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CEOs’ Leadership Styles and Managers’ InnovativeBehaviour: Investigation of Intervening Effects in anEntrepreneurial Context

Jae Hyeung Kang, George T. Solomon and David Y. ChoiOakland University; The George Washington University; Loyola Marymount University

ABSTRACT We examine the relationships and intervening mechanisms between foundingCEOs’ transformational/transactional leadership and the innovative behaviour of managers.We develop and test our hypotheses on a sample of 39 participating CEOs and 105 managerswith the use of a multilevel structural equation model. The results show that bothtransformational and transactional leadership on the part of the CEO relate positively tomanagers’ innovative behaviour. We also discover that firm’s innovative climate mediates therelationship between transformational leadership and innovative behaviour. However, we failto find the mediating effect of innovative climate between transactional leadership andinnovative behaviour. Our findings contribute to an improved understanding of how foundingCEOs’ different leadership styles affect employees’ innovative behaviour in start-ups and towhat extent the innovative climate influences the relationship.

Keywords: innovative behaviour, innovative climate, transactional leadership,transformational leadership

INTRODUCTION

Founding chief executive officers (CEOs) of all shapes and sizes across various indus-tries are striving to lead their organizations to realize desired innovations (Fahlen-brach, 2007; Ling et al., 2007). But given the various available leadership styles andorganizational characteristics, it is uncertain as to what constitutes effective leadershipor organizational climate for start-ups when attempting to stimulate innovative behav-iour in employees. Considering the significance of start-ups to the overall economyand the extensive literature on leadership, there is surprisingly little research or con-sensus on the leadership styles or organizational characteristics that are effective for

Address for reprints: Jae Hyeung Kang, Assistant Professor of Entrepreneurship, Department of Manage-ment and Marketing, School of Business Administration, Oakland University, 2200 N. Squirrel Road,Rochester, MI 48309, USA ([email protected]).

VC 2015 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 52:4 June 2015doi: 10.1111/joms.12125

start-ups. Thus, it is important for both researchers and practitioners to understandhow the founding CEOs’ leadership styles and the organizational climates they buildinspire innovative behaviour on the part of the employees.

A number of researchers have examined the relationships between transforma-tional/transactional leadership styles and positive employee behavioural reactionswithin large and mature organizations (Bass, 1985; Howell and Avolio, 1993; Podsak-off et al., 1990). However, there has been scant published work on how these leader-ship styles affect employee behaviour in firms in their earlier stages of development(for an exception, see Marzler et al., 2008). Several researchers (Antonakis and Autio,2007; Cogliser and Brigham, 2004; Vecchio, 2003) have also observed and remarkedon the dearth of research examining leadership in entrepreneurial organizations.Given this call in previous work, we examine the impacts of founding CEOs’ leader-ship on their managers’ innovative behaviour in start-ups. In our study, we conceptu-alize the ‘founding CEO’ as the one who founded the venture and generally makeskey strategic decisions for the organization. We postulate ‘manager’ as an immediatesubordinate who directly reports to the CEO.

Transformational leadership is one of the most widely studied constructs in theleadership domain. It has been credited with ‘influencing followers by broadeningand elevating followers’ goals and providing them with confidence to perform beyondthe expectations specified in the implicit or explicit exchange agreement’ (Dvir et al.,2002, p. 735). Unfortunately, high levels of transformational leadership do not neces-sarily lead followers to exhibit innovative behaviour (Basu and Green, 1997). Whereassome researchers have found a positive relationship between transformational leader-ship and innovative behaviour (Lee, 2007; Pieterse et al., 2010), others have been lesssuccessful in finding such a relationship, and some have even found a negative rela-tionship (Basu and Green, 1997). Avolio and Bass (1988) suggest that leadershipresearchers examine the specific environmental conditions in which transformationalleadership is most effective. It should be noted that the organizational environmentfor start-ups might be quite different from that of a large organization, given thedegree of uncertainty, difference in resources, and more intimate relationship betweenCEOs and their followers (Ensley et al., 2006a). With that said, researchers havefound that transformational leadership can be particularly effective during times ofextreme challenge or crisis (Bass et al., 2003; Dvir et al., 2002; Van Knippenbergand Sitkin, 2013; Weber, 1947). Thus, we expect that transformational leadershipcould be effective in early growth stages of a company when it experiences variousforms of challenge and hardship.

Frequently contrasted with transformational leadership, transactional leadership isassociated with the notion that leaders, who hold power and control, provide contin-gent rewards (e.g., monetary compensation) to followers who do what the leaderswant (Bass, 1985; Burns, 1978). Researchers have generally argued that transactionalleadership is less effective in achieving innovation than transformational leadership(Howell and Higgins, 1990; Pieterse et al., 2010). For example, it has often been thecase that transactional leadership did not relate to followers’ innovative behaviour(Boerner et al., 2007; Moss and Ritossa, 2007), and it has even been negatively associ-ated with innovative behaviour in large and mature organizations (Pieterse et al.,

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2010). However, the role and effects of transactional leadership may be different instart-ups. For instance, early in the life of a start-up, transactional leadership can beeffective in setting performance expectations and clarifying contingent rewards (Ensleyet al., 2006b). Because of the high environmental uncertainty and a lack of job secu-rity, the employees of start-ups could be more interested in securing tangible rewards,for example salary, bonus, and stocks, all of which transactional leadership styles canoffer (Ensley et al., 2006b). In this study, therefore, we would expect the transactionalleadership style, that is, a style of leadership in which the leader promotes complianceof his/her followers through both extrinsic rewards and punishments (Bass, 1985), tobe effective in start-ups led by the founding CEOs.

Further, we construct a multilevel model for conceptualizing the intervening effectsof the founding CEOs’ leadership styles on innovative behaviour. Researchers havefound that effective leaders can create a situational context that motivates their fol-lowers to perform well in organizations (e.g., Eisenbeiss et al., 2008; Jung et al.,2003). However, leadership researchers have largely focused on individual psychologi-cal processes that lead to behavioural outcomes (Gong et al., 2009; Lee, 2007), inspite of the fact that individual leaders predominately generate situational contexts,such as firm climate or culture (Schein, 1992). Recently, researchers have begun tostudy the theoretical processes of how individual leaders create and develop a specificfirm climate by interacting with their followers (Ehrhart et al., 2013). In this paper,we analyse the multilevel mediating effects of firm innovative climate with the objec-tive to examine its connection to innovative behaviour. The conceptual roles of inno-vative climate, as a situational context, include supporting and encouraging thedevelopment of novel and useful ideas, challenging old ways of doing things, andlearning from others inside or outside the organization (Van der Vegt et al., 2005).Our multilevel model, therefore, aims to address and incorporate how foundingCEOs’ leadership styles upwardly shape the firm innovative climate, which may inturn have a top-down effect on individual innovative behaviour.

