Effect of Managerial Compensation and Ability on the Relationship between Business Strategy and Firm Value: For Small and Medium-Sized Enterprises (SMEs)

Abstract

This study examines the effect of managerial ability and compensation on the relationship between business strategy and firm value for small and medium-sized enterprises (SMEs). Managers determine, plan, implement, and maintain a firm’s business strategy. Therefore, the characteristics of a manager are an important factor in the selection and success of a business strategy. We believe that managerial abilities are important factors in determining that success. If the managerial ability is good, the manager is more likely to implement a strategy suitable for the firm, significantly affecting the firm’s value. Managers are also more motivated to work harder if their compensation level is high. Therefore, the manager will make efforts to successfully lead the firm’s business strategy. In small and medium-sized enterprises (SMEs), the role of managers is important for carrying out strategies due to the lack of internal resources and difficulties in external funding. Therefore, we examine whether managerial ability and compensation affect the relationship between business strategy and firm value for SMEs. The analysis period is from 2011 to 2017, and the analysis was based on 1615 (firm/year), due to some of the listed SMEs being non-financial businesses with a December settlement of accounts. As a result of the analysis, managerial compensation and ability demonstrated different effects depending on the type of strategy, in terms of the relationship between business strategy and firm value. We suggest that managerial ability and compensation affect the value of a firm and moderate the relationship between business strategy and firm value.

1. Introduction

The manager of a business guides strategic decision-making and even plays the role of planning, directing, and controlling its future [1]. The characteristics of managers are important factors that determine the value of a firm in a continuously changing market environment and in global competition [2,3,4]. Therefore, the characteristics of managers can affect a firm’s value, investment activities, and strategies.

In prior studies on the characteristics of managers, researchers were interested in the importance of managerial ability [5,6,7,8]. Demerjian et al. [9,10] measured managerial ability using data envelopment analysis (DEA). The study suggested that the better a staff member’s managerial ability, the better his or her ability to predict the future. They also argued that the better the managerial ability, the higher the understanding of business trends or economic situations. In addition, they suggested that a manager with excellent managerial ability adopts an investment plan that can maximize a firm’s net present value and has a positive effect on growth, sustainability, future performance, and firm value. A prior study analyzed the relationship between managerial compensation and business performance or value in small and medium-sized enterprises in Korea around 2010. The study reported that managerial compensation did not increase business performance. However, according to the corporate governance structure, there was a difference in the relationship between managerial compensation and corporate value [11,12]. In addition, the managerial competency hypothesis holds that the higher the manager’s reward, the more advantageous it is to secure managers with competence and good reputations. The role of managerial compensation is as a way to motivate companies to solve the agency problem and maximize the wealth of shareholders. Therefore, if the managerial compensation is decided by systematically and rationally measuring his or her ability or activity, the manager will be able to efficiently invest in the firm and seek ways to increase the firm’s value [13].

In the relationship between business strategy and firm value, managerial ability and compensation activities require efforts for sustainability and growth. To this end, managers should establish, plan, implement, and control business strategies while appropriately reflecting the firm’s internal characteristics and external environment [14,15]. Managers can establish business strategies and significantly influence their outcomes [16,17].

In terms of these business strategies, studies in the field of accounting classify strategies by using the financial characteristics of the firm and verify the relationship between strategy and firm value, the cost of capital, corporative performance, financial characteristics, and management transparency [18,19,20,21,22,23,24,25,26,27,28,29]. Studies in this field generally analyzed the level or characteristics from various perspectives on the firm’s business strategy [30].

Miles and Snow [31] divided business strategy into a prospector strategy and a defender strategy. A prospector strategy is typified by a firm that actively invests in new businesses that have no competitors, such as developing new products and pioneering new markets. However, a defender strategy is a method of gaining a competitive advantage through cost reduction; this is the opposite of a forward-looking strategy [32,33,34,35,36,37,38,39,40,41,42,43,44]. Establishing a business strategy suitable for each firm can impact continuous performance and value. From the late 2000s to the present day in Korea, the strategy of SMEs has been shown to have an important influence on corporate performance and value [45,46].

