assess the relative risk-taking propensity of
a company: the degree of risk (low vs. high) of projects; the strategic
posture (wait-and-see or bold and aggressive) of the company and
the type of behaviour to achieve goals (cautious vs. bold). The items
requested respondents to specify to what extent their companies re-
flect these types of characteristics. The mean score, calculated as the
average of three items, measured a company's relative risk-taking
propensity.
•	Proactiveness: Three items gauged the proactiveness dimension of
a company: posture towards competitors, initiator of action and
first-to-market or follower strategy. Respondents were required to
signify to what extent their companies reflect these types of actions.
The mean score, calculated as the average of three items, was used
to determine the relative proactiveness of a company.
Frequency, which refers to the number of entrepreneurial events,
may be applied to many different areas, including the introduction
of new products, services, processes, as well as new businesses. The
Entrepreneurial Performance Instrument (epi) questionnaire, used by
Morris and Sexton (1996), contained a number of items to measure fre-
quency. These items were related to new product, new service and new
process introductions. Since this study viewed new business develop-
ment as a part of ce, the questionnaire was expanded to include this
dimension as well.
•	Product frequency: Respondents were informed that new product
introductions refer to repositioning of products, product improve-
ments, and additions to product lines, new category entries as well
as new-to-the-world products. They were requested to rank the de-
gree of product improvements over the past two years, compared
to the past five years relative to their own performance and the per-
formance of their competitors on a 9 point Likert-scale with 1 be-
ing significantly less and 9 being significantly more. They were also
asked to indicate the degree of change in their products (improve-
ments or 'new-to-the-world' products). The mean of three items
provided an indication of product frequency.
•	Service frequency: Service introductions include modifications of
existing services, additions and services not offered before, and re-
spondents were asked to rate the degree of service improvements
over the last two years compared to the past five years relative to
their own performance and that of competitors; as well as the de-
gree of change in service offerings (improvements or services that
did not previously exist in the market) on a 9-point Likert scale.
Service frequency was assessed by the mean of these three items.
•	Process frequency: Process innovations refer to new systems for man-
aging inventories, an improved process for collecting outstanding
debtors or other processes that could improve the effectiveness or
efficiency of operations. Respondents were required to appraise the
degree of process improvements over the last two years compared
table 1 A summary of Cronbach Alpha coefficient values to determine the internal
consistency of Entrepreneurial Intensity
Construct	Cronbach Alpha Coefficient Values
Degree of Entrepreneurship	0.88
Innovativeness	0.80
Risk-taking	0.88
Proactiveness	0.77
Frequency	0.79
Frequency Product	0.68
Frequency Service	0.74
Frequency Process	0.77
Frequency Business	0.67
to the past five years relative to their own performance, that of
their competitors, and also to what extent these processes were new
(improvements or processes not previously used in industry). The
mean score of these three items provided an indication of the pro-
cess frequency of a company's behaviour.
• Business development frequency: New business was seen as new mar-
kets, acquisitions and mergers, internal ventures and spin-offs. Re-
spondents were asked to evaluate the degree of business develop-
ment over the past two years, compared to the past five years rel-
ative to the company's own performance and that of competitors.
Additionally the degree of new business development (market pen-
etration or market development) was also assessed. Business devel-
opment was measured by the mean of these three items.
Cronbach Alpha coefficients were computed to assess the internal
consistency of the constructs assessed by the measurement instrument.
These values are shown in table 1. The two constructs frequency and de-
gree ofentrepreneurship Cronbach Alpha coefficients were 0.79 and 0.88
respectively. The dimensions of degree of entrepreneurship innovative-
ness, risk-taking and pro-activeness were 0.80,0.88 and 0.77 respectively.
The dimensions of frequency product, service, process and business were
0.68, 0.74, 0.77 and 0.67 respectively. These coefficients would appear to
satisfy Nunally's (1978) suggested minimum criteria for internal reliabil-
ity. Coefficients lower than 0.5 are regarded as questionable, coefficients
close to 0.70 as acceptable and coefficients of 0.80 as good (Sekaran 1992).