In summary, we explore the relationships between different leadership styles andinnovative behaviour as well as a multilevel intervening mechanism in an entrepre-neurial context. Evidence suggests that entrepreneurial organizations of all sizes, notjust small companies, could benefit from effective leadership at the top managementlevel when pursuing innovation (Ling et al., 2008a). Nevertheless, the impacts of thedifferent leadership styles on innovative behaviour in start-ups have not been exten-sively studied or established. Therefore, this paper is novel in that it contributes tothe literature in leadership and entrepreneurship by examining how founding CEOs’leadership styles may or may not affect managers’ innovative behaviour in their earlystages of development and growth. As shown in Figure 1, we develop the conceptualmodel underlying our research and propose several hypotheses.

THEORY AND HYPOTHESES

As an underlining theoretical mechanism or a dominant logic, we use Vroom’s (1964)expectancy theory, which integrates intrinsic and extrinsic motivational elements. Webelieve that transformational and transactional leadership will motivate followers in

533CEOs’ Leadership Styles and Managers’ Innovative Behaviour


either intrinsic or extrinsic ways. The expectancy theory suggests that individuals aremotivated to behave in a specific manner due to the results they expect as a conse-quence of their selected behaviours (Oliver, 1974). The theory involves three majorcomponents: expectancy, instrumentality, and valence (Vroom, 1964). First, expect-ancy refers to the belief that hard effort will generate better performance. Second,instrumentality can be described as the belief that if an individual performs well, thena desired reward will come to that individual. Third, valence means ‘value’ and refersto beliefs about outcome desirability. Vroom (1964) concluded that the force of moti-vation in an employee can be calculated using the formula: Motivation 5 Valence 3

Expectancy 3 Instrumentality.We believe that the three components could be in effect simultaneously, with their

magnitudes dependent on the appropriate motivators such as different leadershipstyles and organizational climates. Drawing upon the three components of Vroom’s(1964) expectancy theory, we theorize how the founding CEOs’ different leadershipstyles affect managers’ innovative behaviour, and then we posit a firm-level mediatingmechanism between these relationships. First, we use the expectancy concept to dis-cuss the relationship between transformational leadership and innovative behaviour.Second, we utilize the instrumentality component to argue the relationship betweentransactional leadership and innovative behaviour. Finally, we apply the valence com-ponent to discuss the mediating effect of firm innovative climate between CEOs’ lead-ership styles and managers’ innovative behaviour.

Transformational Leadership and Innovative Behaviour

We define innovative behaviour as individual-level behaviour that aims to achieve theintentional generation and implementation of new and useful ideas within an

Figure 1. The summary model of hypothesized relationships



organization (Janssen, 2003). Innovative behaviour is a multi-stage process of problemrecognition, idea generation, establishment of support for ideas, and idea implementa-tion (Janssen, 2000; Krause, 2004; Pieterse et al., 2010; Scott and Bruce, 1994).According to Janssen (2003), the scope of innovative behaviour ranges from idea gen-eration to implementation of new ideas that have an impact on products and proc-esses across the entire organization. Consistent with the literature, we conceptualizeinnovative behaviour as a multistage process with several different activities and dif-ferent individual behaviours required at each stage.

The expectancy component of Vroom’s (1964) expectancy theory provides a theo-retical basis for understanding how transformational leaders may affect followers’innovative behaviour. According to the expectancy concept, people make decisionsabout exerting effort based on the perceptions that their effort will result in attain-ment of desired goals. Given this premise, Locke and Baum (2007) argue that leadersof organizations in their early stages may be attracted to the high-uncertainty situa-tions and therefore be more tolerant of uncertainty. Mindful of the uncertain andcompetitive business environment, transformational leaders may cultivate a sense ofurgency, demonstrate a compelling vision for the future, and establish desired goals tothe followers within an organization (Bass, 1985; Kotter, 1995). With the belief thattheir efforts will allow the organization to overcome temporal obstacles and eventuallyachieve the desired goals, transformational leaders intrinsically motivate their fol-lowers to behave more innovatively (Jung and Avolio, 2000; Jung et al., 2003). As aresult, the managers under transformational leadership may exert the innovativeefforts necessary to meet the expectations of their leaders above and beyond what isdefined in the mutually agreed-upon contract.

Further, CEOs tend to be more influential in smaller entrepreneurial organizations(Tarabishy et al., 2005; Waldman and Yammarino, 1999). Smaller company size(e.g., in terms of the number of employees) allows CEOs to be more intimately awareof the manager’s goals, obstacles, and capabilities, among other things. Thus, CEOs’transformational leadership in start-up firms may be even more effective than inlarger organizations in motivating managers to generate novel and useful ideas,implement these ideas, and redirect their employees’ activities accordingly (Jansenet al., 2009; Waldman and Yammarino, 1999), even with impediments such as short-ages in financial and other organizational resources. As such, we hypothesize:

Hypothesis 1: Founding CEOs’ transformational leadership is positively related tomanagers’ innovative behaviour.

Transactional Leadership and Innovative Behaviour

The essence of transactional leadership lies in the notion that the leader, who holdspower and control over his or her employees, provides contingent rewards to the fol-lowers who do what he or she wants. Hence, if an employee does what is desired, areward will follow, and if an employee does not, a punishment or withholding of thereward will occur (Bass, 1985; Yukl, 2010). Although Burns (1978) considered transac-tional leadership to be the opposite of transformational leadership, Bass (1985) argued



that transformational leadership and transactional leadership were distinct but not mutu-ally exclusive. Thus, leaders can exhibit both transformational leadership and transac-tional leadership, depending upon their judgment of what is appropriate (Yukl, 2010).

The instrumentality component of Vroom’s (1964) expectancy theory is particularlyrelevant for transactional leadership. Instrumentality is the belief that employees willreceive a desired reward if the performance expectation is met. Vroom (1964) sug-gested that people make rational decisions about exerting effort based on the percep-tions that their effort will generate extrinsic rewards that they expect as a consequence.Employees in start-ups not only seek to understand the nature of the outcomes pro-posed by transactional leaders, but they also seek to understand if those outcomes willbe positive or negative, and, if positive, what the significance of the outcomes are interms of their personal rewards and benefits, and then act accordingly (Ensley et al.,2006b; Self, 2007). Although the literature pertaining to such issues in large organiza-tions has been well established (Bass, 1985), they are not as well understood for start-up organizations. We suggest that transactional leadership could be even more effectivein promoting managers’ innovative behaviour in start-ups where available resourcesand time are limited and individual efforts can make a significant contribution.

For founding CEOs of new ventures, it can be extremely challenging to guaranteesalary and job security to all employees (Ensley et al., 2006b). However, if transac-tional leaders offer rewards (e.g., salaries, stock options, and performance bonuses) inaccordance with the employees’ instrumentality, such compensation structure couldbe more feasible for a start-up while effectively motivating the followers to demon-strate desired behaviours. With clear expectations for extrinsic rewards that promotecertain behaviours (e.g., identifying problems within current markets, suggesting crea-tive ideas, and engaging in innovative activities) in place, employees under transac-tional leadership may exert the required innovative efforts. When the extrinsicrewards offered by transactional leaders correspond to the employees’ needs anddesires, the employees will induce an obligation to reciprocate their employers’ ges-tures by acting more innovatively (Vera and Crossan, 2004). Therefore, we proposethat transactional leadership can be effective in promoting innovative behaviour instart-ups.

