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Modeling Levels and Time in Entrepreneurship Research: An Illustration With Growth

Strategies and Post-IPO Performance
Tim R. Holcomb, James G. Combs, David G. Sirmon and Jennifer Sexton
Organizational Research Methods 2010 13: 348 originally published online 19 November 2009
DOI: 10.1177/1094428109338401
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Modeling Levels and Time in

Entrepreneurship Research
Organizational
Research Methods
Volume 13 Number 2
April 2010 348-389
# 2010 SAGE Publications
10.1177/1094428109338401
http://orm.sagepub.com
hosted at
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An Illustration With Growth Strategies and

Post-IPO Performance
Tim R. Holcomb
James G. Combs
Florida State University
David G. Sirmon
Texas A&M University
Jennifer Sexton
Florida State University
New ventures lack resources, are buffeted by environmental factors, and often experience rapid
growth and organizational transformations that can have profound effects on performance and
survival. This indicates that factors at multiple levels and across time affect new venture
outcomes. Research examining these outcomes often address relationships that cross
levels or time, but rarely both. Because scholars potentially can make rich theoretical
contributions by simultaneously investigating temporal relationships that cross levels, the
authors illustrate multiyear, multilevel model building with random coefficient modeling
(RCM) using language that is accessible to entrepreneurship scholars. Specifically, they
model the effects of strategic growth actions on new venture performance using a
longitudinal data set of young, IPO-stage firms. Their illustration demonstrates the statistical
advantages of modeling levels and time simultaneously and offers a roadmap for entrepreneurship scholars interested in examining these effects, including a step-by-step guide with SAS
code for working with these data. They also describe some specific research questions to help
advance theory development using RCM.
Keywords: entrepreneurship; multilevel methods; longitudinal data; random coefficient
modeling; new venture performance
rganizations are dynamic and complex. In comparison to established firms, new ventures face particular challenges stemming from a liability of newness that heightens
performance risks and makes them more strongly influenced by environmental change,
competitive threats, or shifting consumer preferences (Delmar, Davidsson, & Gartner,
2003; Stinchcombe, 1965). As a result, new ventures fail at an alarming rate, mostly due
Authors Note: We gratefully acknowledge the guidance that Jeremy Short provided in conjunction with the
feedback that we received from three anonymous reviewers. We are also thankful for the support that we
received from the Jim Moran Institute for Global Entrepreneurship at Florida State University. Please address
correspondence to Tim R. Holcomb, Department of Management, College of Business, Florida State University,
Tallahassee, FL 32306; e-mail: tholcomb@cob.fsu.edu.
348
Holcomb et al. / Modeling Levels and Time In Entrepreneurship Research
349
to resource constraints and intense competitive conditions, and many that do survive attain
only marginal performance (Acs & Armington, 2006; Barringer, Jones, & Neubaum, 2005).
At the same time, however, managers of new ventures have more control of their ventures growth than some macro theories suggest (Baum, Locke, & Smith, 2001, p. 301).
These firms are agile and flexible, and they can adapt their organizational strategies and
structure more quickly to changing resource and environmental conditions than their larger,
more established counterparts (Baker & Nelson, 2005; Garud & Karnoe, 2003). Indeed,
whereas firm- and industry-level factors influence key performance outcomes for all firms,
Short, McKelvie, Ketchen, and Chandler (2009) found that young firms experience substantially greater year-to-year changes in performance than established firms. Although such
irregularity may reflect sensitivity to changes in firm effects such as resources or
strategic choice, it may also suggest the influence of environmental contingencies on the
saliency of these relationships.
Extant research also provides evidence that time conditions new ventures ability to
adapt. Specifically, the liability of newness that imposes greater capacity for change upon
young firms declines over time (Bamford, Dean, & Douglas, 2004; Gresov, Haveman, &
Oliva, 1993; Venkataraman & Van de Ven, 1998). This suggests that cross-sectional and
longitudinal differences in firm- and industry-level conditions may create very different
performance expectations for new ventures. As a result, a better understanding of these
relationships requires investigations that cross levels and time simultaneously.
Methodologically, when conditions at multiple levels affect key organizational outcomes
or when conditions change over time, sample observations likely contain some degree of
dependence. Dependence occurs when knowledge about one observation provides meaningful insights about another (Cohen, Cohen, West, & Aiken, 2003).1 In samples containing
new ventures from different industries, for example, information about the industry in
which a venture resides provides knowledge about conditions shared by other members
of the same industry. This form of dependence is called nesting, and it occurs when lower
level units are members of (or nested in) a higher level group (Bliese & Hanges, 2004;
Kenny & Judd, 1986).
Time also creates dependence. Measures for observations located temporally close to one
another (i.e., measures in years 1 and 2) will be more strongly correlated than measures that
are temporally distant (i.e., measures in years 1 and 5; Bliese & Ployhart, 2002), and the rate
of change among measures can become more or less variable over time (Chan, 1998).
Dependence due to levels and time are related, yet distinct concepts. Depending on the
research context, neither, one, or both types of dependence may be relevant. Dependence
matters because failure to address it can adversely affect the accuracy of significance tests,
bias variance estimates, and leave important relationships undiscovered (Bliese & Hanges,
2004).
Unfortunately, research provides compelling evidence that these types of dependence are
common. While results vary, studies estimating the influence of firm and industry effects
among established firms show that industry membership explains between 10% and 20%
of the variance in firm performance (e.g., McGahan & Porter, 1997, 2002; Misangyi, Elms,
Greckhamer, & Lepine, 2006). Moreover, industry and firm effects vary over time, with
systematic change accounting for as much as 40% of the variation in firm performance
(Short, Ketchen, Bennett, & du Toit, 2006). New venture performance outcomes appear
350 Organizational Research Methods
particularly subject to dependence due to both levels and time (Short et al., 2009), which
makes assessing multilevel longitudinal data especially important in entrepreneurship
research.
Fortunately, recent advances have brought methodological techniques, broadly labeled
as random coefficient modeling (RCM), that allow for more accurate modeling of multilevel longitudinal data.2 These techniques provide the ability to perform regression-like analyses of relationships at lower levels alongside analyses depicting variation in lower levels
due to higher level effects and time. Several studies have adopted these techniques in an
effort to explain their usefulness and make them more accessible to scholars interested in
assessing the impact of either levels or time (e.g., Bliese & Ployhart, 2002; Raudenbush
& Bryk, 2002). More recently, important work by Misangyi et al. (2006) and by Short
et al. (2006) provide initial guidance on the use of RCM to model levels and time using
samples of established firms. Because newness introduces greater dynamism into entrepreneurship contexts and because some young firms can quickly adapt to organizational and
environmental contingencies, entrepreneurship scholars stand to benefit greatly from
developing and testing theories that explain the performance effects of these contingencies
across levels and time.
The purpose of this article, therefore, is to extend the discussion of RCM by demonstrating how to model levels and time simultaneously. Expanding from the work of Misangyi
et al. (2006) and Short et al. (2006), we show how scholars can use RCM to investigate
time-varying covariates across multiple levels in ways that potentially increase our understanding of relationships within and between nested levels over time, including important
cross-level interactions. We do so in a new venture setting and using language accessible
to entrepreneurship scholars. Relying on a longitudinal data set of 308 single-product, new
ventures in the United States that undertook an initial public offering (IPO) in 1996, we
illustrate the sequence of steps involved in analyzing IPO-stage new ventures nested in
industries over time (5 years, 1997 to 2001) using RCM. Specifically, we model the effects
of two strategic growth actionsresearch and development (R&D) and acquisitionson
measures of post-IPO performance.
Our central contributions are that we demonstrate, in an entrepreneurial context, how to
capitalize on the rich nature of multilevel longitudinal data using RCM, explain the advantages of doing so, and offer guidance to aid theory building that leverages RCM. Although
there are currently several excellent discussions of model building using multilevel or longitudinal data (e.g., Bliese & Ployhart, 2002; Chan, 1998; Littell, Milliken, Stroup, &
Wolfinger, 2004; Raudenbush & Bryk, 2002), only a small number of studies model both
levels and time (e.g., Hough, 2006; Misangyi et al., 2006; Short et al., 2006, 2009). Extending previous work, our demonstration takes two important steps forward by (1) illustrating
model building using random and stable covariates at three levels and (2) investigating
cross-level interactions that demonstrate how to model constructs at higher levels that act
together with constructs at lower levels to explain variation in venture performance and performance change over time. In doing so, we offer a roadmap designed to help entrepreneurship scholars address rich theoretical questions using RCMs unique analytical capabilities.
In an effort to make RCM more accessible, we also provide the syntax for the PROC
MIXED procedure in SAS for each step (see Appendix) and show how to test and compare
these complicated designs in the model-building process. This is not an entirely unique
351
approach. Previous discussions involving multilevel or longitudinal data have illustrated the
use of structural equation modeling (SEM) programs such as AMOS and LISREL (e.g.,
Chan, 1998; Wang & Bodner, 2007; Willett & Sayer, 1994), special-use programs such
as MLn (e.g., Kreft & de Leeuw, 1998), R and the NMLE package (e.g., Bliese & Ployhart,
2002), and hierarchical linear and nonlinear modeling (HLM) software (e.g., Raudenbush &
Bryk, 2002), and integrated data management and statistical programs such as STATA
(e.g., Rabe-Hesketh & Skrondal, 2008) and SAS PROC MIXED (e.g., Littell et al.,
2004; Singer, 1998). In this work, however, we extend Singers (1998) approach to fitting
two-level individual growth models with PROC MIXED by illustrating step-by-step model
building for three-level mixed models. The position of PROC MIXED as an integrated program within SAS makes it an ideal choice to illustrate model building to those scholars
seeking to perform data reduction, management, and analysis of multilevel longitudinal
data within a single statistical package.
We start by describing the challenges posed by levels and time in designs that model
within- and between-unit change over time and highlight the problems with current
approaches used to address these challenges. We then outline a general strategy for building
a mixed model to simultaneously model random and fixed effects within and between levels
to account for differences in performance and performance change at three levels: withinventures (over repeated annual measures), between ventures nested within industries, and
between industries.3 Finally, we offer practical guidance about how entrepreneurship scholars can construct theories that can be tested via RCM to answer new and important research
questions. We believe that doing so will help entrepreneurship scholars obtain the most
value from their data.
The Case for Modeling Levels and Time in Entrepreneurship Research