The eva figures used in this study were obtained from the McGregor
bfa Database (2005). The eva values for the most current financial year
(eva2005) were downloaded. In order to investigate the longitudinal na-
ture of the relationship between ei and eva, the change in eva over the
period 2003 to 2005 (eva2003-2005) was also calculated. Since the absolute
monetary values of eva are influenced by the size of the enterprise, the
eva values were standardised by dividing the figures by the enterprise's
invested capital at the beginning of the financial year (ict-1).
eva = nopat - (wacc x ICt-1).	(1)
Dividing throughout with ict-1 yields:
eva nopat wacc x ict_ 1
- = - = - = roce - wacc,	(2)
lct-1 lct-1 lct-1
where: roce = Return on Capital Employed and wacc = Weighted Av-
erage Cost of Capital.
The resulting figures provide an indication of the percentage margin
earned above (or below) the enterprise's wacc. Positive values indicate
excess returns, while negative values indicate returns below the wacc.
The market-adjusted share return (tsr) was calculated as the differ-
ence between the annual compounded return on a company's shares, and
that of the All Share Index (alsi). This value represents the excess return
earned on the share above (or below) the overall market return. In order
to calculate the annual compounded share return, the monthly returns
on the share (consisting of the monthly capital gain/loss and all divi-
dends received during the month) were calculated first. A twelve-month
period ending December 2005 was used to calculate the compounded an-
nual return on a share. Similarly, the monthly returns on the alsi index
were calculated (including dividend payments), and compounded over
the corresponding period. Both the share and alsi compounded returns
were obtained from the McGregor bfa database (2005).
The statistical analysis was conducted using Statistica version 7.1. Cor-
relations and best subset regression analyses were used to determine the
relationship between ei, its constructs and eva and tsr.
Results
The first part of this section describes the sample by focusing on the size
of companies (as measured by the number of employees) and also pro-
vides descriptive statistics of entrepreneurial intensity and its constructs.
>3000
1000-2999
500-999
200-499
1-199
15%
15%
24%
figure 2 Size of companies in the sample, reflected by the number of employees
(n = 72)
table 2 Descriptive statistics of degree and frequency of entrepreneurship
and its dimensions
Variables	Mean	Median	Std. dev.	Coef. var.	N
Degree of entrepreneurship	5.4634	5.4444	1.1023	0.2018	82
Innovativeness	5.4715	5.3333	1.5126	0.27648	82
Pro-activeness	6.1056	6.3333	1.5404	0.2523	82
Risk-taking	4.8130	4.667	1-738	0.3611	82
Frequency of entrepreneurship	5.8894	5.9167	1.3308	0.2260	82
Product	5.8694	6.0000	1.5168	0.2584	82
Service	5.7843	5.6667	1.7561	0.3036	82
Process	5.6573	6.0000	1.8179	0.3213	82
Business	5.8148	5-8333	1.6358	0.2813	82
Entrepreneurial Intensity	11.4469	11.2222	2.0206	0.1765	82
19%
The second part contains the results from the correlation analyses, while
the final part presents the results of the best subset regression.
The sample of firms used in the study consists of listed companies on
the Industrial Sector of the jse. As shown in figure 2 most of the com-
panies (27%) employed 3000 and more employees, while 24% employed
less than 200 employees. Thus both smaller and larger companies formed
part of the sample.
Table 2 contains descriptive statistics of entrepreneurial intensity and
its dimensions, using the mean, median, standard deviation and coeffi-
cient of variation to describe the data.
Table 2 describes the Entrepreneurial Intensity of companies listed in
the Industrial Sector of the jse. Examining the dimensions of degree of
entrepreneurship, it would be seen that most companies score the highest
on the pro-activeness dimension with a mean of 6.11, while their risk-
taking propensity is the lowest with a mean of 4.81. The frequency of
table 3 Correlation coefficients between eva2005 and eva2003-2005
and the independent variables (p values in parentheses)
Correlations	EVA2005	eva2003-2005
Entrepreneurial Intensity	0.0841 (0.5341)	0.2823** (0.0368)
Degree of entrepreneurship	0.1474 (0.1919)	0.3057*** (0.0065)
Innovativeness	0.0882 (0.4364)	0.1532 (0.1805)
Risk taking	0.1189 (0.2935)	0.1857 (0.1036)
Pro-activeness	0.0962 (0.3962)	0.3032*** (0.0070)
Frequency	0.0637 (0.6378)	0.1598 (0.2439)
Product	0.1904 (0.1091)	0.1716 (0.1554)
Service	0.1313 (0.2895)	0.2624** (0.0347)
Process	0.0540 (0.6592)	0.1344 (0.2780)
Business	-0.0015 (0.9903)	-0.1603 (0.1916)
notes *** Significant at the 1 percent level. ** Significant at the 5 percent level.
entrepreneurship overall has a higher mean of 5.89 compared to degree of
entrepreneurship (mean = 5.46). Product frequency innovations are the
highest (mean = 5.87), while process innovations are the lowest (mean =
5.66).