Hypothesis 2: Founding CEOs’ transactional leadership is positively related to man-agers’ innovative behaviour.

The Multilevel Indirect effect of Innovative Climate

Although we have suggested an individual-level direct relationship between leadershipstyles and innovative behaviour in the above hypotheses, we also expect that a firm’sinnovative climate will provide an indirect and multilevel effect through which CEOs’leadership styles influence managers’ innovative behaviour. In this section, we discussour mediating hypotheses with respect to the relationship between founding CEOs’leadership styles and the firm’s innovative climate (upward influence), and then therelationship between the innovative climate and individual innovative behaviour(downward influence).



Upward influence of founding CEOs’ leadership on firm climate. Founding CEOs are generallythe most influential persons within their organizations, particularly in the early stages.They exert the strongest authority in the workplace; they make decisions on things suchas strategic directions, organizational norms, and hiring of new employees (Schein,1992). Thus, a CEO’s leadership style significantly affects individual members of theorganization. However, the interpretation of a CEO’s leadership is strongly dependenton the individual followers’ perception (Richmond et al., 1983). Some employees agreewith and are willing to follow the CEO’s vision and strategic direction, but others maycriticize and resist. For instance, employees at Apple Inc. have had different perceptionsof Steve Jobs’ leadership style. Some say that he demonstrated a highly transformationalleadership style by pursuing perfection, but others remember him as an abusive leaderand a micromanager. Such differences in individual perceptions lead to discrepancies inthe assessment of leadership styles and the effectiveness of the CEO.

Meanwhile, firm climate incorporates a shared perception of employees concerningthe practices, procedures, and kinds of behaviours that are rewarded and supportedin a particular setting (Schneider, 1990). Although individual members can differentlyperceive a CEO’s leadership, firm climate represents a shared perception amongmembers in an organization (Ehrhart et al., 2013). Such organizational climate sug-gests desirable and undesirable behaviour of employees, and corrects specific behav-iours that violate organizational norms. This process of forming an organizationalclimate results in organizational homogeneity (Schneider, 1987). For example, topmanagement team members are often relatively homogeneous in their cultural, attitu-dinal, and behavioural aspects (Schneider et al., 1995). Although CEOs’ leadershipstyles might be interpreted differently depending on individual followers’ perceptions,employees in an organization may develop a shared perception of an organizationalclimate that supports and rewards desirable behaviours that are suggested by thefounding CEOs (Ehrhart et al., 2013; Schneider, 1987). This upward influence fromCEOs’ leadership creates attitudinal and behavioural norms, and further shapes theorganizational climate as a whole.

The valence component of expectancy theory might be applied to effectivelyexplain the upward influence of CEOs’ leadership on firm climate. Valence is thevalue an individual places on the rewards of an outcome, whereas this value dependson one’s needs, goals, and personal values. When a leader suggests a particular valuefor an organization, followers are more likely to understand the suggested value, com-pare to their individual values, and eventually make them congruent with that of theleader’s (Jung and Avolio, 2000). If followers are truly convinced by the suggested val-ues of their leaders, they will be more likely to internalize their valences, which willcollectively spread throughout the organization and eventually become a shared per-ception (Jung et al., 2003). This process of making the values unified and congruent isa key element for shaping a firm’s climate. Next, we discuss how specific leadershipstyles affect a firm’s innovative climate, which in turn affects innovative behaviour.

Transformational leadership and innovative climate. Here we conceptualize the relationshipbetween founding CEOs’ transformational leadership behaviour and the creation of afirm-level innovative climate. An innovative climate can be defined as ‘the shared per-ceptions of employees concerning the practices, procedures, and behaviors that promote



the generation, introduction, and realization of new ideas’ (Van der Vegt et al., 2005,p. 1172). An innovative climate can enable founding CEOs to convince their employeesand outside investors to buy in to their entrepreneurial goals and thereby allow them toacquire the necessary resources to develop their new ventures (Ensley et al., 2006b).

Transformational leaders have been shown to inspire and intellectually stimulateothers to act in innovative ways (Burns, 1978; Richer and Vallerand, 1995; Yukl,2010), which also predisposes their employees to be more receptive to an innovativeclimate created by their leaders. In doing so, transformational leaders generate confi-dence among followers, allowing followers to suggest innovative business idea withoutfear or concern (Amabile et al., 1996; Bass, 1985). For example, Jung et al. (2003)argued that there is an important link between transformational leadership and inno-vative climate – which provides a contextual influence on employees in workplaces,supports the innovative efforts among employees, and precludes employees frombeing reactive. In this regard, transformational leaders stimulate an innovative firmclimate, which in return encourages their followers to have a more positive perceptionof the suggested vision and challenges them to create new solutions to old problems(Shalley and Gilson, 2004; Sosik et al., 1997). As such, CEOs’ transformational lead-ership might be positively associated with a firm’s innovative climate.

Downwards influence of innovative climate on innovative behaviour. Researchers have foundthat certain contextual factors act as contributors to individual innovative behaviour(Baer and Frese, 2003; Michaelis et al., 2010). For instance, employees regulate orenhance their behavioural patterns by observing and modelling their supervisors andco-workers (Bandura, 1977) and conforming to the behavioural norms of the organi-zation. That is, when there is an organizational climate that supports innovativebehaviour, employees typically attempt to follow this implicit norm and act innova-tively, often as a result of watching their leaders’ and co-workers’ innovative behav-iour (Jung and Avolio, 2000). Once a certain climate is established, it serves as ‘asense-making device and guiding principle’ for innovative work processes that couldultimately lead to more innovative behaviour (Jung et al., 2003, p. 531).

Employees who buy into the strategic direction of the firm might put more compet-itive efforts into their tasks with the belief that their efforts will lead to desirable out-comes that they truly value (Chen and Miller, 1994). Relying on the valencecomponent of expectancy theory, managers are more likely to engage in a substantialbehavioural change when they value a given outcome being rewarded and supportedby the organization. The extent to which they ‘value’ a certain outcome depends onthe individual (Vroom, 1964) and behavioural change occurs to those who internalizethe organizational value as their individual value. Given this theoretical logic, Fields(2006) noted that no matter how far-reaching a leader’s vision or how brilliant thestrategy, neither would be realized if they were not supported by an organizationalclimate. Winslow (1989) also recognized that a firm climate that fosters innovationwould be helpful in promoting the innovative behaviour of individuals. Moreover,several empirical studies have shown an organization’s innovative climate to be animportant determinant of individual innovativeness (Jung et al., 2003; Scott andBruce, 1994). Given such evidence, we argue that a firm’s innovative climate down-wardly influences the innovative behaviour of managers.



In summary, managers who perceive an innovative firm’s climate tend to feelempowered, think outside the box, build on their intellectual resources to contributeto organizational success, and thus exhibit innovative behaviour (Sosik et al., 1997).Taken together with our previous arguments (the upward influences of transforma-tional leadership), we propose Hypothesis 3 as follows:

Hypothesis 3: A firm’s innovative climate partially mediates the relationship betweenfounding CEOs’ transformational leadership and managers’ innovative behaviour.