Business strategy is one of the major decision-making components of a firm. These decisions affect the firm’s future goals, vision, business plan, investments, and resource allocation, both in its entirety and organizationally. Therefore, managerial ability is related to the firm’s internal core competencies, macroeconomic conditions, competitive strength, future forecasting abilities, and business understanding in establishing business strategies [47]. The abilities of managers and the establishment of appropriate business strategies enable positive corporate value to be expected. Additionally, if managerial compensation is related to managerial competence, an appropriate compensation contract solves the agency’s problem. It can be explained that this aspect contributes positively to firm value because it can be an incentive for managers to improve corporate short- and long-term performance [38,48]. Therefore, this study examines whether managerial compensation and ability have a differentiated effect on the business strategy and the success of a firm.

In this study, we analyze the effect of managerial compensation on the relationship between business strategy and firm value by classifying firms according to those with a high level of managerial ability and those with a low level of managerial ability. If managerial compensation is not an absolute factor in managerial ability, additional verification is needed to determine whether managerial compensation affects firm value through business strategies. Therefore, this study aimed to examine whether managerial compensation and ability affect the firm’s value among other managerial characteristics. In addition, this study can be considered meaningful in considering managerial characteristics as an important variable by expanding the literature on business strategy. The characteristics of managers who establish appropriate business strategies for a firm and impact the firm’s success can have a significant impact on the economic performance of a firm [16,17]. Therefore, as a factor in managerial strategies that can affect firm value, the characteristics of the firm’s level and economic environment and the characteristics of managers can play an important role [5]. Among these managerial characteristics, this study aims to seek a successful business strategy that can increase firm value through managerial compensation and managerial ability.

2. Literature Review and Research Hypotheses

2.1. Literature Review

2.1.1. Managerial Compensation

Executive compensation determines the size of remuneration based on firm value and performance. Managerial compensation can be a system that secures competent managers and induces corporations to motivate them [49,50,51]. The types of compensation can be broadly divided into fixed compensation, a basic salary that can be viewed as salary and privileges, bonuses, variable compensation, and profit distribution, and can be divided into various employment statuses, such as promotion and retirement.

In relation to such managerial compensation, Rose and Shepard [13] explain it using the managerial ability hypothesis or the managerial entrenchment hypothesis. In terms of the manager’s ability hypothesis, a manager’s high reward reflects that manager’s ability; the manager’s reward will increase future performance and have a positive effect on firm value [35,38,52]. However, the managerial entrenchment hypothesis is that managers focus only on their own rewards and business and concentrate on related things, so the overall firm value may decrease; this will manifest as opportunistic behavior, which will negatively affect the firm value due to overinvestment and agency problems. Koh and Jeong [53] tried to verify the relationship between managerial compensation and manager competency. In prior studies, this was used as a surrogate variable for managerial ability in consideration of individual characteristics and intrinsic effects. The managerial competency used in this study was proved by measuring the residuals that controlled the firm characteristics, from the input of resources to the output of performance. Song [54] emphasized the importance of the managerial compensation effect as an incentive policy to solve the manager’s agency problem and increase the firm’s value. Above all, the managerial compensation policy was proposed as an indicator to alleviate the agency problem caused by the manager’s discretion and to increase shareholder value. In addition, it is important to select an efficient method that strengthens the management’s monitoring activities and grants performance-related rewards [55]. Park and Lee [56] argued that the relationship between accounting choices and managerial compensation was a conflicting one. In the study, if the performance level is high, the manager will have higher target earnings, and there is the possibility that future performance may decrease due to the accrual amount, so unreasonable earnings management will not occur. As a result of the analysis, there was a positive (+) correlation with managerial compensation in the positive (+) discretionary accruals. Conversely, it was difficult to verify the relationship with managerial compensation in the negative (−) discretionary accruals. In addition, since operating cash flow is closely related to managerial compensation, these results will differ from those of managerial compensation, depending on the firm’s circumstances.