The next section contains an analysis of the relationship between ei
and eva and between ei and tsr by employing correlation analysis.
Thereafter a best subset regression analysis is used to determine which
of the dimensions of degree and frequency of entrepreneurship explains
the majority of the variance in eva and tsr.
Correlation Analysis
entrepreneurial intensity and economic value added
Perusal of table 3 indicates that the correlations between eva2005 and the
independent variables are all statistically insignificant. The correlation
coefficients are all low, and indicate that no statistically significant rela-
tionships exist between eva2005 and any of the independent variables.
The value of eva2005, however, is calculated by considering only the
most recent financial information. When investigating the relationship
between ce and financial performance a longitudinal approach is pre-
ferred (Goosen, DeCining, and Smit 2002). To address this approach, the
change in an enterprise's level of eva from 2003 to 2005 (eva2003-2005)
was also calculated. When the correlations between this measure and the
independent variables were considered, some were found to be statisti-
cally significant.
The correlation between ei and eva2003-2005 is statistically significant
(p < 0.05). It appears that as the degree of entrepreneurship increases,
there is also an increase in the economic value added. This finding is sup-
ported by the literature, which argues that higher levels of entrepreneur-
ship should lead to value creation by the enterprise over the longer term
(Hayton 2005; Goosen, DeConing, and Smit 2002; Zahra, Nielsen, and
Bogner 1999).
In general, the degree of entrepreneurship exhibits a statistically sig-
nificant relationship with eva2003-2005 (p < 0.01). The components of
the degree of entrepreneurship, innovativeness, pro-activeness and risk-
taking, exhibit varying levels of significance. Although numerous au-
thors (Barringer and Bluedorn 1999; Birkinshaw 2003; Dess et al. 1999)
advocate the importance of innovation in today's complex business en-
vironment, it appears that there is no statistically significant correlation
between innovativeness and eva2003-2005 in the case of this dataset. In
addition, no statistically significant correlation was found between risk-
taking and eva2003-2005. The companies used for this analysis are listed
companies and are accountable to shareholders. It is therefore, reason-
able to expect that they would be cautious and careful in managing risk
regarding uncertain investments. However, a statistically significant cor-
relation exists between pro-activeness and eva2003-2005 (p < 0.01). Pro-
activeness reflects the tendency of top management to anticipate future
trends, opportunities and initiate strategies, rather than follow competi-
tors. This type of commitment is essential for vbm systems to be suc-
cessfully implemented in companies.
No statistically significant correlation was found between frequency
of entrepreneurship and eva2003-2005. In terms of its dimensions: prod-
uct, process or business frequency, no statistically significant correlation
was found. However, frequency of service innovations shows a statisti-
cally significant correlation with eva2003-2005 (p < 0.05). This is a sur-
prising finding, but may be ascribed to service innovations generally be-
ing less costly to implement than product, process and business innova-
tions.
entrepreneurial intensity and total share return
Examination of table 4 indicates that the correlation between ei and
tsr is not statistically significant. A statistically significant correlation,
Entrepreneurial Intensity and Shareholder Value Creation 247
table 4 Correlation coefficients between tsr and the independent variables
Variables	tsr
Entrepreneurial Intensity	0.1460
Degree of entrepreneurship	0.2217**
Innovativeness	0.0721
Risk taking	0.1262
Pro-activeness	0.2663**
Frequency	-0.0345
Product	0.0073
Service	-0.0193
Process	-0.2179*
Business	-0.2050*
notes ** Significant at the 5 percent level. * Significant at the 10 percent level.
however, exists between the degree of entrepreneurship and tsr. One
should bear in mind that the tsr measure used in these analyses rep-
resents excess return earned on the share above the overall market re-
turn. Therefore, it would appear that as the degree of entrepreneurship
increases, the shareholder value increases in excess of the market return.