Organizational outcomes vary systematically over time, between firms, and among
industries. For example, ecology scholars use dynamic models of resource competition
to explain diversity in firm performance (e.g., Hannan & Carroll, 1992; Hannan & Freeman,
1989). Initial increases in the density of firms during the early stages of industry growth
enhance a markets institutional legitimacy and the ability of its members to attract
resources. Over time, legitimacy gains boost performance, reducing mortality among industry members as the market matures. As density in a market continues to grow, however,
competition for scarce resources adversely affects survival at an increasing rate (Carroll
& Hannan, 1989). Other research shows that firm-level factors such as resources firms control (e.g., George, 2005; Katila & Shane, 2005), the strategies they pursue (e.g., Chandler &
Hanks, 1994), and the knowledge they accumulate (e.g., Collins, Holcomb, Certo, Hitt, &
Lester, 2009; Haleblian & Finkelstein, 1999; Lu & Beamish, 2004) also impact
performance.
Research in entrepreneurship indicates that new venture performance may be particularly
subject to relationships that cross levels and time. Short and his colleagues (2009), for
example, found that year-to-year performance change was considerably larger for new
firms than for older, established firms. Other studies offer evidence that firm and industry
conditions exert a strong influence on performance that varies as firms age (e.g., Bruderl &
Schussler, 1990; Eisenhardt & Schoonhoven, 1990; Robinson & McDougall, 2001). Examining new bank foundings, for example, Bamford et al. (2004) found that resources and
decision choices at founding had a stronger impact on new venture growth than the same
factors did in later years. These findings confirm earlier empirical research that younger
firms are less restricted by developed structures, policies, and routines and, thus, have more
latitude for change, which suggest strategies set in the first few years become increasingly
difficult to change (see also Boeker, 1989; Bamford, Dean, & McDougall, 2000). Overall,
research suggests that conditions at multiple levels have direct and indirect influences on
new venture performance, that the rate of change in these relationships differs among levels
and over time, and that levels and time combine to shape venture performance and performance change in important ways.
Examining these relationships entail the use of multilevel longitudinal data. Unfortunately, dependence in these data affects tests of statistical significance and the interpretation
of results from single-level regression techniques (Bliese & Hanges, 2004; Kenny & Judd,
1986). To understand how entrepreneurship scholars currently address levels and time, we
surveyed empirical entrepreneurship studies investigating the antecedents of new venture
performance. Specifically, we examined studies that modeled new venture performance
in leading management and entrepreneurship journals, including the Academy of Management Journal, Administrative Science Quarterly, Strategic Management Journal, Journal of
Management, Entrepreneurship Theory and Practice, and Journal of Business Venturing.
We limited our examination to articles published during the period beginning with 2002
through 2007 because RCM is relatively new to the management literature.
During this period, we found 32 articles that explicitly modeled new venture performance, applying a wide range of theoretical perspectives to test the influence of different
individual, group, organizational, and environmental factors on performance.4 Twentythree of these studies relied on employment or one or more accounting-based measures
of performance. Of these studies, 12 modeled year-to-year change (growth) in sales or
employment. Among the 32 empirical studies, 29 had nested structures implied in the data,
including 14 longitudinal designs and 26 with ventures from two or more industries.
Regression-based techniques such as ordinary least squares (OLS), logit, one-way analysis
of variance (ANOVA), and discriminant analysis were predominant; two studies used SEM.
We found no studies that used RCM. Of the studies with nested structures and/or longitudinal designs, 12 ignored levels and/or time altogether, analyzing the data as though the
effects of these structures were not present.
In the 17 entrepreneurship studies where scholars controlled for dependence, 4 studies
aggregated lower level predictors to higher levels, modeling relationships using means
on the predictor and dependent variables for each group (e.g., industry). Aggregation to
higher levels creates a loss of within-group information. For example, aggregating revenue
from different venturing actions to the firm level in a study of corporate venturing activity
dilutes the large and small impacts of different strategic actions through averaging. It also
obscures important temporal patterns at lower levels and has the practical implication of
ignoring dependence when hierarchically nested levels matter (Bliese, 2000).
We found 13 studies that controlled for dependence using k 1 dummy variables to
account for levels or time (where k is the number of higher level groups or time periods),
including one study that combined the use of dummy variables with aggregation.
353
Examining the relationship between guided preparation (i.e., research, planning, and other
activities that entrepreneurs consider prior to start-up) and venture growth, for example,
Chrisman, McMullan, and Hall (2005) controlled for variation among industries by including a series of industry dummy variables. Dummy variables, however, also pose a challenge
because while these variables account for average differences in the dependent variable
among groups or time periods, their use does not allow scholars to assess the extent to which
relationships vary among levels over time (Hofmann, Griffin, & Gavin, 2000). Furthermore, when many groups are present, this approach consumes substantial degrees of freedom and decreases statistical power (Brush, Bromiley, & Hendrickx, 1999).
Problems associated with these approaches and, consequently, the advantages of RCM
are described elsewhere (see Bliese & Hanges, 2004; Kenny & Judd, 1986). Generally, the
use of conventional regression techniques like OLS to model multilevel or longitudinal data
can lead to understated error terms in some cases; in others, it can inflate errors. Either bias
can increase the likelihood of incorrectly rejecting (not rejecting) a statistical effect where
one exists (does not exist) Heck & Thomas, 2000). Organizational scholars have been aware
of the problems caused by dependence for some time (Kenny & Judd, 1986), and there are
how to guides available for building multilevel models that account for levels or time
(see, Bliese & Ployhart, 2002; Raudenbush & Bryk, 2002).
We are aware of only four studies, however, that demonstrate the application of RCM to
test levels and time. These include Hough (2006), Misangyi et al. (2006), and Short et al.
(2006, 2009). Three of these studiesHough (2006), Misangyi et al. (2006), and Short et al.
(2006)model performance for established firms. Two of themHough (2006) and
Short et al. (2009)decompose firm performance by level over time but do not model the
types of substantive relationships of interest to entrepreneurship researchers (i.e., venture
strategy performance, industry performance, etc.). Short et al. (2006) investigated how
firm- and industry-level attributes impact performance trends for established firms. We
build upon Short et al. (2006) by showing how entrepreneurship scholars can separate the
performance effects of these attributes into their time-varying and stable components for
new ventures. Furthermore, we also build upon Misangyi et al. (2006) by modeling industry
as a level and adding random and stable covariates at three levels, which allows us to simultaneously model performance and performance change effects within and between industries. Finally, we build upon Misangyi et al. (2006), Short et al. (2006), and other work
in this area by explicitly modeling cross-level interactions. These additional steps are
important because they will allow entrepreneurship scholars to move beyond using RCM
to better control for the effects of level and instead develop testable theories that consider
the effects of cross-sectional and longitudinal differences in organizational and environmental contingencies on venture performance (see Step 4 in the step-by-step illustration
that follows). As such, we also suggest research domains in which scholars can exploit
RCMs capabilities to investigate new, theoretically rich research questions. Specifically,
we attempt to guide entrepreneurship research beyond simple estimates of the variance
explained at each level, toward more elaborate questions involving substantive constructs
of interest at multiple levels.
We offer our example in an entrepreneurship context. This is important because, as Short
and his colleagues (2009) demonstrate, firm and industry effects differ between new and
established firms in their influence on performance. Their findings are consistent with
several theoretical perspectives within entrepreneurship that offer explanations as to why

this may be the case (e.g., Baker & Nelson, 2005; Boone, Carroll, & van Witteloostuijn,
2002; Florin, Lubatkin, & Schulze, 2003; Stuart, Hoang, & Hybels, 1999). Thus, whereas
efforts to explain how scholars can adapt RCM to deal with either levels or time are important first steps, the complexities involved in adapting RCM to deal with levels and time
simultaneously in a new venture context suggest the need to demonstrate model building
specifically to entrepreneurship scholars.
Model Building Using RCM

Random coefficient regression permits mathematical analysis of nested relationships
within a single model by incorporating a series of simultaneous within-group regressions
that iterate between estimation of fixed and random effects until a model converges. In
doing so, RCM partitions total variance into within- and between-group components and
thereby controls for dependence. Modeling effects in this way accounts for random variance
among levels and across time (see Kreft & de Leeuw, 1998). This approach partitions variance among levels, called variance components, which allows scholars to specify how
attributes at a higher level influence (moderate) the relationship between lower level predictors and a dependent variable. RCM accounts for the variance components among time
periods and sheds light on how individual units change over time and whether there are differences in the patterns of change among levels. In our example, we are interested in
whether there are identifiable differences in patterns of post-IPO performance change over
time (e.g., some experience growth, others contract, and still others experience little or no
growth) and the extent to which these patterns relate to ventures strategic growth actions
and resource slack, to industry conditions such as munificence, or to combined effects that
cross levels at different stages following an IPO.
To facilitate our discussion, we introduce notation to help illustrate model building using
RCM (Bryk & Raudenbush, 1992).5 In its simplest form, RCM provides estimations of variance components using an unconditional means (Raudenbush & Bryk, 2002) or null (Kreft &
de Leeuw, 1998) model that contains no predictors. We use the indices i, j, and k to denote
time, firm, and industry, respectively. In the case of our three-level mixed model example that
contains repeated measurements for ventures nested in industries, the unconditional means
model partitions variation in the dependent variable among three levels: within-ventures
(measures repeated at different points in time), between ventures nested within industries, and
between industries. At the first level of analysis (i.e., level 1, within-ventures), RCM models
performance at each time period as a function of an intercept plus a random error:
Yijk p0jk eijk ;
1a
where Yijk is the dependent variable for time period i of venture j in industry k; p0jk is mean
of Y for venture j in industry k (across time); and eijk is a random time effect, that is, the
deviation of Y for time period i of venture j in industry k.
In this case, there are i observations for j new ventures in k industries of a continuous
variable, Y, which are modeled as a function of the intercept for each venture (p0jk, the mean
of Y) and error (eijk), and the variance of eijk is the level 1 random variance. The model
355
assumes a normal distribution for eijk with a mean of zero and variance of s2. RCM assumes
variance is uniform for measures of venture j in industry k across 1 ijk time periods. At the
second level of analysis (i.e., level 2, between ventures nested within industries), RCM
models the mean performance p0jk as a dependent variable varying randomly around each
industrys mean performance. The level 2 equation is as follows:
p0jk b00k r0jk ;
1b
where b00k is the mean of Y for industry k in time period i and r0jk is a random firm effect,
that is, the deviation of Y for venture j in industry k over time.
This level 2 equation assumes a normal distribution for r0jk with a mean of zero and
variance of tp. In this case, RCM assumes the variance tp is uniform for measures for all
ventures in industry k. The third level (i.e., level 3, between industries) completes the
three-level RCM model with the intercept b00k of Equation 1b, and the level 2 equation
modeling variance among ventures within industries is simultaneously modeled as
a dependent variable varying randomly (in this case) around the grand mean of
performance.
b00k g000 u00k ;
1c
where g000 is the population mean of Y (i.e., the grand mean) and u00k is a random industry
effect, that is, the deviation of Y for industry k over time.
At level 3, RCM assumes the among-industries residual u00k is distributed normally with
a mean of zero and variance of tb. The unconditional means model illustrated in Equations
1a1c examines the amount of variance attributable to each level of analysis. In this
example, RCM partitions the variance in performance into three variance components:
within-ventures (across time periods) s2, among ventures within industries tp, and among
industries tb. As a result, Equations 1a1c provide initial estimates of the variance
components in Yijk at three levels: variance in Yijk within venture j over time (level 1),
s2; variance in Yijk among ventures within industry k (level 2), tp; and variance in Yijk
among industries (level 3), tb. RCM represents total variance in a three-level mixed model
by s2 tp tb. Based on the variance component estimates, we can compute the proportion of variance that is within ventures over time, among ventures within industries and
among industries as follows:
s2/(s2 tp tb) is the proportion of variance within ventures (across time periods);
tp/(s2 tp tb) is the proportion of variance among ventures within industries; and
tb/(s2 tp tb) is the proportion of variance among industries.
If variation across levels is statistically significant, RCM assumes that observations differ on the dependent variable among groups and/or across time periods. This approach is
equivalent to other variance components techniques such as ANOVA, with one important
caveatRCM differs in the method of estimation. Specifically, RCM uses iterative procedures, such as maximum likelihood or restricted maximum likelihood estimation, that are
more efficient and do not produce negative variances. Furthermore, RCM incorporates
additional error terms as it iterates across levels to estimate equations and is less restrictive
than OLS or ANOVA. By contrast, single-level approaches often require, for example,
equal group sizes, assume that errors due to time tp (between-venture variability) and group
tb (between-industry variability) are zero, and only provide an estimate for variability in
each observation, s2 (Snijders & Bosker, 1994). RCM, however, partitions variance
into within- and between-group components and thereby controls for dependence in data
(Raudenbush & Bryk, 2002).
Of note, the basic multilevel approach extends naturally to longitudinal research designs
using RCM with one important difference: the level 1 variable (time) has a chronological
ordering in multilevel longitudinal models, whereas level 1 variables typically have no
structure in multilevel models (Raudenbush & Bryk, 2002). Bliese and Ployhart (2002) note
that this critical difference raises two issues scholars should consider when estimating longitudinal models. First, scholars should carefully consider how to treat time as a predictor to
test different growth functions (linear, quadratic, etc.). Second, scholars must pay closer
attention to the error variancecovariance matrix, which typically displays much more complex patterns than do multilevel models (Littell et al., 2004; Wolfinger, 1996). For instance,
when fitting a model in which slopes vary over time, one can potentially introduce heteroscedasticity into the error variance-covariance matrix. In our example, this suggests that
residual within-venture observations (after controlling for the linear effect of time) may correlate with one another through the within-venture error-covariance matrix. Many different
types of error-covariance structures are possible. We describe our approach using SAS
PROC MIXED in the Appendix.
An Illustration of Levels and Time Effects on Post-IPO Performance