Kim [57] defined managerial compensation as a system implemented for the purpose of securing excellent managers and enhancing motivation, the ultimate goal of which is to enhance firm value. This study can be divided into several parts, comprising the compensation of managers, the determinants of compensation, the situation or result of the compensation, and the compensation mechanism. The important factors that determine compensation are performance, behavior, size, and individual competency or role; the compensation mechanism can be explained by focusing on governance, the board of directors, a controlled market, and the general public. Lastly, the compensation situation and results were presented in terms of business strategy, the growth potential of the R & D market, industry, national culture, and the tax system. Although the domestic managerial compensation system is highly regulated, this suggests that it may be difficult to find evidence for the relationship between compensation and long-term performance or firm value due to the fact that remuneration is not directly related to business performance and the disclosure is transparent. Kim [58] found that, in Korea, the remuneration of family executives is much higher than that of professional managers, and individual remuneration is often not announced unless it is for a registered executive who receives a total remuneration of KRW 500 million or more. He also suggested that it may be difficult to properly evaluate performance and remuneration, as the disclosures include total remuneration, other income, earned income, and retirement income. It was also suggested that it is necessary to regulate this as a matter needing agreement from the board of directors so that the manager or the controlling shareholder cannot temporarily decide the pay of executives; it is also necessary to set a lower limit than the current regulations allow by setting a lower limit on the establishment of a compensation committee for corporations over a certain size. Oh [51] stated that managerial compensation offers a means to secure excellent managers and is a motivation and incentive to maximize shareholder wealth and firm value. In a situation where the employment of professional managers from owner-managers is gradually increasing, the importance of compensation for managers has been emphasized [59]. However, due to information asymmetry and adverse selection problems, it was suggested that there is a possibility of opportunistic behavior and that the business value can be reduced through unethical behavior without the manager doing their best, due to moral dilemmas. If the management’s efforts are limited in providing all information, and if the clear proposition of performance creation is not resolved, it will be difficult to create firm value in connection with continuous growth and performance creation or future business performance that is limited to short-term performance. In terms of their own compensation, the manager in question suggested that the overall firm value could be reduced by limiting remuneration according to the present performance or business rating rather than future performance.

Park [60] shows that in the case of Korean firms, they exhibit the characteristics of a fixed salary regardless of performance level, in the form of a basic salary and bonuses. In the case of executives’ year-end bonuses, the overall compensation came out at an average level. In addition, even if some compensation programs are related to earnings management, there will be situations where it is difficult to connect with the strategy of the business unit or the performance of the organization as a compensation system focused on short-term performance. In order for Korean managers to do their best in their work, appropriate compensation for authority is required. With this compensation system, firms can not only engage excellent managers but also prevent them from leaving the company. Korean managerial compensation programs have limitations that mean it is difficult to motivate managers. It can be difficult to solve the agency problem due to the separation of ownership and management, which is their basic purpose.

In order to solve the agency problem, it seems that an appropriate compensation system is needed so that the manager can make decisions and perform actions that maximize the future performance of the firm and increase the wealth of shareholders [48,55,61]. Lee [62] argued that the separation of ownership and management can lead to a decision that reduces the wealth of shareholders if the purpose of management is to maximize private interests. The determinants of managerial compensation include task complexity, solvency, and managerial ability [63]. Gaver and Gaver [64] observed that growth potential, workload, and management risk are also factors that determine managerial compensation, but information asymmetry is also highly related to the level of managerial compensation. In other words, when information asymmetry is high, it is possible to focus on the compensation level of the manager him- or herself, rather than using the manager’s performance or value creation, due to the agency problem caused by the high level of information asymmetry. Being an incentive for managers to seek only high rewards, it negatively affects the entire firm as a result of unbalanced input activities that involve only compensation. Overinvestment in a firm’s reputation or career can increase rewards but will reduce the firm’s value. In particular, managers will distort the firm’s values for their own benefit [65] or trigger management transparency, such as profit management [66,67]. Considering this, the managerial compensation system can be an incentive for managers to reduce agency problems with shareholders and maximize firm value. In addition, such a system can make a positive contribution to the value of the firm according to the manager’s ability or motivation. On the other hand, managerial compensation appears to be an opportunistic behavior that may result in an imbalance in the overall investment activity. Therefore, even if the manager’s ability is excellent, if the manager focuses only on performance related to compensation, the manager’s pay grade may have a negative effect on the long-term or overall firm value. In addition, the managerial compensation system is focused on short-term performance, and it is clear that there are difficulties to address in connection with firm value due to the unclear disclosure system.

These previous studies explain the relationship between managerial compensation and firm value [48,55,61,65,66,67]. The results of empirical analysis on the relationship between manager compensation and firm value in prior studies can be summarized as follows. It was suggested that the manager’s compensation rate has a significant positive (+) firm value. Park and Shin [68] found that managerial compensation has a significant positive (+) effect on firm value. In this study, tax evasion was regarded as a proxy for the opportunistic behavior of managers or opaque management status. Therefore, it was found that the manager’s tendency to avoid tax bills decreases the relationship between the manager’s compensation and firm value. These results prove that if the agency problem of the manager’s compensation is resolved, the manager’s compensation becomes an important factor in increasing corporate value due to motivation. Song [69] also found that managerial compensation had a positive (+) effect on firm value. This study found that managerial compensation affects firm value, and the same results were found in firms with high risk.