Even though the tsr values are calculated for the current year only, these
values should reflect market perceptions with regard to future financial
performance in an efficient market (Biddle, Bowen, and Wallace 1997).
The literature argues that the strength of this value creation will increase
over time as levels of entrepreneurship increase (Hayton 2005; Goosen,
DeConing, and Smit 2002; Zahra, Nielsen, and Bogner 1999).
Similarly to the results obtained for eva2003-2005, the components
of the degree of entrepreneurship show varying significance levels. No
statistically significant correlation between innovativeness and tsr and
risk-taking and tsr was found. However, a statistically significant corre-
lation exists between pro-activeness and tsr (p < 0.05). Pro-activeness
reflects the tendency of top management to spot trends and opportuni-
ties to take initiative in the market, rather than being reactive and fol-
lowing competitors. This finding also implies that a pro-active attitude
of top management generates excess shareholder returns.
Comparable to the results of ei and eva2003-2005 no statistically signif-
icant correlation was found between frequency of entrepreneurship and
tsr. In terms of its dimensions: product or service frequency, no statis-
tically significant correlation was found. However, frequency of process
and business innovations show a statistically significant negative corre-
lation with tsr (p < 0.10). This finding is to be expected, and may be
ascribed to the cost of process and business innovations often being high
in the year they are implemented, while the returns realised from these
innovations are generally evident over a longer term.
Additionally it should be pointed out that several external market fac-
tors also influence tsr. Examples of these include general economic con-
ditions, irrational market behaviour, and global market crises. Since ei
only partly contributes to the overall tsr value, it is unrealistic to expect
very high correlations with tsr.
Regression Analysis
Multiple regression analysis was used to assess the degree of relation-
ship between the vb measures and the dimensions of degree and fre-
quency of entrepreneurship. The first regression model assessed was
the relationship between degree and frequency of entrepreneurship and
the change in eva (eva2003—2005). These results indicated that although
the degree of entrepreneurship had a statistically significant relationship
with eva2003—2005, only 7.62% (adjusted R2 = 0.0762) of the variance in
eva2003-2005 was explained by degree of entrepreneurship. The second
regression model assessed the relationship between ei and tsr, to deter-
mine whether higher levels of entrepreneurship resulted in excess share
returns. Again, the results indicated that degree of entrepreneurship had
a significant relationship with tsr. The adjusted regression coefficient,
however, was only 0.0938. Therefore, it was decided to use best subset
regression analysis to determine how the separate dimensions of degree
and frequency of entrepreneurship influence these two vb measures.
Best subset regression analysis runs all possible regressions between
the dependent variable and all possible subsets of independent variables
and enables the user to find the best regression model, given a specified
number of independent variables (fewer than 14). It excludes variables
which do not contribute to increasing the regression coefficient. The cri-
terion used in determining which estimated regression equations are the
best for only a number of predictors is the value of the coefficient of de-
termination (R2) (Hair et al. 2006). Consequently, best subset regression
analysis has the benefit over stepwise regression, forward selection and
backward elimination for which the best model for a given number of
variables will be found.
table 5 Summary of the best subset regression analysis conducted to determine the
most relevant dimensions of ei for eva2oo3—2005
Variables	ß	Std. err. ofß	B	t( 50)	p-level
Intercept	-	-	-16.7512	-1.68	0.09*
Pro-activeness	0.2905	0.1317	2.9436	2.21	0.03**
Risk taking	0.1894	0.1256	1.6972	1.51	0.13
Product	-0.3938	0.2222	-4.2504	-1.77	0.08*
Service	0.7415	0.2092	6.9883	3.54	0.00**
Business	-0.3769	0.1434	-3.6043	-2.63	0.01**
Innovativeness	-	-	-	-	-
Process	-	-	-	-	-
notes R = 0.5657, R2= 0.3200, adjusted R2 = 0.2520, ^(5,50) = 4.7051, p < 0.0013; std.
err. of estimate: 13.3818; ** significant at the 5 percent level, * significant at the 10 percent
level.