Sample and Data
Our sample consists of financial and operating data from 1997 through 2001 for U.S.
ventures that undertook an IPO in 1996. We identified these firms from the Thomson Financials Securities Data Company (SDC) New Issues database, which provides a comprehensive listing of U.S.-based IPOs. During 1996, approximately 830 ventures completed an
IPO. As with prior research involving IPO firms (e.g., Fischer & Pollock, 2004), we
restricted the sample to single-product firms, which limits extraneous variance and
increases the accuracy of measures and results (Morrow, Sirmon, Hitt, & Holcomb,
2007). Next, we excluded regulation A offerings (small issues raising less than U.S.$1.5
million), real estate investment trusts (REITS), spin-offs, savings banks and insurance companies experiencing a demutualization, closed-end mutual funds, and reverse leverage buyouts (LBOs; Ritter, 1991), leaving 631 ventures. We then restricted the sample to ventures
that were 6 years old or less at IPO. Research suggests that disruptive events associated with
an initial offering reset the liability of newness clock (e.g., Certo, 2003; Fischer &
Pollock, 2004), and a 6-year cutoff reflects a conservative definition of new venture applied
in previous entrepreneurship research (e.g., McDougall & Robinson, 1990; Zahra, Ireland,
& Hitt, 2000). The final sample contains 308 ventures representing 35 industries (using the
four-digit standard industrial classification (SIC) code).
We collected data from Standard & Poors (S&P) COMPUSTAT database, Thomson
Financials SDC Platinum Merger and Acquisitions database, Compact Disclosure, the
357
Investor Responsibility Research Center (IRRC) Directors database, the Center for
Research in Securities Prices (CRSP) database, and IPO prospectuses filed pursuant to the
Securities and Exchange Commissions (SEC) Rule 424(b)(1). We selected these sources
for their comprehensiveness and extensive use in entrepreneurship research.
Measures
We measured performance following the IPO in two ways: employment growth and
return-on-assets (ROA). Two of the most common measures of growth performance in new
ventures are sales and employment (Gilbert, McDougall, & Audretsch, 2006). Although
sales growth often generates cash that can be reinvested to fund expansion and development, this measure of growth assumes firms have products or services to sell, which in
industries such as biotechnology and pharmaceuticals, semiconductor and component
design, and prepackaged software, may take years to develop. As a result, many consider
annual employment growth a more relevant indicator of growth, particularly in hightechnology industries (Bruton & Rubanik, 2002). Given these advantages and the measures
strong correlation with sales growth (Baysinger, Meiners, & Zeithaml, 1982; Chrisman
et al., 2005; Murphy, Trailer, & Hill, 1996), we use employment growth via year-to-year
change in employment for the years 19972001. Prior research and reviews of
accounting-based performance constructs in entrepreneurship research suggest widespread
use of ROA as a measure of new venture performance (e.g., Murphy et al., 1996; Robinson,
1999). Therefore, we calculated ROA as the ratio of operating income to total assets. Importantly, our inclusion of this measure enables us to compare our results with results from
prior studies that examine industry, firm, and time effects on performance (e.g., McGahan
& Porter, 1997, 2002; Misangyi et al., 2006; Short et al., 2006).
Growth is a vital indicator of a new ventures viability and survival. As a result, the question of why some new ventures experience different growth performance than others has
generated an extensive literature (see Gilbert et al., 2006, for a review). Ventures produce
growth from both internal and external sources. Therefore, we model two strategic growth
actionsone internal and one externalcommonly pursued by new ventures: R&D intensity (internal) and acquisition investment (external). Growing through internal R&D occurs
when a venture uses innovative product development or marketing practices to produce new
products or services that capture incremental (new) market demand. R&D investments
ensure the ventures ownership and control of key knowledge and enable it to profitably
exploit technological developments and build proprietary research platforms that can lead
to future success (Zahra & Bogner, 1999). That is, R&D is important because the knowledge gained at any one point in time becomes a foundation for later R&D efforts. We
calculated R&D intensity as the ratio of total R&D spending to net sales during the year.
Because internal innovations require the allocation of significant resources that often
have uncertain outcomes, new ventures frequently rely on acquired growth. Acquisitions
enable young, entrepreneurial firms to quickly expand their product or service offerings
(Penrose, 1959), extending their reach into new markets without investing internally. For
each year, we operationalized acquisition investment by calculating the annual investment
(U.S. dollars) in acquisitions that represent at least 5% of the acquiring firms market
capitalization (Rosen, 2006). We obtained the acquisition history for each venture from
Thomson Financials SDC Platinum database. Acquired firms (target firms) were both
public and private. To measure the relative size of the target and the acquiring firm, we used
the ratio of the targets market value to the market value of the acquiring firm.6 We included
only those announced acquisitions that ventures completed. During the 5-year period,
ventures in our sample completed 670 acquisitions meeting the 5% restriction.
We also included two additional firm effects: financial slack and venture size. Even
among groups of otherwise similar ventures, evidence suggests that differences in financial
capital held by new firms can account for variations in strategies and performance (e.g.,
Lee, Lee, & Pennings, 2001; Shrader & Simon, 1997). Financial slack is a dynamic quantity that represents the difference between financial resources currently possessed by a firm
and expected (financial) demands of the current business. Slack impacts performance by
increasing the number of potentially positive-return strategic alternatives available (Tan
& Peng, 2003) and by funding experimentation and risk taking (Nohria & Gulati, 1996).
Thus, we included a measure of financial slack to account for the level of working capital
available to firms to meet growth needs following an IPO. Specifically, we measured financial slack as the ratio of working capital to net sales (Bourgeois, 1981). We included a measure of venture size, calculated as the natural logarithm (a linear transformation) of each
ventures net sales dollars for each year (Certo, Daily, Cannella, & Dalton, 2003). Empirical
findings suggest that performance varies as a function of size (e.g., Freeman, Carroll, &
Hannan, 1983). The advantages of size, for example, relate to greater market power (Bain,
1956), minimum efficient scale (Jovanovic, 1982; Jovanovic & MacDonald, 1994), and
legitimacy with stakeholders (Zimmerman & Zeitz, 2002) and are known to change over
time as industry conditions change (Agarwal, Sarkar, & Echambadi, 2002).
To model industry-level conditions, we included a measure of industry munificence,
which reflects environments capacity to support growth given the abundance (or lack)
of available resources (Dess & Beard, 1984). We expect a positive association between
munificence and venture performance, as competition for resources tends to be less intense
in high growth industries (Porter, 1980). We summed the sales for firms operating in each
industry (with four-digit SIC codes) for each year in our sample and logged each value to
reduce skewness (Keats & Hitt, 1988). We calculated munificence for each year by first
regressing the annual average industry sales over 5 years with the focal year as a midpoint
(i.e., munificence for 1996 is based on a regression of sales from 1994 to 1998; Keats &
Hitt, 1988; Misangyi et al., 2006). As a final step, we divided the resulting slope coefficient
by the mean value of industry sales for those years to adjust for absolute industry size (Dess
& Beard, 1984).
Data Set-Up
Importantly, our three-level mixed model contains some covariates that remain fixed
over time, such as a ventures primary SIC industry membership, and others that vary with
time across different levels. Following this approach, some higher level factors such as
industry munificence may differentially influence lower level effects (i.e., R&D intensity,
acquisition investment) on venture performance. In an effort to be clear about how we organized these data prior to the analysis, Table 1 contains a subgroup of ventures in our sample
from three industries.
599902
599902
599902
599902
599902
92276H
92276H
92276H
92276H
92276H
131347
131347
131347
131347
131347
902951
902951
902951
902951
902951
46612K
46612K
46612K
46612K
46612K
826170
826170
826170
826170
826170
1997
1998
1999
2000
2001
1997
1998
1999
2000
2001
1997
1998
1999
2000
2001
1997
1998
1999
2000
2001
1997
1998
1999
2000
2001
1997
1998
1999
2000
2001
JDA Software Group

JDA Software Group
JDA Software Group
JDA Software Group
JDA Software Group
Siebel Systems Inc
Siebel Systems Inc
Siebel Systems Inc
Siebel Systems Inc
Siebel Systems Inc
Calpine Corp
Calpine Corp
Calpine Corp
Calpine Corp
Calpine Corp
U S Energy Systems
U S Energy Systems
U S Energy Systems
U S Energy Systems
U S Energy Systems
Inc
Inc
Inc
Inc
Inc
Inc
Inc
Inc
Inc
Inc
Millennium Pharmaceuticals
Ventana Medical System Inc
Company Name
Note: ROA return-on-assets.
CNUM
Year
7372
7372
7372
7372
7372
7372
7372
7372
7372
7372
4991
4991
4991
4991
4991
4991
4991
4991
4991
4991
2835
2835
2835
2835
2835
2835
2835
2835
2835
2835
SIC
0.0872
0.0576
0.1182
0.1113
0.0992
0.2163
0.1673
0.1899
0.1740
0.1054
0.1130
0.0683
0.0752
0.0689
0.0500
0.0078
0.0724
0.0700
0.0969
0.0228
0.0336
0.0148
0.0544
0.1056
0.0807
0.1164
0.1554
0.0172
0.0697
0.0994
ROA
0.6135
0.0327
0.0704
0.2121
0.1070
1.9979
1.2588
1.3069
0.0019
0.2018
0.2865
0.8886
1.1769
0.9750
0.0984
0.0000
0.1429
0.3750
2.3636
0.5676
0.4038
0.3493
0.3503
0.4286
0.0942
0.6682
0.1705
0.2500
0.0544
0.0258
Empl_Growth
39.1710
25.0000
29.0400
36.7670
42.6190
42.6980
72.8530
145.5140
198.6290
366.2300
7.1650
10.7120
27.5560
35.8600
79.3480
0.0000
0.0000
0.0000
0.0000
0.0000
114.1900
510.3800
268.7400
400.5750
579.5100
7.9570
7.0780
11.1160
14.9290
16.3590
RD_Intense
0.0000
44.0000
0.0000
20.5000
51.8500
15.7600
490.6610
259.0000
1942.5140
0.0000
331.0000
157.7999
572.1670
1209.8540
2466.4510
3.3000
0.0000
0.0000
2.7190
17.9950
4.0000
0.0000
577.3350
86.0000
2416.8300
0.0000
10.5000
0.0000
0.0000
0.0000
Acq_Invest
Table 1
Multilevel Longitudinal Data from a Subgroup of Sample Firms
4.2202
4.5035
5.8907
4.5009
2.7439
3.7017
2.5344
4.4994
3.1676
3.5978
0.9328
1.7091
1.9120
1.1492
1.2412
0.8868
1.6003
0.8964
4.2478
1.6470
6.2308
8.3529
4.8427
10.9094
7.4552
6.2417
3.6967
3.6757
3.6185
3.3645
Slack
4.5301
4.9378
4.9675
5.1517
5.3371
4.7856
5.9726
6.6745
7.4935
7.6253
5.5664
6.2761
6.6997
7.7227
8.9336
1.1734
1.6477
1.7431
2.2329
3.6770
4.5101
4.9029
5.2186
5.2846
5.5103
3.5011
3.8858
4.2543
4.2787
4.4865
Ln_Sales
49.3244
48.2348
38.2370
25.9734
23.7284
49.3244
48.2348
38.2370
25.9734
23.7284
3.1259
4.1884
4.2079
2.5031
1.4176
3.1259
4.1884
4.2079
2.5031
1.4176
8.4512
16.8988
22.0645
13.9558
12.6291
8.4512
16.8988
22.0645
13.9558
12.6291
Ind_Munif