Transactional leadership and innovative climate. We also argue that CEOs’ transactionalleadership affects a firm’s innovative climate. Transactional leaders may create, shape,and promote a firm’s innovative climate with the use of contingent rewards for desira-ble behaviours and punishments for undesirable behaviours among their followers(Bass, 1985; Yukl, 2010). More specifically, transactional leaders carefully analyse theinternal and external risks surrounding their business activities, calculate the pros andcons of pursuing new ventures, and then take innovative approaches to hedge the risk(Ensley et al., 2006b; Jansen et al., 2009). Thus, transactional leaders interested in pur-suing innovation in their organization are likely to stimulate an innovative work environ-ment by rewarding their followers who generate creative solutions to problems andsuccessfully implement the business idea, and by challenging them not to rely on the oldway of doing things (Politis, 2004). In short, transactional leaders may establish anorganizational context that rewards innovative efforts and punishes reactive attitudes oftheir followers (El-Annan, 2013). The above-mentioned CEOs’ transactional leadershipstyle, a sort of a ‘carrot on a stick’ method of motivating employees, might be effectivein creating a shared perception of an innovative climate among followers.

We earlier predicted (in support of Hypothesis 3) a positive relationship betweeninnovative climate and innovative behaviour. This, taken together with our argumentsabove, which relate founding CEOs’ transactional leadership to innovative climate,suggests that firm innovative climate mediates the positive relationship between found-ing CEOs’ transactional leadership and managers’ innovative behaviour. Since wehave also predicted a direct effect of transactional leadership on innovative behaviour(Hypothesis 2), this is a partial mediation effect.

Hypothesis 4: A firm’s innovative climate partially mediates the relationship betweenfounding CEOs’ transactional leadership and managers’ innovative behaviour.

METHODS

We test both direct and indirect effects between CEOs’ leadership styles and manag-ers’ innovative behaviour. Because we are interested in the multilevel antecedents thataffect managers’ innovative behaviour, we prepare our key variables for statisticalanalysis according to the methods described below.

Sample

In this study, we primarily focus on small and young companies with limited trackrecords and histories that are in the process of implementing a novel idea. Such start-



ups are typically exposed to competitive market environments and scarce resources –the conditions that demand a high level of innovative efforts on the part of the leaderand his/her followers (Bass, 1985; Miller, 1983).

Our sampling strategy was to collect the perceptional and behavioural data ofCEOs and their immediate followers from young firms at relatively early stages oftheir growth. We took a random sampling approach by picking companies that metcertain criteria in a particular database (i.e., Mergent Online, a fully searchable data-base with over 25,000 active and inactive US companies). Since it was almost impos-sible to survey all of the companies in the United States, we took a systematicsampling procedure with multiple steps to reach a relevant sample. First, we had toclearly define the population (i.e., young and small private organizations in theUnited States) so that we can appropriately test our hypothesized model. Second, weadopted a systematic sampling strategy (e.g., every 100th name from MergentOnline). Third, we maintained the representative nature between the population andour sample by balancing the ratios of industry and geographic location. Fourth, weignored the firms no longer in business but still in the database. As a result, we cameup with a total of 173 organizations for the sample.

In this study, we attempted to examine the firms in the early stages of their devel-opment – that is, the companies in existence less than 10 years. These firms are rela-tively less experienced and more vulnerable in highly competitive marketenvironments (Katz and Green, 2007). We also intended to collect data from smallsized private firms with less than 100 employees. Because of the small size, weassumed that there might be intimate work-related interactions between the CEOsand their immediate subordinates (Ling et al., 2008b). We did not make a distinctionbetween founding CEOs and hired CEOs because all of the CEOs in the samplewere founding CEOs. However, if our study were on small and medium-sized enter-prises (SMEs) with more years in business, the distinction would be necessary.

Once the target firms had satisfied our screening criteria (e.g., firm size <100 employ-ees, firm age <10 years, founding CEOs), we sent out invitational emails to CEOs ofeach company. Then, the CEOs distributed the survey materials to their immediate sub-ordinates (a minimum of two respondents) in each firm (173 CEOs and 692 managers).After a three-month data collection period, we collected a total of 50 CEOs’ and 117managers’ responses. Since we had to match the survey responses between CEOs andtheir managers, we deleted the samples that did not have an appropriate match. Addi-tionally, we deleted missing data that were partially completed from the respondents byusing the listwise deletion technique. As a result, we achieved a 23 per cent responserate, with 39 organizations included in the study and a total of 144 individual responses(i.e., 39 responses from CEOs and 105 responses from their immediate managers).Although the response rate was 23 per cent, the characteristics of the non-respondingcompanies (77 per cent) were not significantly different from those of the collected sam-ple because we had contacted companies with a similar demographic profile (i.e., com-panies with <100 employees and a firm age <10 years). Finally, we generated 105matched relationships between CEOs and their immediate subordinates.

Participants had an average age of 38 years for managers and 43 years for CEOs(SD 5 11.09 and 9.75, respectively). Fifty nine per cent of managers and 84 per cent of



CEOs were men. Industries most commonly represented by the participants were infor-mation technology (36.2 per cent), health care (16.2 per cent), retail/wholesale (15.2per cent), and service (10.5 per cent). Firms were most commonly located in the South-west (52.4 per cent), followed by the Northeast (23.8 per cent), and Southeast (16.2 percent) regions of the United States. The average revenue and employment growths ofthe firms over the past 5 years were 17 and 21 per cent, respectively. The firm ageindicates that the average age of an organization included in the sample is 6–7 years ofage. The firm size indicates that the average number of employee is 45.27, whichimplies the firms are in an early stage of development (Katz and Green, 2007).

Measures

Transformational and transactional leadership. We evaluated CEOs’ transformational leader-ship using the measures from the Podsakoff et al. (1990) transformational leadership(12 items) and transactional leadership (5 items) scales, which had been used in anumber of previous research studies (e.g., Hill et al., 2012; Kirkman et al., 2009).

We chose to use the 12 items of transformational leadership selected and validatedby Rafferty and Griffin (2004) because they provided a short but effective measure torepresent the four sub-dimensions (three items for each dimension) consistent with ourconceptualization of transformational leadership, including charisma/vision (e.g., ‘MyCEO has a clear sense of where he/she wants our unit to be in the future’), inspira-tional motivation (e.g., ‘My CEO is always seeking new opportunities for the organi-zation’), intellectual stimulation (e.g., ‘My CEO has ideas that have challenged me toreexamine some basic assumptions about my work’), and individual consideration(e.g., ‘My CEO behaves in a manner thoughtful of my personal needs’)(alpha 5 0.92). We also used five items of transactional leadership by Podsakoff et al.(1990). Survey items included ‘My CEO rewards me when I do a better than averagejob’, ‘My CEO gives me special recognition when my work is very good’, and ‘MyCEO personally compliments me when I do outstanding work’ (alpha 5 0.90).