The results of the best subset regression analysis in table 5 indicate
that pro-activeness, service, business and product innovations are statis-
tically significant contributors to the variance in eva2003-2005 at the 90%
confidence level. Pro-activeness (t = 2.21) and service innovations (t =
3.54) are positively and significantly related to eva2003-2005, while prod-
uct and business innovations are negatively and significantly related to
the change in eva2003-2005. The independent variables explain 25% (ad-
justed R2 = 0.25) of the variation in eva2003-2005.
It is interesting to note that especially service innovations and the
pro-activeness dimension of the degree of entrepreneurship contribute
towards this relationship to the change in eva. Product and business
innovations show a negative relationship towards the change in eva,
since these innovations are often costly and the results seem to indi-
cate that the return on these innovations may be longer than the three
year period used in the analysis above. These results suggest that en-
trepreneurial strategies could yield long-term benefits. However, if firms
are only focused on short-term annual financial results their long-term
entrepreneurial intensity and competitiveness may decline.
A best subset regression analysis was also conducted with tsr as de-
pendent variable, but weak results were obtained. It seems that tsr,
which is an external measure of shareholder value creation, is influenced
by many external factors, such as general economic conditions, irra-
tional market behaviour, political instability of emerging markets, and
global market crises. Thus the influence of ei on the overall tsr value is
weak.
Conclusions
This study contributes to the current literature by describing the ei of
manufacturing firms listed on the jse and focusing on the relationship
between ei and shareholder value creation, rather than merely on the
accounting-based financial performance measures of an enterprise. Data
obtained from companies listed on the jse for the period 2003-2005
strongly suggest that the relationship between ei and financial perfor-
mance should be viewed longitudinally. The results indicate that there
is a statistically significant relationship between ei and the change in an
enterprise's level of eva from 2003 to 2005. It appears that companies
with higher degrees of entrepreneurship create more economic value
added over the longer term. In particular, the pro-active dimension of
the degree of entrepreneurship appears to contribute toward this value
creation. Similar results were found when the association between ei and
tsr was examined. No statistically significant relationship exists between
ei and tsr, but a statistically significant relationship exists between de-
gree of entrepreneurship and tsr, again with the pro-activeness dimen-
sion contributing to this relationship with shareholder value creation. It
appears that companies with higher degrees of entrepreneurship create
excess returns for shareholders above market returns.
Frequency of entrepreneurship (in general) was not found to exert a
statistically significant relationship with eva and tsr. The correlation
analysis indicates that frequency of product innovations shows no rela-
tionship with eva or tsr. Frequency of service innovations, however,
shows a statistically significant correlation with eva2003—2005 (p < 0.05).
This may be ascribed to service innovations generally being less costly
than product, process and business innovations. Frequency of process
and business innovations has a statistically significant negative correla-
tion with tsr (p < 0.10). This finding is to be expected, since process and
business innovations are generally more costly and take a longer period
to realise returns.
The best subset regression analysis supports the above findings and
indicates that ei explains 25% of the variance in the change in eva. The
constructs: pro-activeness, service, product and business showed the best
regression equation with the change in eva. Pro-activeness and service
innovations exhibit a positive relationship with the change in eva, which
indicates that the market evaluates top management stance towards op-
portunities, encouragement of initiative, and competitive aggressiveness
positively, as well as service innovations. However, the negative relation-
ship observed for product and business innovations suggest that the cost
of entrepreneurial initiatives is high and may in some instances only be
recouped over a longer period (more than three years).
Only companies listed on the jse could be included in this study, since
published financial and share data are not available for unlisted compa-
nies. Consequently it would prove difficult to calculate eva, cost of cap-
ital and tsr values for unlisted companies over a period of time. The
specific focus on only those companies that provided complete eva and
tsr data over the period investigated, however, could expose the study
to a survivorship bias.
Future researchers should measure ei longitudinally and ought to de-
termine whether it is a stable characteristic of a company or whether it
varies over time. These measures could then be correlated with vb mea-
sures. Whereas this study investigated the relationship between ei and
historic eva and tsr values, investigating the effect of current ei lev-
els on future eva and tsr values could provide further insight. Addi-
tional future research could focus on determining whether enterprises
that incorporate vb measures in their compensation systems may differ
in terms of ei from those that do not.
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