359
Each row contains a unique venture-year observation. Although our sample contains 308
ventures in 35 four-digit SIC industries, the longitudinal design includes 5 years of data;
therefore, the data set contains 1,540 rows (observations). Furthermore, as previously noted,
we coded time such that Year 0 represents the first year following a new ventures IPO,
Year 1 is 2 years following the year of its IPO, and so forth. The four-digit SIC representing
industry membership remains fixed over the period. However, transient firm and industry
effects, such as R&D intensity, acquisition investment, and industry munificence, vary over
time.
Model Specification and Estimation

In the following section, we conduct a step-by-step illustration of RCM to examine
multilevel, longitudinal data. With each step, we illustrate the model, summarize output
produced by the estimation procedure, and explain how to interpret the results. We offer
syntax for the PROC MIXED procedure in the Appendix. We begin with the unconditional
means (null) model and successively add complexity by adding factors until we reach the
complete model.
Step 1: Unconditional Means Model. The first step is to partition the variance components (i.e., s2, tp, tb) into their within-ventures (i.e., over time), between ventures nested
within industries and between industries components as described by Equations 1a1c. This
model provides an initial estimate of the variance components for Yijk. In our example, Yijk
represents venture performance at time i for venture j in industry k. p0jk in Equation 1b represents mean performance across time for venture j in industry k. The intercept for Equation
1b, b00k (estimated in Equation 1c), represents the mean performance of all ventures in
industry k, and g000 is the overall (grand) mean for all new ventures. We estimate iteratively
via full maximum likelihood estimation to ensure comparability across nested models
(Raudenbush & Bryk, 2002).
We report the results of the unconditional means models in Table 2. From these results,
we can compute the percentage of variance that is within ventures over time (level 1),
between ventures within industries (level 2), and between industries (level 3). If industries
do not differ with respect to mean performance, then the among-industries variance component (i.e., [tb]/[s2 tp tb]) will equal 0. Our analysis finds the proportion of the total
variance in employment growth that occurs within ventures over time is 89.9% (p < .001),
variance among ventures within industries is 9.8% (p < .001), and the variance among
industries is 1.3% (p < .05). The proportion of the total variance in ROA that occurs within
ventures over time is 58.3% (p < .001), variance among ventures within industries is 32.2%
(p < .001), and the variance among industries is 9.5% (p < .01). These estimates suggest
that industries do differ with respect to mean performance following an IPO and that the
variation within ventures over time and among ventures within industries is even greater.
However, whereas the amount of variance in ROA explained by industry membership parallels the size of effects found elsewhere (e.g., McGahan & Porter, 1997; Short et al., 2006),
we find greater variability within ventures over time, which suggests that new ventures may
be more vulnerable to environmental conditions following their transition from private to
public capital markets.
361
Table 2
Unconditional Means Model
Results for Venture Employment Growth
Fixed Effect
Coefficient
SE
t Value
Average initial employment growth, g000
0.1590***
0.0202
7.86
Variance
Component
SE
Z Value
Pr > |t|
0.6293***
0.0173
36.29
<.0001
0.0698***
0.0122
5.75
<.0001
0.0094*
0.0057
1.65
.0500
Random Effect
Temporal variation (within-firm variation in
employment growth over time), eijk
Firm initial variation (variation in initial
employment growth among ventures within
industries), r0jk
Industry initial variation (variation in industry
mean employment growth among industries), u00k
Variance Decomposition (by Level)
% by Level
Level 1 (within firm over time)

Level 2 (among ventures within industries)
Level 3 (among industries)
89.9
9.8
1.3
Model Fit Statistics

D 2LL
Results for Venture ROA

Fixed Effect
Coefficient
SE
t Value
Average initial return on assets, g000
0.1064*
0.0512
2.08
Variance
Component
SE
Z Value
Pr > |t|
Temporal variation (within-firm variation in ROA

over time), eijk
Firm initial variation (variation in initial ROA
among ventures within industries), r0jk
Industry initial variation (variation in industry
mean ROA among industries), u00k
0.2707***
0.0152
17.82
<.0001
0.1498***
0.0224
6.69
<.0001
0.0442**
0.0171
2.58
.0050
Variance Decomposition (by Level)
% by Level
Random Effect
Level 1 (within firm over time)

Level 2 (among ventures within industries)
Level 3 (among industries)
58.3
32.2
9.5

D 2LL
*** p < .001;

** p < .01;
* p < .05
Step 2: Linear change model with fixed effects at all levels. In Step 1, we used the unconditional means model (Equations 1a1c) to examine the amount of variance attributable to
each type of effect. In the second step, we examine the total variance explained by year
effects by adding a covariate to the model to determine whether patterns of change vary
among ventures over time. Specifically, we extend Equations 1a1c by adding the covariate
YEARijk and its slope coefficient p1jk to the level 1 equation (see Equation 2a) to represent
the rate of performance change for venture i in industry k for each period. We coded YEARijk such that Year 0 is the first full year following the IPO, Year 1 is second full year following the IPO, Year 2 is the third full year, and so forth (for more details, see Bliese &
Ployhart, 2002). By coding the first year as zero, the intercept represents the measure of
performance in the initial period following the IPO. In this step, p0jk in Equation 2a represents the mean performance for venture j in industry k. The intercept for Equation 2b, b00k,
represents the mean performance of all ventures in industry k, whereas g000 is the overall
initial mean performance for all ventures (when YEAR 0). These changes produce the
following equations:
Yijk p0jk p1jk YEARijk eijk
2a
p0jk b00k r0jk
2b
p1jk b10k
2c
b00k g000 u00k
2d
b10k g100
2e
We report the results of the linear change model with random intercepts in Table 3. Importantly, PROC MIXED produces a variety of statistics useful for comparing the goodness-of-fit
of multiple models using the degrees of freedom (df) associated with the number of model differences between the contrasted models. Of particular relevance are the 2 log likelihood
(2LL, also referred to as the deviance statistic) and Akaikes information criterion (AIC).
In both cases, models that fit better produce smaller values. The 2LL depicts difference scores
between nested modelsfor example, comparing one model containing n predictors with
another containing n 1 predictorsand follows an approximate w2 distribution. Thus, unlike
AIC, it offers a w2 significance test. For model comparison purposes and for consistency with
previous studies, we report the 2LL and evaluate goodness-of-fit using the w2 test.
Comparison of the goodness-of-fit w2 for the model in Step 2 with the unconditional
means (null) model from Step 1 returns a statistically significant difference (D 2LL
13.20; p < .001; df 1), suggesting that the model with the random slope for time fits the
data significantly better than the unconditional means model. The total variance explained
by year is determined by comparing the time period variance estimated in this model with
that estimated in the unconditional model. As reported in Table 3, differences in the trajectories (slopes) of individual ventures account for approximately 3.1% and 4.4% of the
htotal variance in employment growth
i. and ROA, respectively (calculated as
s2linear change model with fixed effects s2unconditional means model
s2 tp tb unconditional means model ).7
363
Table 3
Linear Change Model With Fixed Effects at All Levels
Fixed Effect
Coefficient
SE

Average linear change rate for employment
growth, g100
0.3357***
0.0883***
0.0279
0.0096
SE
Z Value
Pr > |t|
Variance
Component
Random Effect
Level 1
Temporal variation, eijk
Level 2
Firm initial variation, r0jk
Level 3
Industry initial variation, u00k
D 2LL
t Value
0.6098***
0.0168
36.29
<.0001
0.0737***
0.0121
6.08
<.0001
0.0095*
0.0058
1.65
.0500
82.90***
Total variance explained by year effects
3.1%

Fixed Effect
Coefficient
SE
t Value

Average linear change rate for ROA, g100
0.1444*
0.0239**
0.0554
0.0087
2.60
2.93
Variance
Component
SE
Z Value
Pr > |t|
0.2695***
0.0151
17.83
<.0001
0.1497***
0.0224
6.70
<.0001
0.0445**
0.0172
2.59
.0050
Random Effect
Level 1
Level 2
Level 3
D 2LL
13.20***
Total variance explained by year effects
4.4%
*** p < .001;

*** p < .01;
*** p < .05
Step 3: Linear change model with random effects at all levels. In the third step, we allow
YEARijk to vary randomly at level 2 and level 3 by extending Equations 2a2e to specify a
basic three-level growth model that considers the extent to which significant slope variation
exists across time at each level. First, we add the residual, r1jk, to Equation 2c, to produce a
slope coefficient for YEARijk (i.e., a linear trend) that varies randomly among ventures
within industries. In this equation, b10k is the mean rate of change in performance for ventures within industry k. Next, we add a residual (u10k) to Equation 2e to estimate the intercept in the level 2 equation that allows the slope coefficient for YEARijk to vary among
industries. The g100 term in this equation is the overall (grand) mean rate of change in performance for all ventures. These changes produce the following equations:
Yijk p0jk p1jk YEARijk eijk
3a
p0jk b00k r0jk
3b
p1jk b10k r1jk
3c
b00k g000 u00k
3d
b10k g100 u10k
3e
Table 4 contains the results of the linear change model with random intercepts that
allows the linear trend to vary randomly by level. In equations modeling ROA, the variance
component for the firm initial variation, r0jk, and the firm linear change rate within industries, r1jk, are statistically significant (both p < .001), suggesting performance change parameters using ROA vary among ventures within industries. This provides empirical support
for the idea that ventures differ in their average performance following an IPO and follow
different rates of adaptation over time (Singh, House, & Tucker, 1986), which highlights
again the importance of considering differences in the rate of performance change in samples containing ventures nested within industries. Comparison of the goodness-of-fit
deviance statistics in Step 3 with fixed effects from Step 2 using ROA returns a statistically
significant difference (D 2LL 26.30; p < .001; df 4), suggesting that the model with
random slopes for time is a better fit.
Step 4: Linear change model with level 2 direct (Step 4a) and moderating (Step 4b)
effects. Broadly speaking, we designed the models in Step 2 and Step 3 to understand the nature
of the relationship between new venture performance and time among ventures within industries and among industries. From the results, we conclude (a) the linear trend in employment
growth and ROA following an IPO is negative and statistically significant, (b) ventures nested
within industries differ in terms of their initial performance levels, (c) the linear rate of performance change among ventures within industries following an IPO is statistically significant for
ROA but not for employment growth, and (d) differences in the linear rate of performance
change among industries are not significant for either measure of post-IPO performance.
To examine the effects of our independent variables (i.e., R&D intensity, acquisition
investment, slack, size, and munificence), we need to first determine the appropriate level
at which each predictor should enter the model. Theory should drive this decision (House,
Rousseau, & Thomas-Hunt, 1995; Klein, Dansereau, & Hall, 1994; Mitchell & James,
2001). Fortunately, many constructs in entrepreneurship research are global, meaning
one measures them at the same level where they have theoretical meaning. In our case,
R&D intensity, acquisition investments, slack, and size clearly represents theoretical
365
Table 4
Linear Change Model With Random Effects at All Levels
Fixed Effect
Coefficient
SE
t Value

Average linear change rate for
employment growth, g100
0.3357***
0.0883***
0.0279
0.0096
12.02
9.18
Variance
Component
SE
Z Value
Pr > |t|
0.6098***
0.0168
36.29
<.0001
0.0737***
0.0089
0.0121
0.0064
6.08
1.39
<.0001
n.s.
0.0093*
0.0009
0.0056
0.0017
1.66
0.55
.0500
n.s.
Fixed Effect
Coefficient
SE

0.1464*
0.0209*
0.0644
0.0104
Variance
Component
SE
Z Value
0.1648***
0.0139
11.82
<.0001
0.3483***
0.0289***
0.0526
0.0064
6.62
4.50
<.0001
<.0001
0.0571**
0.0095
0.0254
0.0102
2.25
0.93
.0100
n.s.
Random Effect
Level 1
Level 2
Firm linear change rate for employment
growth, r1jk
Level 3
Industry linear change rate for
employment growth, u10k
D 2LL
1.30
Random Effect
Level 1
Level 2
Firm linear change rate for ROA, r1jk
Level 3
Industry linear change rate for ROA, u10k
D 2LL
26.30***
*** p < .001;