2.1.2. Managerial Ability

A firm’s managerial ability is viewed as a major intangible resource that dictates future performance or affects firm value [6]. This managerial ability is moving in a new research direction due to the managerial ability measurement suggested by Demerjian et al. [9]. First, Hambrick and Snow [33] defined strategic leadership as “ultimately predicting organizational performance by revealing the psychological and observable demographic characteristics of executives and understanding the business performance”. The management of the firm is responsible for the performance of the entire firm, and the decisions and actions of the entire management team affect not only the performance of the firm but also the reputation of the firm, so it is very important to understand the behavior and roles of management. Research on manager fixed effects is representative of the evidence that managers have an effect on business performance. Lieberman et al. [70] suggested that the effect of managerial characteristics affects the productivity of the industry, focusing on the automobile industry in the United States and Japan. Bertrand and Schoar [71] showed that the manager’s character affects decision-making in investment and financial matters, such as research and development (R & D) and merger and acquisition (M & A). This study revealed that the data on the effect of managerial characteristics on the total return on assets (ROA) was divided into quartiles, and the level of the ROA of managers increased (decreased) by 3% in the upper (lower) quintile.

Graham et al. [7] reported the results of a study showing that the manager’s intrinsic qualities, such as the manager’s work experience or gender and education level, establish managerial compensation. However, it is difficult to empirically analyze the effect of the manager’s intrinsic qualities; this is a very rare situation in the Korean business environment because it occurs when a person transfers to another firm and performs a role as a manager. Baik et al. [72] used media exposure, industry-adjusted total asset returns, and efficiency scores through modified data envelopment analysis to measure the manager’s ability to determine the direction and frequency of earnings forecasts, and it was found to increase. In addition, the results of the study showed that the forecasts of managers with high managerial abilities are more accurate than those of managers with low abilities and that the market responds more quickly to the disclosure of the earnings forecasts of managers with excellent abilities.

Demerjian et al. [10] conducted a study to quantify managerial ability using a new measurement method and validation test that they developed. Managers with high levels of ability were expected to generate maximum profit with limited resources from the firm or to minimize the input of resources to increase value and future performance. In this study, managerial ability was measured via a two-step method. In the first step, the efficiency scores of individual firms that generated profits within the same industry were generated using data envelopment analysis. In the second step, factors unique to individual firms that may affect the manager’s ability to succeed were removed from the firm’s efficiency measurement through Tobit regression analysis, then the residuals were defined as the manager’s ability value. As a result of this analysis, the new standard is highly related to the characteristic effect of managers. It was found that the new criterion was significantly correlated with whether the stock price response to manager replacement was also positive or negative when evaluating the manager’s ability as low or high. After, Demerjian et al. [10] analyzed the relationship between managerial ability and profit quality by using efficiency through data envelopment analysis, modifying previously published data [9]. As a result of analyzing the relationship between managerial ability and profit quality, a positive relationship was found.

Using the method proposed by Demerjian et al. [10], research on managerial ability is being conducted in Korea as well. Ko et al. [73] analyzed the relationship between managerial ability and business performance, according to the research method developed by Demerjian et al. [10]. As a result of this analysis, it was found that managerial ability and business performance had a significant positive (+) effect. Demerjian et al. [10] found that, as a result of analyzing the relationship between managerial ability proxies and business performance, the results of the Tobin Q, ROA, and operating cash flow, which were adjusted for managerial ability and industry, all showed a statistically positive effect on the results. The manager’s ability and historical stock returns, assessed using the data envelopment analysis method, were defined in terms of efficiency as the managerial ability value by removing individual firms’ characteristic factors that affect each firm’s efficiency. This is a study that showed the relationship between the measurement of managerial ability and business performance, which expanded the analysis target by extending it from measuring the efficiency of a single firm using data envelopment analysis to all industries through empirical analysis.

Park [74] analyzed the relationship between managerial ability and the downward rigidity of cost through a two-step data envelopment analysis. As a result, it was confirmed that the downward rigidity of selling and administrative expenses (the price that should have been reduced does not decrease) has a positive (+) relationship with managerial ability. This means that managers have the ability and the possibility to choose different management strategies according to their abilities.