Although transformational or transactional leadership has traditionally been meas-ured by examining the followers’ individual perceptions, researchers have treated thisvariable as a firm-level construct when they utilize multilevel theoretical models (i.e.,aggregating individual perception of transformational leadership to the firm level)despite its shortcomings, in part due to the limitation of previously utilized statisticalmodels. However, treating individual perceptions as firm-level constructs is inaccurate,because there could be significant variation in employees’ perceptions of transforma-tional leadership within an organization. Here, we examine how specific leadershipstyles can be understood by the immediate followers’ individual perceptions within anorganization and between organizations.

Innovative climate. We measured innovative climate using three items that we selectedfrom the scales developed by Patterson et al. (2005) and Scott and Bruce (1994). Par-ticipants selected a number from 1 through 5 that best described their firm innovativeclimate. The survey items for innovative climate included ‘In my organization, assis-tance in developing new ideas is readily available’, ‘My organization gives me freetime to pursue creative ideas during the workday’, and ‘My organization publicly rec-ognizes those who are innovative’ (alpha 5 0.68).



Employees of each organization were asked to assess their perceptions of theirorganizations’ innovative climate. The organizational-level construct of innovative cli-mate required aggregation of multiple ratings from employees. Although the averagenumber of employee responses per company was 2.69, we believe that it was a rea-sonable number. When the size of the firms is small as in the case of young compa-nies, the organization has fewer intervening levels of management and is lessinfluenced by external influences (Ling et al., 2008b). Thus, it is conceptually feasibleto measure the firm climate based on an aggregated perception (Ehrhart et al., 2013).

To justify aggregation, we calculated inter-rater agreement (James et al., 1984) andtwo intra-class correlations, ICC(1) and ICC(2). ICC(1) refers to the proportion of thetotal variance accounted for by group membership. A one-way analysis of variancewas used to confirm that a statistically significant proportion of the variance acrossindividuals was accounted for by group membership (Bliese, 2000). ICC(2) refers tothe reliability of the group-level means, or whether average ratings in groups help todifferentiate between groups (Bliese, 2000). For innovative climate, the values for themedian rWG, ICC(1), and ICC(2) were 0.95, 0.30, and 0.54, respectively. This rWG

exceeds 0.70, which is the value commonly used to justify aggregation of individual-level measures to the organizational level (Klein and Kozlowski, 2000). In addition,the ICC(1) value was statistically significant (F 5 2.16, p< 0.01), and both ICC(1) andICC(2) were within the acceptable range of values summarized in the literature (Bli-ese, 2000). Considered in combination, these statistics provided justification foraggregation.

Innovative behaviour. Scott and Bruce’s (1994) scales were used to assess managers’innovative behaviour. To avoid same-source bias, we asked the CEOs to evaluateindividual managers’ innovative behaviour (e.g., ‘Please rate each of your subordi-nates on the extent to which he or she. . .’). Sample items for managers’ innovativebehaviour included ‘searches out new technologies, processes, techniques, and/orproduct ideas’, ‘generates creative ideas’, ‘promotes and champions ideas to others’,‘investigates and secures resources needed to implement new ideas’, and ‘developsadequate plans and schedules for the implementation of new ideas’ (alpha 5 0.81).

Control variables. Because our study focused on multiple rather than single levels ofanalysis, we collected both organizational- and individual-level data. With regard tothe organizational-level data, we controlled for firm age because in an early stagefirms may face more severe challenges due to their small resource base (Hmieleskiand Ensley, 2007). Firm age was measured as the number of years since the firm wasestablished. Second, we controlled for firm size because managers’ innovative behav-iour might be influenced by the size of firms; innovative behaviour might be more (orless) easily observed in bigger companies than smaller companies. Firm size was meas-ured by asking the number of employees. These company attributes were used ascontrol variables because prior studies suggested their positive relationship with per-formance outcomes (Ensley et al., 2006a; Jung et al., 2003). With regard toindividual-level data, we controlled for managers’ education since managers who havea higher educational background may respond to their CEOs’ transformational lead-ership and firm innovative climate differently than those who have less education. Inaddition, we controlled for the gender of respondents (i.e., managers).



Assessment of Validity

In this study, the second-order CFA with the four variables (i.e., transformationalleadership, transactional leadership, innovative climate, and innovative behaviour) asdistinct factors should demonstrate a good fit to the data, and v2, CFI, and RMSEAvalues were checked. Since our research variables involved sub-dimensions (e.g., trans-formational leadership had four sub-dimensions), we conducted the second-orderCFA analysis so that we could analyse the hypothesized relationships of the researchvariables across the same dimension. This four-factor model should demonstrate sig-nificantly better fit than a two- or three-factor model. We first performed the second-order CFA on the transformational leadership, transactional leadership, innovative cli-mate, and innovative behaviour variables to establish their discriminant validity. Thesecond-order CFA with the four variables as distinct factors demonstrated a good fitto the data (v2 5 427.37, p< 0.000, CFI 5 0.91, RMSEA 5 0.06), and a significantlybetter fit than a three-factor model with both transformational leadership and transac-tional leadership variables combined into a single factor (v2 5 532.09, p< 0.000,CFI 5 0.85, RMSEA 5 0.09). This analysis provided support for treating these fourvariables as distinct in the analysis.

Analytic Approach

The multi-level structural equation modelling (MSEM) allows researchers to test notonly the individual-level direct effect of CEOs’ leadership styles on innovative behav-iour (1–1 model), but also the multilevel indirect effects (1–2–1 model) (Preacheret al., 2010). In this study, we examine an ‘upward’ influence of CEOs’ leadershipstyles (i.e., from individual level to organizational level), and a ‘downward’ influenceof firm climate (i.e., from organizational level to individual level). Although there aremany multilevel studies testing downward influence by using hierarchical linear mod-elling (HLM), there have been few empirical studies that analyse the upward relation-ship between independent variables (at individual levels) and dependent variables (atfirm-levels) (for an exception, see Zang et al., 2012). Studying the upward influencehas emerged as a promising methodological approach (Preacher et al., 2010), offeringnew insights on the leadership dynamics inside an organization (e.g., Garc�ıa-Moraleset al., 2008; Jung et al., 2003; Ling et al., 2008b; Schein, 1992). The researchapproach of theoretically conceptualizing the relationship between individual predic-tors and firm outcomes has been applied in entrepreneurship literature (e.g., Baumet al., 2001). However, there is limited empirical research testing the upward relation-ship, because of the methodological difficulties and complexities involved with thisanalysis. In this paper, we overcome the methodological limitation by utilizing theMSEM technique to examine the upward influence of CEOs’ leadership styles onfirm innovative climate (Level 1 ! Level 2) and the downward influence of innova-tive climate on innovative behaviour (Level 2 ! Level 1).