*** p < .01;
*** p < .05
t Value
2.26
2.01
Pr > |t|
constructs that describe firms, whereas scholars commonly use munificence to characterize
industries. Entrepreneurship scholars are less likely to confront shared constructs
wherein they aggregate information about lower level units to higher level constructs. This
might occur in entrepreneurship research, for example, if one takes measures of entrepreneurial orientation from individuals within an organization to depict the organizations
overall entrepreneurial orientation (Lumpkin & Dess, 1996; Stam & Elfring, 2008). Shared
constructs require that scholars examine consistency among lower level responses to insure
that aggregation is appropriate as dictated by theory (Bliese, 2000). Thus, when modeling
levels in entrepreneurship, selecting the correct level should be straightforward except in
cases of shared constructs. Introducing chronological ordering (time), however, introduces
a new level of complexity. Time occupies level 1 in the model, so a theoretical question
becomes whether a measure changes enough that it conceptually belongs to time more
so than to hierarchically nested levels such as firm or industry. One can view a measure such
as industry growth rate, for example, as characterizing changes to industry life-cycle conditions and thus a candidate for entering the model as a time-level construct.
With our focus on new ventures, firm size is a likely candidate to model at level 1 (within
venture); it can theoretically move on a trajectory that is not fully under managers (firmlevel) control. However, strategic growth actions and financial slack, while exhibiting
certain path dependencies over time, can be manipulated by managers and theory and
evidence suggests although there are effects at different levels that may change them systematically over time, they are largely idiosyncratic decisions that are based on firm
resources and competitive opportunities (Haleblian & Finkelstein, 1999; Holcomb, Holmes,
& Connelly, 2009). Industry munificence characterizes environmental contingencies that
may account for within-venture performance change to the extent firms fit or align strategies with these contingencies (Zajac, Kraatz, & Bresser, 2000) as well as betweenindustry differences in performance over time (Scherer & Ross, 1990). If correct, these are
shared constructs that emerge at lower levels (i.e., points in time) and manifest at higher
levels, and the lower level measures should show substantial consistency before aggregation to the higher level is justified empirically.
A common way to test whether the data are consistent with theory regarding aggregation
is with the intraclass correlation (ICC; Bliese, 2000). In this case, we use ICC to examine
the amount of variance in each variable that occurs within versus between levels (Hofmann
et al., 2000). We used a one-way ANOVA with each variable as the dependent variable and
level (e.g., year, venture, or industry) as the independent variable. Consistent with our reasoning above, the ICC showed that 84.4% of the variance in venture size is attributed to
time, whereas more than 90% of the variance in slack, R&D intensity, and acquisition
investment occur between ventures (i.e., they are reasonably stable over time). In all,
8.4% and 82.4% of the variance in munificence is a function of transient and betweenindustry factors, respectively; hence, we model industry munificence at level 1 and level
3 (in Step 4b). Thus, in Step 4a, we include measures for venture size, financial slack,
R&D intensity, and acquisition investment (industry munificence will be added in Step 5).
These changes produce the following equations:
Yijk p0jk p1jk YEARijk p2jk SIZEijk eijk
4a
367
p0jk b00k b01k R&D0jk b02k ACQ0jk b03k SLACK0jk r0jk
4b
p1jk b10k r1jk
4c
p2jk b20k
4d
b00k g000 u00k
4e
b01k g010
4f
b02k g020
4g
b03k g030
4h
b10k g100 u10k
4i
b20k g200
4j
RCM also allows scholars to model how time moderates (or changes) relationships
between predictors and the dependent variable. We chose to demonstrate moderation using
three different interaction terms. Specifically, we create separate terms for R&D intensity,
acquisition investment, and financial slack with YEARijk.8 One can also examine interactions at other levels and there may well be theoretical reasons for doing so. In addition
to theoretically specifying the level of each construct in the model, a key decision in RCM
is how to scale effects at lower levels to investigate moderation from higher level covariates
(see Hofmann & Gavin, 1998; Kreft, de Leeuw, & Aiken, 1995). With RCM, the intercept
and slopes at the lower level (i.e., level 1) become outcome variables at the next higher level
(i.e., dependent variables in level 2 regressions). The meaning and interpretation of these
parameters is critical and the choice regarding centering of lower level effects influences
the interpretation of the intercept term as well as the variance in the intercept across groups.
We considered three different scaling options: (a) no centering where the lower level effects
are used in their original metric, (b) grand mean centering where the grand mean of the
lower level effect is subtracted from each measure (i.e., Xijk X . . ., where X is the measure
for a lower predictor), or (c) group mean centering where the relevant group mean of the
lower level effect is subtracted from each measure. Under these scaling options, the intercept term takes on a different meaning. We used grand mean centering yielding an intercept
equal to the expected value of Yijk for an observation whose value Xijk is equal to the grand
mean, X . . . (Raudenbush & Bryk, 2002). This approach reduces correlation between parameter estimates for the intercepts and slopes among levels, which can alleviate potential
estimation problems due to multicollinearity (Hofmann & Gavin, 1998).
Tables 5 and 6 contain the results for Steps 4 and 5 using employment growth and ROA,
respectively. We present the results for the model containing the level 2 predictors (Step 4a)
in Model 1 (Tables 5 and 6). Size (p < .10 using employment growth; p < .001 using ROA),
slack (p < .10 using employment growth; p < .001 using ROA), and acquisition investment
(p < .05 using employment growth; p < .10 using ROA) are significant predictors in equations that separately model the two measures. R&D intensity (p < .01) significantly predicted
Table 5
RCM Estimates of Level 2 and Level 3 Effects on Venture Employment Growth
Model
0.4367***
(0.0696)
0.1002***
(0.0145)
0.3837***
(0.0714)
0.0711***
(0.0160)
0.2879***
(0.0750)
0.0583***
(0.0158)
0.2975***
(0.0751)
0.0581***
(0.0150)
0.0217y
(0.0139)
0.0059
(0.0216)
0.0041y
(0.0023)
0.0261*
(0.0118)
0.0220y
(0.0141)
0.0108
(0.0234)
0.0011
(0.0010)
0.0836***
(0.0117)
0.0015
(0.0068)
0.0007
(0.0006)
0.0406***
(0.0081)
0.0237y
(0.0142)
0.0081
(0.0239)
0.0013
(0.0010)
0.0792***
(0.0184)
0.0203**
(0.0081)
0.0023
(0.0067)
0.0008y
(0.0005)
0.0423***
(0.0082)
0.0235y
(0.0142)
0.0084
(0.0238)
0.0008
(0.0012)
0.0783***
(0.0186)
0.0204**
(0.0080)
0.0027
(0.0067)
0.0003y
(0.0002)
0.0435***
(0.0088)
0.0001
(0.0002)
0.0008y
(0.0005)
0.0017**
(0.0008)
0.8279***
(0.0294)
0.8034***
(0.0288)
0.7404***
(0.0270)
0.7398***
(0.0264)
0.0609**
(0.0211)
0.0058
(0.0064)
0.0098**
(0.0045)
0.0629
(0.1337)
0.0031**
(0.0013)
0.0705***
(0.0216)
0.0061
(0.0063)
0.0099**
(0.0045)
0.0316
0.1326
0.0058***
(0.0018)
0.0465**
(0.0180)
0.0056
(0.0064)
0.0117**
(0.0050)
0.0437
(0.1074)
0.0085***
(0.0024)
0.0465**
(0.0180)
0.0058
(0.0059)
0.0118**
(0.0051)
0.0426
(0.1068)
0.0085***
(0.0025)
Fixed Effect
Average linear change rate for employment
growth, g100
Venture size
Financial slack
R&D intensity
Acquisition investment
Industry munificence
Financial slack (moderating linear D rate)
R&D intensity (moderating linear D rate)
Acquisition investment (moderating linear D rate)
Industry munificence (moderating the effect of
financial slack on linear D rate)
R&D intensity on linear D rate)
acquisition investment on linear D rate)
Random Effect
Level 1
Level 2
Firm linear change rate for employment
growth, r1jk
Financial slack
R&D intensity
(continued)
369
Table 5. (continued)
Model
0.0157y
(0.0097)
0.0008
(0.0017)
0.0019***
(0.0005)
25.30***
0.0174y
(0.0109)
0.0008
(0.0015)
0.0019***
(0.0005)
13.80***
Random Effect
Level 3
Industry linear change rate for employment
growth, r1jk
Deviance (2ResLogLik)
0.0142y
(0.0095)
0.0009
(0.0017)
0.0145y
(0.0099)
0.0009
(0.0016)
194.20***
22.20***
Note: Robust standard errors in parentheses.

*** p < .001;
*** p < .01;
*** p < .05;
y p < .10
ROA but not employment growth. In addition, by examining the random effects for level 2
(that is, the extent to which predictors at this level explain variation in mean performance
among ventures within industries), we find that slack (p < .01) and acquisition investment
(p < .01) are statistically significant predictors of variation in employment growth among ventures within industries, r0jk (the level 1 intercept in Equation 4b), while R&D intensity (p <
.05) and slack (p < .10) are statistically significant predictors of ROA at level 2.
We present these results for Step 4b that includes the moderating influence of R&D
intensity, acquisition investment, and slack by time in Model 2 on Table 5. Only the moderating linear change rate effect of acquisition investment on employment growth (p < .001)
is statistically significant. However, all three moderating effects are statistically significant
predictors of ROA (see Model 2 on Table 6). R&D intensity (p < .001) has a positive effect
on ROA that increases over time, whereas the negative effects of slack (p < .001) and acquisitions (p < .01) on venture performance (see Model 1) increase with time following an IPO.
Step 5: Linear change model with level 2 and level 3 direct (Step 5a) and moderating
(Step 5b) effects. In the final step, we add industry munificence as a level 3 effect to the
previous model to determine the extent to which munificence explains variation in
between-industry performance, u00k. Equations 5a5k illustrate the model containing level 2
and level 3 effects.9
Yijk p0jk p1jk YEARijk p2jk SIZEijk p3jk INDMUNIFijk eijk
5a
p0jk b00k b01k R&D0jk b02k ACQ0jk b03k SLACK0jk r0jk
5b
p1jk b10k r1jk
5c
p2jk b20k
5d
Table 6
RCM Estimates of Level 2 and Level 3 Effects on Venture ROA
Model
Fixed Effect
Venture size
Financial slack
R&D intensity
0.2483***
(0.0515)
0.0143**
(0.0061)
0.0447***
(0.0101)
0.0037***
(0.0006)
0.0052**
(0.0020)
0.0032y
(0.0017)
0.2786***
(0.0529)
0.0074*
(0.0041)
0.0486***
(0.0102)
0.0120
(0.0139)
0.0011
(0.0021)
0.0088y
(0.0051)
0.0011***
(0.0001)
0.0023***
(0.0004)
0.0053**
(0.0021)
Financial slack (moderating linear D rate)

R&D intensity (moderating linear D rate)
Acquisition investment (moderating linear
D rate)
0.2614***
(0.0514)
0.0036y
(0.0020)
0.0482***
(0.0100)
0.0086
(0.0142)
0.0019
(0.0023)
0.0090y
(0.0050)
0.0011
(0.0024)
0.0012***
(0.0002)
0.0024***
(0.0005)
0.0052**
(0.0021)
Industry munificence (moderating the

effect of financial slack on linear D rate)
effect of R&D intensity on linear D rate)
effect of acquisition investment on
linear D rate)
0.2656***
(0.05207)
0.0038y
(0.0021)
0.0486***
(0.0100)
0.0126
(0.0155)
0.0011
(0.0021)
0.0081y
(0.0050)
0.0011
(0.0022)
0.0015**
(0.0005)
0.0032***
(0.0005)
0.0065**
(0.0021)
0.0003
(0.0004)
0.0006**
(0.0001)
0.0002**
(0.0001)
Random Effect
Level 1
Level 2
Firm linear change rate for ROA, r1jk
Financial slack
R&D intensity
0.0100***
(0.0009)
0.0092**
(0.0009)
0.0089***
(0.0009)
0.0085***
(0.0009)
0.0805***
(0.1146)
0.0038***
(0.0007)
0.0028y
(0.0020)
0.0004*
(0.0002)
0.0004
(0.0008)
0.0835***
(0.0117)
0.0039***
(0.0007)
0.0041
(0.0037)
0.0003*
(0.0002)
0.0001
(0.0007)
0.0809***
(0.0114)
0.0038***
(0.0007)
0.0043
(0.0041)
0.0004*
(0.0003)
0.0001
(0.0007)
0.0812***
(0.0115)
0.0041***
(0.0008)
0.0055
(0.0048)
0.0004*
(0.0003)
0.0003
(0.0006)
(continued)
371
Table 6. (continued)
Model
Random Effect
Level 3
0.0189**
(0.0082)
0.0088
(0.0097)
Industry linear change rate for ROA, r1jk
0.0174**
(0.0079)
0.0087
(0.0098)
354.7***
Deviance (2ResLogLik)
374.5***
0.0088y
(0.0060)
0.0079
(0.0098)
0.0047*
(0.0030)
403.5***
0.0098y
(0.0070)
0.0081
(0.0098)
0.0036y
(0.0027)
35.4***
Note: Robust standard errors in parentheses.