Ko et al. [75] suggested that the higher the managerial ability, the lower the firm’s intrinsic cost of equity capital. These results show that the higher the manager’s ability, the lower the cost of intrinsic capital required by reducing the uncertainty of external stakeholders about future business performance and cash flow. Further analysis showed a significant negative relationship between managerial ability and the implied cost of equity in the group, with low information asymmetry. In the group with high information asymmetry, this relationship could not be proved. These results can be interpreted that information asymmetry plays an important role in the relationship between managerial ability and the cost of equity capital.

Ko [76] analyzed the relationship between managerial ability, tax evasion, and firm value using a sample of non-financial corporations listed on the stock market, with a December settlement date, from 1999 to 2011. To measure managerial ability, the research method of Demerjian et al. [9] was used. Tax avoidance was measured using the discretion of the difference between accounting profit and tax profit [77]. As a result of empirical analysis, it was found that the better the managerial ability, the less there was tax avoidance behavior, while the efficient use of limited resources to produce the maximum profit would increase the value of the firm. Therefore, it is suggested that managerial ability can play a role in increasing firm value by reducing tax avoidance. Ko and Park [3] argued that managerial ability would reduce tax avoidance, a form of opportunistic behavior, and increase company value by efficiently utilizing limited resources.

Koester et al. [8] show that effective firm value has the potential to reduce costs and provide positive returns on investment. In other words, managerial ability can be viewed as the ability to efficiently manage the firm’s resources. Lee and Choi [78] modified the methodology devised by Demerjian et al. [9] to suit the situation of domestic financial institutions. The effect of managerial ability in a financial institution on the institution’s operating performance was analyzed and identified through empirical studies. These analyses were used to determine whether managers with outstanding abilities achieve high operating performance through the strategy of increasing the size of the bank and diversifying the bank’s revenue sources. Their research results can be summarized as follows. The ability of financial institution managers was found to have a significant positive (+) relationship with the financial institution’s performance. Through empirical analysis, it was proved that the strategy of expanding financial institutions and diversifying income sources affects the positive (+) relationship between financial institution managerial abilities and performance.

Koh and Jeong [53] conducted an empirical analysis on the relationship between managerial ability and compensation for listed companies, with a December settlement of accounts, representing non-financial businesses from 2002 to 2013. For measuring managerial ability, the method of Demerjian et al. [9] used a numerical value obtained by separating and removing the individual characteristics of a firm to establish the efficiency of a firm. The manager’s compensation was limited to cash compensation, and the manager’s compensation was measured as the average value of the total compensation amount of the entire management. As a result of this analysis, it was found that the coefficiency of managerial ability had a significant positive (+) relationship with managerial compensation. Statistically, the result identified an increase in managerial compensation. In addition, the result of analyzing the effect of the manager’s own stock ownership on the relationship between the manager’s ability and their compensation showed a statistically significant negative (−) relationship. It is clear that the level of compensation for managers increased as the managerial ability increased and decreased when the manager acquires treasury stock.

Lee and Lee [79] empirically analyzed the relationship between managerial ability and a firm’s financial and credit ratings using a sample of listed corporations from 2000 to 2012, according to the method suggested by Demerjian et al. [9]. They determined the level of maximal earnings by utilizing the firm’s resources as a marker of management efficiency and thereby measured the manager’s ability. The empirical analytical results are as follows. The sample with high managerial ability was confirmed to have high financial ratings. In addition, it was found that managerial ability had a significant positive (+) effect on the firm’s creditworthiness. It is suggested that the ability of a person to effectively communicate the firm’s value to external investors is related to the active disclosure of information. Therefore, managerial ability was interpreted as an important factor in reducing risks due to business uncertainty and increasing creditworthiness. Park et al. [80] observed that managerial ability also affects business investment decision-making and managerial ability has a positive effect on investment efficiency. Kang and Kim [81] set firm value as a long-term business performance measure and accounting earnings as a short-term performance measure, using them as dependent variables, and analyzed the relationship between the capabilities of the managers in the chaebol(a large family-owned business conglomerate) group and the long-term and short-term performance of the firm. As a result of that analysis, the study showed that managerial ability had a significant positive (+) effect on short-term and long-term performance. Conglomerates improved their firm value, which represents the long-term performance of management abilities, compared to general corporations. On the other hand, it was confirmed that in the chaebol group, the short-term performance of managerial ability decreased accounting earnings. It has been reported that the ability of managers of the chaebol group has a positive effect on value, which is mainly seen in long-term performance. The structural characteristics of the chaebol group were viewed as focusing one’s abilities on long-term company performance rather than short-term accounting earnings. Cho and Kang [82] expanded the results of previous studies in this field and analyzed whether managerial ability affects business performance according to the quality of accounting information and the intensity of competition. When the quality of accounting information and the intensity of competition were high, it was verified that the manager’s ability further increased the firm’s performance. In particular, in the case of small and medium-sized enterprises (SMEs) that are highly dependent on individuals, managerial ability was found to be greater in enhancing company performance.