When a model involves the bottom-up and top-down effects (e.g., 1–2–1 model), themediation effect is inherently analysed at the between-group level (Preacher et al., 2010).Because of this fact, researchers must pay close attention to the meaning of lower levelvariables at the between-group level of analysis and how that meaning is interpreted ina multilevel mediation model (Preacher et al., 2010). In this study, a firm’s innovative



climate was conceptualized as a firm level variable, because a firm climate by definitionrepresents a shared perception among employees (Schneider, 1990). Thus, the firm’sinnovative climate required aggregation of employees’ responses. On the other hand,managers’ innovative behaviour was defined as individual behaviour that aims to achievethe intentional generation and implementation of innovative ideas (Janssen, 2003). Ameasure of innovative behaviour rated by CEOs, such as ‘my immediate subordinatesearches out new technologies, processes, techniques, and/or product ideas’, assessedindividual innovative behaviour both within and between firms. Although differencesbetween firms on this measure were at the level of the group, the construct was stillinherently focused on the individual behaviour (Preacher et al., 2010). Therefore, ouranalytical approach involved the conceptual reasons for the resulting levels of each vari-able rather than simply applying the MSEM techniques and tools.

RESULTS

Descriptive Statistics

Table I shows the descriptive statistics – the mean, standard deviation, and correla-tion coefficient for each research variable and bivariate correlations for all study vari-ables. The table also shows the control variables at the individual level (gender andeducation) and the organizational level (firm size and firm age). These correlationsdid not account for the non-independent nature of the data at the individual level.Thus, we aggregated the individual-level variables to firm-levels when we calculatedthe correlations with the firm-level variables.

Table I. Means, standard deviations, and correlations among study variablesa

Level Mean SD 1 2 3 4 5 6 7

1 Genderb 1 1.41 0.49 –2 Educationc 1 3.44 1.24 20.02 –3 Innovative behaviour 1 3.85 0.64 20.01 0.16 –4 Transformational

leadership1 4.15 0.64 20.04 0.04 0.22* –

5 Transactional leadership 1 3.92 0.82 0.00 0.10 0.26* 0.67** –6 Firm sized 2 45.27 51.84 0.02 0.15 0.27** 20.19 20.17 –7 Firm agee 2 3.02 1.34 0.40** 0.00 0.32** 20.34** 20.29** 0.23* –8 Innovative climate 2 3.57 0.58 0.05 20.02 0.09 0.66** 0.73** 20.24* 20.26**

Notes: aMeans, standard deviations, and correlations for Level 1 variables were calculated between individuals (N 5 105managers).For the innovative climate variable, the mean, standard deviation, and correlations were calculated between groupsusing aggregated scores for Level 1 variables (N 5 39 companies).b1 5 Male; 2 5 Female.c1 5 High school; 2 5 Associate’s degree; 3 5 Bachelor’s/undergraduate degree or similar; 4 5 Master’s/graduatedegree; 5 5 Professional degree; 6 5 Doctoral degree; 7 5 Other.dFirm size was calculated by the number of employees.eFirm age: 1 5 1�2 years; 2 5 3�5 years; 3 5 6�10 years; 4 5 more than 10 years; 5 5 more than 15 years.*p< 0.05**p< 0.01.



Tests of Hypotheses

We tested the individual-level and direct-effect relationships between CEOs’ transfor-mational leadership and managers’ innovative behaviour (Hypothesis 1) and betweenCEOs’ transactional leadership and managers’ innovative behaviour (Hypothesis 2) inthe model using the Mplus multiple regression approach to regress the dependentvariable (managers’ innovative behaviour) on the independent variables (CEOs’ trans-formational and transactional leadership) and the control variables (firm size and firmage as firm-level controlling variables; gender and education as individual-level con-trolling variables).

As the results of Table II show, CEOs’ transformational leadership was directlyand positively related to managers’ innovative behaviour (b 5 0.340, p < 0.01; 90%confidence interval (CI) 0.167, 0.513). The MSEM approach provided fit indices forthe direct effect of transformational leadership, and these indices showed a satisfactorymodel fit (v2 5 21.89, p< 0.001, CFI 5 0.99, RMSEA 5 0.00, SRMRB 5 0.006,SRMRW 5 0.002, where SRMRB and SRMRW were the standardized root meansquare residuals for the between and within models, respectively). Hence, Hypothesis1 was fully supported. Furthermore, CEOs’ transactional leadership was directly andpositively related to managers’ innovative behaviour (b 5 0.337, p < 0.001; 90% CI0.186, 0.489). The MSEM approach provided fit indices for the direct effect of trans-actional leadership, and these indices showed a satisfactory model fit (v2 5 24.64,p< 0.001, CFI 5 0.99, RMSEA 5 0.00, SRMRB 5 0.003, SRMRW 5 0.002). Hence,Hypothesis 2 was supported.

In addition, we put both transformational and transactional leadership to theregression equation so that we could see which leadership variable generated a

Table II. MSEM result for the direct effect of transformational and transactional leadership (1–1model)a

Level Coefficient SEb Coefficient SEb

Within level

Innovative behaviour (DV) 1Transformational leadership (IV) 1 (0.340**) 0.105Transactional leadership (IV) 1 (0.337***) 0.092Gender 1 20.086 0.115 20.105 0.119Education 1 0.071 0.050 0.061 0.049

Between level

Innovative behaviour 1Transformational leadership 1 20.200 0.617Transactional leadership 1 0.002 0.215Firm size 2 0.001 0.001 0.001 0.001Firm age 2 0.075 0.062 0.091 0.055

Notes: aAnalyses are based on Mplus multiple regression approach; N 5 105 at Level 1, N 5 39 at Level 2.bUnstandardized coefficients shown in parentheses for significant effects; IV 5 independent variable; DV 5 dependentvariable; SE 5 standard error.*p< 0.05**p< 0.01***p< 0.001 (one-tailed p-value).



stronger relationship with innovative behaviour. We found that only transformationalleadership was significantly related to innovative behaviour (b 5 0.253, p < 0.05;90% CI 0.080, 0.426). This implies CEOs’ transformational leadership style is a morepowerful predictor for their immediate followers’ innovative behaviour than CEOs’transactional leadership.

To test Hypotheses 3 and 4, we examined the multilevel mediating impacts of firminnovative climate (Level 2) between CEOs’ leadership styles (Level 1) and managers’innovative behaviour (Level 1). Unlike individual-level models, all multilevel modelsdescribe an indirect effect functioning strictly at the group level of analysis (Preacheret al., 2010). As a result, in the MSEM approach, multiple indicators were used tomeasure the latent variables of CEOs’ leadership styles (Level 1) and innovative cli-mate (Level 2), and managers’ innovative behaviour (Level 1). Then, Path A (i.e.,CEOs’ leadership styles ! innovative climate) and Path B (i.e., innovative climate !innovative behaviour) were estimated simultaneously.