*** p < .001;
*** p < .01;
*** p < .05;
y
p < .10
p3jk b30k r3jk
5e
b00k g000 g001 INDMUNIF00k u00k
5f
b01k g010
5g
b02k g020
5h
b03k g030
5i
b10k g100 u10k
5j
b20k g200
5k
b30k g300 u30k
5l
As noted previously, a benefit of using RCM to model slopes as outcomes is the ability to
investigate whether specific factors explain variance in the slopes among higher levels. For
instance, in Steps 4a and 4b, we modeled p0jk simultaneously as the intercept in Equation
4a, representing the average initial performance for venture j in industry k when time and
venture size equal zero, and as the outcome in Equation 4b, representing the effect of R&D
intensity and acquisition investment on variance in post-IPO performance among ventures
within industries. In Step 5a (and following the results of the intraclass correlation
completed in Step 4), we add industry munificence as a level 1 predictor to explain variation
within ventures over time and simultaneously model industry munificence at level 3 to
explain variation in mean venture performance across industries (the level 2 intercept in
Equation 5f).
Munificence refers to an environments support for organizational growth (Dess &
Beard, 1984). High munificence enables firms to cope with challenges by obtaining outside
resources, an issue that is particularly important for new ventures (McDougall, Robinson, &
DeNisi, 1992). We summarize the results for this step in Tables 5 and 6 (see Model 3). For
equations using employment growth, the coefficient for industry munificence is statistically
significant at level 1 (p < .01) and at level 3 (p < .001), suggesting changes in levels of
industry resources account for variation in within-venture over time and among-industry
growth. However, munificence only appears to affect ROA at the industry level (p <
.05). These results lend some support to theories and empirical findings that suggest that
environments directly affect organizational outcomes (Aldrich & Wiedenmayer, 1993).
In Step 5b, we included interaction terms containing industry munificence to examine the
extent to which industry conditions account for differences in the influence of firm effects
on performance and the rate of performance change following the IPO. Specifically, we created terms using industry munificence with the two strategic growth actions (e.g., R&D and
acquisition) and our firm measurement of slack, and with the linear change rate, YEARijk, to
assess the moderating influence of industry membership on these firm effects over time.
We summarize the results for this final step regressing employment growth and ROA in
Model 4 of Tables 5 and 6, respectively. In this case, industry munificence had a significant
and meaningful influence on the relationship between several firm-level variables and our
two measures of post-IPO performance over time, including the performance effect of our
two strategic growth actions. The coefficient for the interaction terms containing industry
munificence and the moderating effect of R&D intensity and acquisition investments are
statistically significant for equations using employment growth (p < .10 and p < .01, respectively) and using ROA (p < .01 and p < .01, respectively). This suggests changes in the environmental context over time not only have a direct influence on post-IPO performance but
also moderates the efficacy of firm competitive strategies and resources on measures of
venture performance over time. Our findings are consistent with the views of economists
(Scherer & Ross, 1990) and strategic management theorists (Bourgeois, 1980) and with
empirical work by entrepreneurship researchers (Sandberg & Hofer, 1987). For example,
the entire structure (environment)-conduct (strategy)-performance paradigm in industrial
organization (IO) economics rests on the premise that industry structure influences strategy
(conduct), which in turn affects performance (Scherer & Ross, 1990). Furthermore, because
strategic decision making is a human behavior, social cognitive theory (Bandura, 1986)
points to the determination of behavior by environmental (and personal) forces. Finally,
entrepreneurship research has found that new venture strategies form in response to environmental forces (McDougall et al., 1992; Sandberg, 1986).
Discussion
Our purpose was to demonstrate how to model levels and time simultaneously in a contextthe field of entrepreneurship researchthat is particularly sensitive to nested and
longitudinal data. For the reasons noted previously, levels and time effects can have a meaningful influence on relationships of interest to entrepreneurship scholars, perhaps more so
than many other areas of organizational research. Adopting a multilevel longitudinal view
provides a powerful way to conceptualize and test entrepreneurship theory. Doing so
enables us to answer new and potentially important questions as we explore nuances in
373
relationships nested between levels across time while at the same time avoiding the biases
that occur when data violate independence assumptions.
To substantiate these points and to provide a road map for entrepreneurship scholars,
we used RCM to assess the context in which internal and external growth actions affect
post-IPO performance for a sample of entrepreneurial firms. Our results illustrate the following: (a) post-IPO performance varies significantly among industries, among ventures
within industries, and within ventures over time (see Table 2), (b) the linear performance
trend increases at a decreasing rate (i.e., rate of growth slows) over time (see Table 3),
(c) strategic growth actions and financial slack have a direct effect on within-venture performance (see Model 1, Tables 5 and 6) that changes over time (see Model 2, Tables 5 and
6), and (d) industry conditions explain stable performance differences among industries
(see level 3 effects in Model 3, Tables 5 and 6) and moderate the efficacy of venture behaviors and slack on venture performance.
Research Questions in Entrepreneurship Involving Levels and Time

In prior studies, entrepreneurship scholars have studied attributes of individual (e.g.,
Baum & Locke, 2004; Begley & Boyd, 1987; Katz & Shepherd, 2003), ecological and evolutionary conditions (e.g., Aldrich & Wiedenmayer, 1993; Boone et al., 2002; Carroll &
Hannan, 1989), strategy formulation (e.g., McDougall et al., 1992), and resource-based
conditions (e.g., Baker & Nelson, 2005; Katila & Shane, 2005; Lichtenstein & Brush,
2001) often as isolated causes of venture performance. More recently, some scholars have
proposed that individual, organizational, and environmental dimensions combine to provide
a more comprehensive prediction of venture development and growth than any one dimension in isolation (e.g., Baum et al., 2001; Chrisman, Bauerschmidt, & Hofer, 1998). Others
note the importance of considering the conditioning effect of time (e.g., Agarwal et al.,
2002). Nevertheless, there have been few attempts to conceptualize and test theory
involving relationships that cross levels and time in this field. We think that efforts to build
multilevel and crosslevel entrepreneurship theory will be crucial for the fields future
development.
We offer four broad areas where RCM might advance research involving hierarchically
nested levels and time. One set of questions involve whether and how a ventures competitive and environmental context shapes strategic choices and to what extent those choices
enable or constrain sustainable performance advantages over time. Empirical research in
organizational ecology and evolutionary economics has shown that industries exert strong
selection processes that change substantively over time (Hannan & Carroll, 1992; Nelson
& Winter, 1982). Because of high environmental uncertainty and varying degrees of
resource munificence, realizing a performance advantage over time can be difficult for
young firms (Lichtenstein & Brush, 2001). Uncertainty created by environmental instability
produces information deficits, making cause-and-effect relationships difficult to identify
and interpret (Carpenter & Fredrickson, 2001). As a result, firms often seek a series of temporary advantages (Holcomb, Holmes, & Hitt, 2006). This raises important questions about
the sources of temporary or dynamic advantages. For example, are controllable (i.e., strategy) or uncontrollable (i.e., munificence) sources more (less) important? How important is
fit? In our example, we illustrated that internal and external growth actions and slack have
a direct and meaningful influence on post-IPO performance that changes over time and as
a function of higher level industry effects. We also found that industry munificence has a
significant direct effect on within firm variation as well for growth but not for ROA, which
suggests certain industry conditions may be of greater value to firms seeking growth over
profitability. Moreover, these results suggest the important trade-offs ventures face when
making decisions that involve selecting strategic actions that align the venture with its
competitive conditions (Holcomb, Holmes, & Connelly, 2009; Siggelkow, 2001). Investigating these questions might reveal additional contingencies, including time, surrounding
important firm and industry effects on the advantages new ventures achieve at different
stages in their evolution.
A second area of inquiry using levels and time is to better understand the many resourcebased obstacles that confront young entrepreneurial firms and how those obstacles interact
with firm-specific characteristics to affect performance over time. New ventures often lack
financial resources, knowledge of their competitive environment, legitimacy, and mature
operate routines (Sorensen & Stuart, 2000). Furthermore, they encounter numerous potential hazards that evolve and change rapidly over time. Nevertheless, some research finds
that despite resource constraints new ventures often make do and even flourish by applying differing combinations of resources to exploit environmental opportunities (e.g., Baker
& Nelson, 2005), showing that the answer to the question of whether firms or industries
matter most is contingent upon the quality of their combination. That is, the value of a
firm-specific resource cannot be determined in a vacuum, but depends on the context in
which it is used (Holcomb, Holmes, & Connelly, 2009; Sirmon, Gove, & Hitt, 2008). Does
time condition these effects? If so, what level (industry or firm) exerts the strongest influence? Future research capitalizing on levels and time could build and test theory to explain
the extent to which time-varying firm and industry effects constrain or complement each
other.
Future research could also pursue questions involving interactions among strategic
choice and obstacles that new ventures face. For example, Morrow and his colleagues
(2007) found that valuable and difficult-to-implement strategic actions that bundle and
deploy existing resources in new ways increase shareholder returns of firms in crisis more
than actions that involve acquisitions or alliances, and such actions were more likely to lead
to recovery. In an entrepreneurial setting, strategic decision options often compete for
scarce resources. As a result, new ventures make explicit and implicit choices between
them. Some research suggests that new ventures may be more vulnerable to actions that
consume rather than conserve resources, especially in uncertain or rapidly changing environments (e.g., Agarwal et al., 2002). It may well be that industry characteristics condition
the underlying selection mechanism at work in the environment. For example, under what
conditions is it more important to rebundle existing resources than to acquire new ones?
How do industry life-cycle changes affect the performance prospects of these actions over
time? Understanding the performance effects of different strategic actions for given industry contexts and how those relationships evolve with changes to firm and industry attributes
over time would be particularly informative to research in this area. Moreover, future
research also needs to further explore the contingent impact of time on how strategic
choices affect growth, and other measures of performance, such as sales, market share,
profitability, and survival (Schoonhoven, Eisenhardt, & Lyman, 1990).
375
Third, RCM might be useful to investigating emerging concepts in strategic entrepreneurship. Ireland, Hitt, and Sirmon (2003) argue that new ventures are more opportunityseeking; opportunity-seeking action entails recognizing and sorting potential opportunities.
As new ventures age, however, they often shift their focus to sustaining advantages they
accrued through prior opportunity-seeking actions. These advantage-seeking actions are
particularly important when the goal is to exploit established positions in the market.
Because firms rarely maintain effectiveness at both opportunity- and advantage-seeking
actions, embedded within strategic entrepreneurship are issues of transition and change.
Future research might explore whether, for example, an important boundary condition to
this transition is the level of environmental uncertainty or dynamism. In a highly placid
or stable environment, it may be that although a baseline of opportunity seeking is necessary, new ventures with the highest level of advantage-seeking aimed at exploiting established positions are the best performers. Moreover, there may well be different paths in
the transition between the two. Depending on the conditions at founding, characteristics
of the industry as it evolves, the administrative heritage of the venture, and the values and
abilities of its leaders, firms can follow equally valid, but slightly different organizational
transitions. With RCM, scholars can investigate factors that might account for increases in
the rate of change from opportunity- to advantage-seeking. They could also investigate how
factors from multiple levels affect this change. Without RCM, dynamic theories pertaining
to rates of change may be more difficult to model.
Thus far, we have treated dependence as a statistical nuisance that scholars should
avoid because of the bias it introduces even when scholars have no interest in understanding
the role of higher level effects (Bliese & Hanges, 2004). However, as a final example, there
may be occasions where dependence among individual observations (ventures) is the substantive phenomenon that entrepreneurship scholars should attempt to better understand. In
new venture research, for example, a commonly asked question concerns legitimacy attainment. Legitimacy is a critical resource for new venturesone that reduces the chronic
effects of uncertainty and provides a means for them to overcome the liability of newness
that contributes to the high percentage of new venture failure (Aldrich & Fiol, 1994; Stinchcombe, 1965). Theoretically speaking, legitimacy represents a perception of acceptance,
appropriateness, and/or desirability socially constructed by the system of norms, values,
and beliefs of members in a market (Zimmerman & Zeitz, 2002, p. 416). In the face of
uncertainty and changing environmental conditions, perceptions change. These changes can
produce new rules, norms, and values that become socially reinforced and that others come
to view as legitimate. To the extent that members share these perceptions and judgments,
consideration of the social context in which a new venture operates implies some level
of dependence. To study social interactions that produce norms that legitimize a business,
then we should be interested in dependence not simply as a statistical problem but as a substantive phenomena that scholars should conceptualize and study.
Practical Guidance to Modeling Levels and Time for Entrepreneurship

