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Do Entrepreneurs Make Predictable Mistakes? Evidence from Corporate Divestitures

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Tags The EntrepreneurEntrepreneurship

07/30/2014Peter G. Klein
 

Volume 4, No. 2 (Summer 2001)

 
Do entrepreneurs make predictable mistakes? Theory and evidence suggest otherwise. Contrary to the conventional wisdom on mergers and sell-offs, divestitures of previously acquired assets do not necessarily indicate that the original acquisitions were mistakes. Indeed, empire-building motives do not seem to be systematically related to long-term merger performance. Instead, divestitures are more likely to be associated with experimentation, learning, and other socially beneficial activities.Acquisitions are uncertain endeavors, and the entrepreneur–promoter—along with the manager to whom he delegates authority—is a speculator. If the consequences of his actions were determinate, he would not be an entrepreneur, but rather, as some economic theories seem to treat him, "a soulless automaton."  However, the future can never be known with certainty; long-term profit and loss cannot be predicted based on current information.  The relevant question for policy is whether there is a feasible alternative to market-based corporate governance.  Our reading of the political-economy literature leaves us doubtful that such an alternative exists.

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Cite This Article

Klein, Peter G.and Klein, Sandra K. "Do entrepreneurs make profitable mistakes? Evidence from Corporate Divestitures." The Quarterly Journal of Austrian Economics 4, No. 2 (Summer 2001): 3-23.