Hypothesis 3 predicted that firm innovative climate partially mediates the relation-ship between CEOs’ transformational leadership and managers’ innovative behaviour.We tested the relationship between CEOs’ transformational leadership and the com-pany’s innovative climate (i.e., the upward influence of transformational leadership).As the results of Table III show, CEOs’ transformational leadership was positivelyand upwardly related to innovative climate (b 5 1.872, p < 0.001; 90% CI 1.282,2.462). Simultaneously, we tested the relationship between firm’s innovative climate

Table III. MSEM result for the multilevel indirect effect of innovative CLIMATE (1–2–1 model)a

Level Coefficient SE Coefficient SE

Within level

Innovative behaviour (DV) 1Transformational leadership (IV) 1 (0.323**) 0.105Transactional leadership (IV) 1 (0.337***) 0.086Gender 1 20.088 0.120 20.105 0.121Education 1 0.076 0.050 0.070 0.050

Between level

Innovative climate (ME) 2Transformational leadership (IV) 1 (1.872***) 0.359Transactional leadership (IV) 1 (1.205***) 0.130

Innovative behaviour (DV) 1Innovative climate (ME) 2 (1.173*) 0.684 1.133 0.720Transformational leadership 1 22.017 1.294Transactional leadership 1 21.264 0.859Firm size 2 0.002 0.001 0.002 0.001Firm age 2 0.121 0.054 0.116 0.056

Notes: aAnalyses are based on Mplus 1–2–1 approach; N 5 105 at Level 1, N 5 39 at Level 2.bUnstandardized coefficients shown in parentheses for significant effects; IV 5 independent variable; DV 5 dependentvariable; ME 5 mediating variable; SE 5 standard error.*p< 0.05**p< 0.01***p< 0.001 (one-tailed p-value).



and managers’ innovative behaviour (i.e., the downward influence of innovative cli-mate). As predicted, innovative climate was positively related to managers’ innovativebehaviour (b 5 1.173, p < 0.05; 90% CI 0.048, 2.299). The MSEM approach pro-vided fit indices for the mediating effect of innovative climate, and these indicesshowed a good model fit (v2 5 64.31, p< 0.000, CFI 5 0.95, RMSEA 5 0.06,SRMRB 5 0.125, SRMRW 5 0.013). Finally, we compared the slope differencebetween the direct effect (b 5 0.340, p < 0.01) and the indirect effect (b 5 0.323, p <0.01). Since the slope of the direct effect was higher than that of the indirect effect,the partial mediation effect of innovative climate (Hypothesis 3) was fully supported.

Hypothesis 4 predicted that perceptions of a firm’s innovative climate would mediatethe relationship between CEOs’ transactional leadership and managers’ innovativebehaviour. We first tested the relationship between CEOs’ transactional leadership andthe company’s innovative climate (i.e., the upward influence of transactional leadership).As the results of Table III show, CEOs’ transactional leadership was positively related toinnovative climate (b 5 1.205, p < 0.001; 90% CI 0.990, 1.420). Simultaneously, wetested the relationship between innovative climate and managers’ innovative behaviour(i.e., the downward influence of innovative climate). However, innovative climate wasnot significantly related to managers’ innovative behaviour (b 5 1.133, NS) and had awider confidence interval (90% CI 20.052, 2.319). The MSEM approach provided fitindices for the mediating effect of innovative climate, and these indices showed a goodmodel fit (v2 5 74.85, p< 0.000, CFI 5 0.99, RMSEA 5 0.04, SRMRB 5 0.108,SRMRW 5 0.024). Since the relationship between innovative climate (Level 2) andmanagers’ innovative behaviour (Level 1) was not significant, the partial mediation effectof innovative climate (Hypothesis 4) was not supported.

Supplementary Analysis

We conducted a supplemental analysis in order to compare the traditional approachof aggregating perceptions of CEOs’ leadership styles with our non-aggregationapproach (MSEM). We tested the hypothesized model with a traditional multilevelapproach. This additional test was intended to separate out the different effectsbetween these two statistical approaches. According to the traditional multilevelapproach, we found significant relationships between the aggregated CEOs’ leader-ship styles and firm innovative climate (b 5 0.991, p < 0.001 for transformationalleadership; b 5 0.736, p < 0.001 for transactional leadership), but we failed to findany significant relationship between innovative climate and managers’ innovativebehaviour. This difference in the results arose because of the loss in the varianceamong employees’ individual perceptions on their leaders’ leadership styles whenaggregating the data. This supplementary analysis shows the benefits of our non-aggregated treatment of CEOs’ leadership styles based on individual perceptions.

DISCUSSION

We examined multilevel antecedents to managers’ innovative behaviour in an entre-preneurial context. The results showed that both CEOs’ transformational and



transactional leadership styles were positively related to their immediate followers’innovative behaviour (rated by their CEOs). We also found that a firm’s innovativeclimate mediated the relationship between CEOs’ transformational leadership andmanagers’ innovative behaviour. Interestingly, we found no significant mediatingeffect of innovative climate between transactional leadership and innovative behav-iour. We discuss our findings in more detail below, including their important researchand practical implications.

Research Implications

This research makes several distinct contributions to the literature. The first is ourfinding that CEOs’ evaluations of immediate followers’ innovative behaviour corre-lates with these followers’ perceptions of CEOs’ transformational and transactionalleadership styles in small and young organizations. As expected, we found a positiverelationship between CEOs’ leadership capacity (regardless of style) and individual-level innovative behaviour. The findings suggest that both styles can be effective inmotivating innovative behaviour. There may be a couple of different reasons for thefindings. One explanation may be self-selection: CEOs of a certain leadership stylemay attract managers who respond to their style. It is also possible that most employ-ees respond to both leadership styles to a certain extent. Insightful explanations canbe obtained from Vroom’s (1964) expectancy theory. By using expectancy as a moti-vational force, transformational leaders intrinsically motivate their followers to exhibitinnovative behaviour. Meanwhile, with the use of instrumentality, transactional lead-ers extrinsically motivate their followers to behave innovatively. Thus, we extend theexpectancy theory by applying its two sub-components to explain the distinctiveimpacts of two different leadership styles.

When we inserted both transformational and transactional leadership variables tothe regression equation, only transformational leadership remained significant.Although we did not formally hypothesize the combined effects between transforma-tional and transactional leadership, this unexpected finding can be well explained bythe augmentation effect suggested by Bass and Avolio (1993), which seems to apply inthis situation. The augmentation effect would assert that transformational leadershipbuilds on transactional leadership styles (Judge and Piccolo, 2004). According to Rob-bins and Judge (2009), someone who is a good transactional leader without havingtransformational qualities will only be a mediocre leader. Although the evidencepoints to the fact that transactional leadership style can enhance the followers’ innova-tive behaviour with appropriate use of extrinsic rewards (instrumentality), it is unlikelyto fundamentally change the followers’ individual values underlying their behaviour.Such values can be the most important motivating factor that governs individual atti-tudes and behaviours (Bass, 1985). On the other hand, transformational leadershipultimately shifts the followers’ existing values to the new values suggested by theirleaders. Namely, managers tend to internalize the values of their transformationalleaders into their personal value system, which can be altered through value congru-ence processes between transformational leaders and their followers (Jung and Avolio,2000). Based on the augmentation effect (Bass and Avolio, 1993), we believe that



independent leadership styles can concurrently co-exist and that these combiningeffects must be complementary rather than redundant or opposing. Thus, our resultssupport and extend the literature on augmentation effect (Bass and Avolio, 1993;Judge and Piccolo, 2004) by suggesting that the best leaders are transformational withtransactional characteristics as supplementary leadership capability.