Scholars
Our example demonstrates the use of RCM to investigate entrepreneurial relationships
that cross levels and time, and we suggested four broad areas of new venture inquiry that
Table 7
Practical Guidance to Model Specification Involving Levels and Time
Steps
What to Consider
1. Determine the levels in the hierarchy.
2. Place the constructs and relationships within the

hierarchy (aggregation, fixed vs. random, and so
forth).
Key questions:
Do unit (or firm)-level attributes influence
performance change over time?
To what degree do the effects of unit-level
measures vary across groups?
Do properties of higher level groups
modify relationships at a lower level in the
hierarchy?
3. Evaluate scaling (centering) options and select
approach.
No centering (lower level effects remain in
their original metric).
Grand mean centering (grand mean of the
lower level effect is subtracted from each
measure).
Group mean centering (where the group
mean of the lower level effect is subtracted
from each measure).
Theoretical importance of levels and time.

Proportion of total variance from the unconditional
means model (null model).
Tests of statistical power to assess the number of
groups and group sizes (see Barcikowski, 1981;
Scherbaum & Ferreter, 2009).
Significance tests of the constructs.Intraclass

correlation estimates.Significance tests of the
interactions.Tests of statistical power to assess the
number of groups and group sizes.
Conceptual and theoretical relevance of the

relationships and interpretation of the intercept (see
Hofmann & Gavin, 1998; Kreft et al., 1995).
might benefit from analysis using RCM. Although RCM addresses methodological concerns involving dependencies, an underused strength is its ability to understand differences
and patterns of change within and across levels (Bliese & Ployhart, 2002). Because these
methods are relatively new, however, many theories that might benefit from multilevel
longitudinal designs remain limited in their scope or scholars have yet to conceptualize
them altogether.
In putting theory and method together to model levels and time, perhaps the most important consideration is the specification of the model (see Kozlowski & Klein, 2000, for a
detailed review of principles for model specification). We briefly describe three important
steps that relate broadly to specifying multilevel longitudinal models using RCM: (a) decide
what levels have theoretical importance, (b) determine the placement of the constructs and
relationships that comprise the theoretical system at the correct level, and (c) select the
scaling (centering) approach that ensures appropriate testing and interpretation of the
theoretical system. We provide a summary of these considerations in Table 7.
The first step is to determine the levels in the hierarchy, and here, theory should be the
first guide. For example, when studying the role of affect (Baron, 2008) or learning
377
(Holcomb, Ireland, Holmes, & Hitt, 2009) in the entrepreneurial process, one should consider specifying a level that contains individual entrepreneurs nested within groups or
teams. However, a level that contains individual entrepreneurs nested within groups or
teams may not be necessary to test resource-based theory in work that examines the value
creation potential of new ventures resource stocks (Barney, 1991) or strategic actions
involving their use (Holcomb et al., 2009; Morrow et al., 2007; Sirmon et al., 2008).
Conceptualizing the specific levels also has practical importance because it avoids bias
in variance estimates that might leave important relationships undiscovered (Kenny & Judd,
1986). Thus, it is critical to conduct statistical tests to determine whether the variability one
observes between groups at each level is evidence of random fluctuation or meaningful
differences. In our example, we modeled measures of strategic growth actions over time
(level 1) for new ventures (level 2) that were members of industry groups (level 3). Placing
time at level 1 might seem counter-intuitive because the march of time conceptually has
a broad impact on all other levels. However, the firm-year observation is the smallest unit
and thus constitutes level 1 in repeated measures designs.
Another factor that affects the choice of levels is consideration of the number of groups and
the number of members in each group, which effects statistical power (Scherbaum & Ferreter,
2009). Opinions on the minimum number of groups and minimum group size vary. As a rule,
if the number of members within a higher level group is small, regression coefficients estimated by the model may include larger error terms, which can adversely affect the power
to detect relationships (Hofmann et al., 2000). Our data set contained 308 IPO-stage new ventures, and the analysis are based on 35 groups (four-digit SIC industry segments) that average
approximately 9 members (new ventures) measured annually over 5 years. Although some
scholars suggest a group size of at least 5 with 20 or more groups for adequate power to detect
a moderate effect size (Kreft & de Leeuw, 1998), others suggest that group sizes of at least 10
with at least 30 groups are needed (LaHuis & Ferguson, 2009; Snijders & Bosker, 1993). If
the number of groups is small, then dummy variables may be the safest way to assess that
level. Illustrations of approaches to approximate power computations for fixed effects, variance components, and cross-level interactions are available elsewhere (for tests of statistical
power, see Barcikowski, 1981; Scherbaum & Ferreter, 2009).
Once the levels are established, the second step is to determine the placement of constructs (and their relationships) within the system. Specifically, in a mixed model such as
the one in our example, it is important to consider whether a construct should enter the
analysis as a random effect (i.e., repeated measures to explain variation over time), as
a stable or fixed effect (i.e., measures averaged over time to explain cross-sectional variance between ventures or industry segments), or both. Again, where possible, theory
should drive this decision (House et al., 1995). In addition, it may also be helpful to consider three questions.
First, do unit (or firm)-level attributes influence performance change over time? This is
an important first question for longitudinal designs because it considers whether (and if so,
to what extent) change in the outcome variable is related to differences in measures of the
same predictors at different points in time, which can be examined by viewing unit-level
significance tests of the correlates of interest. In our example, we addressed this question
by modeling ROA and employment growth on our two strategic growth actions (see Tables
5 and 6) and found that differences in growth actions produced different growth trajectories
(i.e., rate of performance change) between ventures that varied among industries. Because
these measures vary over time, we entered them as time-varying effects at level 1.
Second, to what degree do the effects of unit-level measures vary across groups? Here,
the question concerns the nature of relationships between units in the same group. As we
discussed in the model-building section, this question involves constructs that might manifest at a higher level in the hierarchy. Measures of lower level constructs that manifest at
higher levels should show consistency across lower level units before aggregation to the
higher level is justified (Bliese, 2000). The ICC, an ANOVA-based measure, is a particularly useful way to test the consistency of data with theory about aggregation. When ICC
values are greater than zero, higher level contextual effects are present and measures
aggregated to a higher level are no longer directly equivalent to measures allowed to vary
at lower levels (Bliese, 2002). In our example, we had theoretical reasons to expect that
financial slack would affect performance among firms within an industry (i.e., level 2) in
similar ways (e.g., IO economics; Porter, 1980) but also that its impact on venture performance would vary over time (e.g., resource-based theory; Barney, 1991). These theoretical
ideas were consistent with the ICC in our case, and we entered financial slack as a random
variable at two levels: within-ventures (level 1) and between ventures nested within industry (level 2).
Third, do properties of higher level groups modify relationships at a lower level in the
hierarchy? In the language of RCM, we are interested in the relationship between a level
1 slope and a predictor at a higher level in the hierarchy. In multilevel longitudinal
models, a cross level interaction appears in the final model whenever group-specific
estimates of the effect of a lower level variable are modeled as a function of higher level
(group level) variables. Consistent with theory predicting that environmental conditions
influence the efficacy of competitive strategies on venture performance (McDougall
et al., 1992; Sandberg & Hofer, 1987), we modeled the relationship between strategic
growth actions and performance over time (level 1) as a function of industry munificence
(see model 4 in Tables 5 and 6). The results provide evidence that industry munificence
moderates the efficacy of R&D intensity and acquisition investment behaviors on venture
performance. To date, little theory has been developed that takes advantage of the crosslevel modeling capabilities in RCM. Beyond practical theoretical considerations, entrepreneurship scholars must also consider statistical power when designing RCM models to
account for cross level interactions. To detect cross-level interactions, some scholars
advocate a minimum of 30 groups and 30 observations within each group to achieve
sufficient power (e.g., Bedeian, Kemery, Mossholder, 1989; Tate, 1985; van der Leeden
& Busing, 1994). However, with a larger numbers of groups, smaller member sizes at the
lower level may still produce high levels of statistical power (Scherbaum & Ferreter, 2009).
The last step in specifying the model is to consider scaling (centering) of predictors.
Under various scaling options, an intercept term can assume a different meaning, which has
implications not only for interpretation of the intercept but also for the variance in the intercept term across groups and for the covariance of the intercept term with other parameters
(Hofmann & Gavin, 1998; Raudenbush & Bryk, 2002). As indicated previously, we considered three different scaling options and selected grand mean centering. Grand mean and
raw-metric approaches (no centering) yield equivalent models (Kreft et al., 1995) wherein
the variance in the intercept term (for example, at level 2) represents the adjusted between-
379
group variance in the dependent variable after controlling for lower level predictors. In our
example using grand mean centering, the variance in the intercept term over time represents
the within-venture variance in performance after controlling for strategic growth actions
and slack. Alternatively, in using group-mean centering, the level 1 intercept variance
reflects unadjusted between-group variance. In our example, the level 2 intercept would
merely reflect the within-venture (over time) variance in performance (without controlling
for the effects of strategic growth actions).
Conclusion
The purpose of this article has been to extend the discussion of RCM to an entrepreneurial context where levels and time jointly matter. Practically speaking, the use of RCM
allows for regression-like modeling of relationships at the firm-level alongside
regression-like models that describe how relationships vary among groups over time. Our
hope is that this demonstration will help make RCM more accessible to entrepreneurship
scholars and that RCM will increasingly help answer new and important questions about
entrepreneurs, the opportunities they pursue, and what contributes to their success.
Notes
1. Dependence stems from autocorrelation, which occurs when a variable measured at one point in time correlates with that same variable measured at a different point for a given observation and from contemporaneous
correlation, which occurs when observations are correlated because of some shared omitted factor such as group
membership (Beck & Katz, 1995). Both cause heteroscedasticity where the variances of correlated error terms
are not equal (Certo & Semadeni, 2006). Unless one models dependence in observations in the data analysis, it
can remain in the residuals and bias the resulting inferential statistics (Kenny & Judd, 1986).
2. Scholars also refer to RCM as hierarchical linear modeling, multilevel modeling, random coefficient
regression, and growth modeling (e.g., Bliese & Ployhart, 2002; Kreft & de Leeuw, 1998; Raudenbush & Bryk,
2002). Although discussions of RCM often associate RCM with multilevel analyses (e.g., Hofmann, Griffin, &
Gavin, 2000), RCM extends naturally to longitudinal designs (Bliese & Ployhart, 2002). For simplicity, we use
RCM throughout this article to refer to multilevel and longitudinal designs.
3. The distinction between random versus fixed effects is important in RCM (and multilevel) regression. A fixed effect is one in which the parameter estimate is assumed to be the same among observations across
groups and is therefore generalized to values of the predictor across a population (Littell et al., 2004). Fixed
effects have a predetermined set of values, such as gender for individuals or primary SIC industry code for firms.
By contrast, a random effect represents variance associated with differences in parameter estimates among
groups or over time for variables whose values are selected at random from a normal population of effects
(Cohen et al., 2003). For example, in a three-level mixed model, predictors specified at each level are assumed
to be fixed at the level specified (i.e., generalize only to level 1, level 2, or level 3), but intercepts and slopes
produced at levels 1 and 2 vary randomly among groups and over time. Because of the assumptions about their
error distributions, we call the variance of intercepts and slopes, respectively, random coefficients. A goal of
RCM, then, is to explain the variances in intercepts and slopes among groups modeled at one level using one
or more higher level predictors.
4. A complete list of the articles is available upon request, including data descriptions, operationalization of
key variables, estimation method, and treatment of nested structures and/or time.
5. Our notation pertaining to model-building using RCM also follows that of Singer (1998) and Snijders and
Bosker (1994) and is very closely related to that of Cohen et al. (2003) and Kreft and de Leeuw (1998).