This research also sheds light on the role of a firm’s innovative climate. Based onour analysis, both CEOs’ transformational and transactional leadership styles arerelated to firm-level innovative climate. However, our finding also suggests that inno-vative climate affects managers’ innovative behaviour only under good transforma-tional leadership. In other words, the innovative climate created by CEOs’transformational leadership, not by transactional leadership, promotes managers’innovative behaviour.

There might be a theoretical reason for this unexpected finding. Organizational cli-mate is, by definition, a shared perception among employees, but not a set of sharedvalues (i.e., organizational culture). Unlike Jung et al.’s (2003) previous argument, afirm’s innovative climate may serve only as a sense-making device (i.e., a shared per-ception), but not as a guiding principle (i.e., a shared value) that can lead to a behav-ioural change among managers. Drawing upon Vroom’s (1964) expectancy theory,transformational leaders may positively affect valence among their followers to workinnovatively by creating a shared value (above and beyond a shared perception) as abehavioural guideline to the followers. This shared value should be internalized inindividual employees’ valence, and thus lead to effective work behaviours throughwhich top management teams support innovative efforts (Jansen et al., 2008). On theother hand, a firm’s innovative climate shaped by transactional leadership does notseem to lead to managers’ innovative behaviour. This unexpected finding may implythat transactional leadership in start-ups might be helpful in creating a shared percep-tion but not a shared value, which seems to be a more critical motivator for innova-tive behaviour. In short, we suggest that more research should be pursued on theliterature on firm climate and firm culture (see Ehrhart et al., 2013).

Practical Implications

Our findings also have important practical implications for implementing innovationin organizations. First, CEOs of start-ups and entrepreneurial companies may find ithelpful to know that their transformational and transactional leadership capabilitiescan indeed motivate their managers to work innovatively. Transformational leader-ship, which involves encouraging managers to sacrifice their individual interests forthe sake of achieving organizational goals (Howell and Avolio, 1993), would be ahighly effective leadership method. Meanwhile, given the fact that start-ups tend tohave limited resources, CEOs in those firms may extrinsically motivate their followerswith desired rewards (e.g., performance-based rewards) – important motivating devi-ces among transactional leaders. Although transactional leadership has been largelyconsidered a useful managerial skillset, we note that transactional leadership is also aneffective leadership style in promoting managers’ innovative behaviour. Therefore, wesuggest that entrepreneurial CEOs clearly develop an understanding of the roles and



effectiveness of the different leadership styles and use them appropriately based ontheir followers’ individual needs and expectations.

Second, our findings indicate that entrepreneurs could benefit from an understand-ing of an important outcome of CEOs’ leadership: a firm-level innovative climate.According to the traditional motivation theory (Muchinsky and Monahan, 1987), thefirm-level climate may result in a situational constraint, which will be helpful in achievingdesirable performance. Once the innovative climate is successfully installed in anorganization, CEOs should be able to promote a desirable behaviour (e.g., for theirmanagers to act more innovatively) on the part of their followers to achieve organiza-tional objectives. This process of creating a strong innovative climate would poten-tially lead to a strong innovative culture (Ehrhart et al., 2013). Therefore,entrepreneurs should make the effort to initiate an innovative climate, which they canfurther develop into an innovative culture.

Limitations and Future Research Directions

This study is not without limitations. First, it is based on a correlational analysis andcross-sectional research design, which makes it difficult to establish causal relationshipsbetween variables. However, given that transformational and transactional leadershipstyles have been generally considered independent variables (e.g., Boerner et al.,2007; Lee, 2007; Michaelis et al., 2010; Pieterse et al., 2010), it is likely that they areindeed causal variables that impact innovative behaviour. On the topic of longitudinalresearch design, future research might use longitudinal analysis to explore how man-agers’ innovative behaviour changes over time. For example, it may be interesting toexamine if it is possible to recover from early negative perceptions of CEOs’ leader-ship styles, and if so, what interventions might facilitate such a recovery.

Second, we explained earlier on in the paper that innovative behaviour was amulti-stage process which our measure was not able to capture. However, there areother studies also using the measures in Scott and Bruce (1994) for examining amulti-stage process of innovative behaviour (Janssen, 2000; Scott and Bruce, 1994;Yuan and Woodman, 2010). Janssen (2000) was first to try and develop a multi-dimensional measure by formulating items such as idea generation and idea imple-mentation. However, Janssen (2000) found strong correlations among each componentand concluded that his research variables could best be combined and used as a sin-gle measure (de Jong and den Hartog, 2010), as is the case for this paper. Futureresearchers may want to develop the measures of innovative behaviour in a way thatcaptures multi-stage processes based on the longitudinal research design.

Third, the sample size was relatively small at the individual level (a total of 105manager responses) and firm level (a total of 39 firms), so some might question thegeneralizability of our theoretical relationships. However, it should be noted that sucha sample size for testing conceptual relationships is not uncommon in entrepreneur-ship studies (e.g., Ensley et al., 2006b; Marzler et al., 2008). In addition, it should benoted that there is little research on the appropriate sample size associated withMSEM because it is a quite new statistical technique (Cheung and Au, 2005;Preacher et al., 2010). Although there are ongoing discussions about the appropriatesample size for MSEM (Hox and Maas, 2001; Muthen and Asparouhov, 2008),



Meuleman and Billiet (2009) suggested that around 40 clusters may be required totest structural paths at the firm-level; we use 39 clusters at the firm-level in this paper.Most important, while it is generally difficult to get statistically meaningful resultsfrom a small sample size in multilevel analysis (MSEM), we were able to obtain statis-tically significant and meaningful results. Therefore, we believe that our conceptualrelationships were empirically and properly validated.

Finally, future research might examine how managers’ innovative behaviour affectsorganizational performance over time. Although we examined the relationshipbetween our research variables and an actual performance measure (e.g., firm reve-nue and employee growth), we were not able to find any significant result. Becauseour sample companies were in their early stages of growth, they may not have hadenough time to generate meaningful performance. However, given that there is lim-ited empirical research on the relationship between innovative behaviour and actualperformance, it would be meaningful for future researchers to investigate when andhow innovative behaviour affects actual (or lagged) performance.

Conclusion

The paper makes important contributions to the literature on leadership and entre-preneurship by applying Vroom’s (1964) expectancy theory and extending the verylimited research on the multilevel antecedents towards innovative behaviour in anentrepreneurial context. Our findings suggest that managers’ innovative behavioursare indeed influenced by their founding CEOs’ transformational and transactionalleadership styles. We also examine the multilevel indirect effects of innovative climateon the relationships between founding CEOs’ leadership styles and their immediatefollowers’ innovative behaviour. We obtain new insights through the use of MSEMwhich should encourage future empirical studies investigating the multilevel impactsof firm-level constructs.

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http://www.relationaldynamicsinstitute.com/?p=48

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