6. Because most targets are not publicly traded, we use the price paid in the acquisition as a proxy for the
targets market value when the market value is not otherwise available. When the value of the acquisition is not
available, we use the book values of equity for both the target and the acquiring firm to estimate relative size.
7. Although prior work popularizes the analysis of the explained or modeled proportion of variance, we
encourage scholars to use caution when making such evaluations, especially when modeling random slopes for
predictors (Snijders & Bosker, 1994). This is because explained or modeled variance depends not only on the
regression coefficients and the residual variance but also on the variances and covariance of the predictor variables. In cases where group sizes differ, for example, it is possible for the addition of a predictor variable to the
model to increase rather than decrease variance components, which sometimes occurs in designs with differing
group sizes. This is especially true in instances when scholars estimate random slopes. For example, it is possible to add a significant predictor to an RCM equation and see a drop in variance accounted for in these
formulas.
8. Due to space constraints, we do not present the equations used to model the cross-level interactions. A
copy is available upon request from the authors.
9. We excluded the interaction terms for the three firm-level predictors (slack, R&D intensity, and acquisition investment) and YEARijk from these equations to reduce the complexity of the model for illustrative purposes only. However, we did include the interaction terms in the PROC MIXED code (see Appendix) and
present the results for models containing the interaction terms in Table 5.
10. We limit our description of SAS programming and PROC MIXED procedural options to the scope of our
illustration. For a more complete explanation of the PROC MIXED procedure, its syntax, and additional options
that are available, see Littell et al. (2004) and the PROC MIXED documentation from SAS (SAS Institute,
2001).
Appendix
Sample SAS PROC MIXED Syntax
The following contains the SAS PROC MIXED procedural syntax for specifying the equations
described in Steps 15.
Step 1Estimating Equations 1a1c

In Step 1, we fit an unconditional means model without effects at any level represented in Equations 1a1c. This model uses the three levels of analysis specified in the mixed model to represent
individual changes in post-IPO performance for ventures (level 1), the variation in performance
change parameters between ventures within an industry (level 2), and the variation between industries (level 3). This leads to the following specification in PROC MIXED:
proc mixed dataIPO_DATA methodml noclprint covtest;
class FIRM INDUSTRY;
model PERFORMANCE / solution ddfmbw;
random intercept
/ subjectINDUSTRY typeun;
random intercept
/ subjectFIRM(INDUSTRY)
typeun;
run;
The METHOD ML option on the PROC MIXED statement specifies maximum likelihood estimation. The NOCLPRINT suppresses printing of CLASS level information. The COVTEST option
produces the hypotheses tests for whether the variance and covariance components differ from zero.
381
The CLASS statement indicates that FIRM (a unique six-digit firm identifier) and INDUSTRY (a
unique four-digit SIC code for each industry segment) are the grouping variables. The MODEL statement indicates that PERFORMANCE is the dependent variable, which we run separately for
employment growth and ROA; any fixed effects are listed to the right of the equal sign (). The
SOLUTION option tells SAS to print the fixed effects estimates. The DDFM BW option instructs
SAS to use the between/within method for computing the denominator degrees of freedom for
tests of fixed effects. Finally, RANDOM statements indicate the random effects to be modeled at
each level. By default, there is always at least one random effect for each RANDOM statement. The
SUBJECT option on each RANDOM statement specifies the multilevel structure, indicating how
nested units are divided into higher ordered units in the hierarchy. In this analyses, the SUBJECT
option indicates that the data set is composed of a set of different groups. Groups are assumed to
be independent of each other; hence, the SUBJECT ID command indicates that the variance
covariance matrix for the random effects is to be block diagonal, with identical blocks.
The TYPE option specifies the structure of these diagonal blocks. Specifying TYPE UN indicates that you would like to treat the variance-covariance matrix for the intercepts and slopes as
unstructured, with a separate variance (or covariance) component for each of the elements. The
unstructured option indicates that you would not like to place any structure on the variances for intercepts and variances for slopes and that you would not like to impose any structure on the covariance
between these two either. As we explain, many different error-covariance structures are possible and
a detailed discussion of the alternative structures is beyond the scope of this paper. For more
information about different treatments of the covariance structure of the R matrix in SAS,
scholars are encouraged to refer to Littell et al. (2004, pp. 92-102) and Wolfinger (1996). For the
within-industry level (level 2), this effect is the residual from the level 1 model, eijk. For level 3, the
default effect is the residual from the within-industry level (level 2), rijk. By specifying the INTERCEPT on the RANDOM statement, we are indicating the presence of a second random effect. As
illustrated by Equation 4a, the unconditional means model has no predictor, but it does have an intercept, which PROC MIXED includes in the MODEL statement by default.10
Step 2Estimating Equations 2a2e

Estimating the linear model with a random slope for YEAR, the PROC MIXED syntax is:
model PERFORMANCE YEAR / solution ddfmbw notest;
random intercept
random intercept
typeun;
run;
In this syntax, YEAR is a simple count measure representing successive years corresponding to
1997 to 2001. We centered this variable, which allowed us to interpret the intercept as an average
level of performance (see Bliese & Ployhart, 2002). Again, by modeling a randomly varying linear
trend for YEAR, we test the extent to which the variation in performance is due to differences in the
trajectories (slopes) of individual ventures.
Step 3Estimating Equations 3a3e
The PROC MIXED syntax for a linear change model with random effects at three levels of analysis is as follows:
model PERFORMANCE YEAR / solution ddfmbw notest;
random intercept YEAR
random interceptYEAR
typeun;
run;
The linear change rates for the firm and industry levels enter the model following the
RANDOM statements for SUBJECT FIRM(INDUSTRY) and SUBJECT INDUSTRY,
respectively.
Step 4Estimating Equations 4a4j

In Step 4, we added the level 2 (between ventures nested within industries) effects for the two
strategic growth actions (and slack) in the model by adding the terms following the RANDOM statement for SUBJECT FIRM(INDUSTRY). Fixed effects for the two strategic actions and the firm
controls (firm size and resource slack) enter the model following the MODEL statement. This produced the following PROC MIXED syntax:
model PERFORMANCE YEAR
LN_SALES
SLACK
RD_INTENSE
ACQ_INVEST
/ solution ddfmbw notest;
random intercept YEAR / subjectINDUSTRY typeun;
SLACK
RD_INTENSE
ACQ_INVEST
/ subjectFIRM(INDUSTRY) typeun;
run;
With the PROC MIXED procedure, scholars can specify interaction terms by adding an asterisk
(*) between the terms. Adding the interaction terms to assess the moderating effects of the two strategic growth actions and resource slack over time produces the following syntax, which we use to
model the cross-level effects in Step 4b.
LN_SALES
SLACK
RD_INTENSE
383
ACQ_INVEST
SLACK*YEAR
RD_INTENSE*YEAR
ACQ_INVEST*YEAR
random intercept YEAR / subjectINDUSTRY typeun;
SLACK
RD_INTENSE
ACQ_INVEST
run;
Step 5Estimating Equations 5a5l

In the final step (Step 5), we added our level 3 effect (industry munificence) and the
cross level interactions between-industry munificence, our two strategic growth actions,
and slack with the linear change rate. To do so, we used the following syntax in PROC
MIXED:
LN_SALES
SLACK
RD_INTENSE
ACQ_INVEST
IND_MUNIFICENCE
SLACK*YEAR
RD_INTENSE*YEAR
ACQ_INVEST*YEAR
IND_MUNIFICENCE*SLACK*YEAR
IND_MUNIFICENCE*RD_INTENSE*YEAR
IND_MUNIFICENCE*ACQ_INVEST*YEAR
random intercept
YEAR
IND_MUNIFICENCE
random intercept
YEAR
SLACK
RD_INTENSE
ACQ_INVEST
run;
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Tim R. Holcomb (Ph.D., Texas A&M University) is an assistant professor of strategic management and entrepreneurship in the Department of Management and faculty member in the Jim Moran Institute for Global Entrepreneurship at Florida State University. His research focuses on multilevel determinants of performance,
resource-based theory, new venture performance and growth, and initial public offerings (IPOs) and has
appeared in Strategic Management Journal, Journal of Management, Entrepreneurship: Theory & Practice,
Journal of Business Research, and Journal of Operations Management.
James G. Combs (Ph.D., Louisiana State University) is a Jim Moran Professor of Management and Executive
Director of the Jim Moran Institute for Global Entrepreneurship at Florida State University. His research interests are primarily in the areas of franchising, research synthesis, and corporate governance. His research appears
in journals such as the Academy of Management Journal, Strategic Management Journal, Journal of Management, Journal of Business Venturing, and Entrepreneurship: Theory & Practice.
David G. Sirmon (Ph.D., Arizona State University) is an assistant professor of management in the Mays
School of Business at Texas A&M University. His research, which focuses on resource management, firm governance, family business, and strategic entrepreneurship, has appeared in journals such as Academy of Management Journal, Academy of Management Review, Strategic Management Journal, Journal of International
Business, Journal of Management, and Entrepreneurship: Theory & Practice, among others.
Jennifer C. Sexton is a doctoral candidate in strategic management at Florida State University. Her research
interests include innovation, strategic leadership, knowledge-based perspectives, entrepreneurship, and merger
and acquisition integration.

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Organizational Research

Modeling Levels and Time in Entrepreneurship Research: An Illustration With Growth

The Research Methods Division of The Academy of Management

>> Version of Record - Mar 18, 2010

Modeling Levels and Time in

An Illustration With Growth Strategies and

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The Case for Modeling Levels and Time in Entrepreneurship Research

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several theoretical perspectives within entrepreneurship that offer explanations as to why

Model Building Using RCM

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An Illustration of Levels and Time Effects on Post-IPO Performance

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JDA Software Group

Note: ROA return-on-assets.

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Model Specification and Estimation

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Average initial employment growth, g000

Level 1 (within firm over time)

Model Fit Statistics

Results for Venture ROA

Average initial return on assets, g000

Temporal variation (within-firm variation in ROA

Variance Decomposition (by Level)

Level 1 (within firm over time)

Model Fit Statistics

*** p < .001;

362 Organizational Research Methods

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s2 tp tb unconditional means model ).7

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Holcomb et al. / Modeling Levels and Time In Entrepreneurship Research

Average initial employment growth, g000

Total variance explained by year effects

Results for Venture ROA

Average initial return on assets, g000

Total variance explained by year effects

*** p < .001;

364 Organizational Research Methods

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p1jk b10k r1jk