These research results suggest that managerial ability is an important factor related to firm value and future performance and that excellent managers will increase efficiency and make a positive contribution to performance or firm value [74,75,76,82,83]. In the current study, the effect of managerial ability on firm value is demonstrated using the managerial ability measurement method of Demerjian et al. [9].

It was found that managerial ability has a significant positive (+) effect on corporate value by increasing efficiency and creating a good performance in business activities [6,75,79]. However, this analytical result cannot be regarded as evidencing a direct relationship between managerial ability and corporate value. Hwang [84] empirically analyzed managerial ability and corporate value. As a result of the empirical analysis of Korean companies, this study explained that managerial ability was a variable that decreased corporate value. It was argued that managers with superior ability did not maximize shareholders’ profits through their efforts to pursue private profits. However, these results are difficult to generalize, and additional analysis considering other variables is likely to be necessary.

2.1.3. Conceptual Arrangement and Research of Business Strategy

Strategy has always been used as a military term but was extended to the field of management in the 1950s. A strategy refers to an action or plan that integrates major goals, policies, and action programs within an organization [85]. Chandler [86] defined it as “determining the long-term goals and objectives of a firm, determining the direction of action to achieve these goals, and allocating firm resources”. Ansoff [87] stated that “business strategy is mainly an external problem of a firm, and it is the decision of product and market structure to adapt the firm as a whole to changes in the external environment”. A firm needs a strategy suitable for each situation to achieve its goals in a successful business environment. A business strategy must overcome competition within a particular product, service market, or market environment in order to achieve the objectives set by the firm. Business strategy is an important decision-making stage that allows a company to create and maintain a competitive advantage in the market environment by allocating limited management resources.

Porter [88] defined business strategy as a decision-making process to secure a competitive advantage in the market and to select a specific competitive method. Securing a competitive advantage is regarded as the most important core concept of business strategy [89]. Day and Wensley [90] argued that in order for a firm to gain a competitive advantage in market competition, the resources and capabilities possessed by the firm must be the source, while a competitive advantage in the market environment appears as differentiation and cost advantage. Specific definitions of management strategies are presented in various ways, depending on the researcher’s point of view or research purpose.

Prahalad and Hamel [91] suggest that the role and ability of a manager to lead by integrating various resources possessed by a firm is important as a key factor for gaining an edge in market competition. Chandler [86] defined business strategy as the establishment of long-term goals for the pursuit of company profits, the determination of actions necessary to achieve the goals and the allocation of management resources.

Andrews [14] defined a plan or policy as a strategy for implementing a firm’s business goals and argued that business strategy is an important clue to determining whether a firm participates in a specific product or service business field and its competitiveness. Hambrick [92] defined the adaptation to the external business environment of a firm in a business strategy as an integrated form of the internal activities of a firm. Hatten and Hatten [93] argued that the process of setting goals for business activities and supervising the organization reflects business strategy. Mintzberg and Quinn [94] defined the form of continuous decision-making, reflecting the purpose of business activities, as a business strategy. This study included five concepts: plan, play, pattern, position, and perspective.

Types of management strategies are suggested according to the unique characteristics of the firm and the approach to the strategic goals set by the firm. Halt [95], Huff and Reger [96] et al. classified management strategies in a hierarchical structure according to the level of the analysis unit. The specific unit of analysis is a company strategy at the head office level, a business strategy at the sub-division level, and a functional strategy at the department or department level.

Halt [95] emphasized the importance of business strategy at the business unit level, which acts as a means to achieve the goals of the firm strategy located at the upper level among the above hierarchical types of strategy, and at the same time provided the direction for the strategy for each function located at the lower level. Miller [97] argued that the specific competitive strategies of business unit-level business strategy include innovation-based differentiation strategy, marketing differentiation strategy, market coverage strategy to increase market share, and cost-driven strategy. Huff and Reger [96] identified that a strategy with a hierarchical structure was constrained by a higher-level strategy for each strategy. It was argued that high-level strategy establishes a close relationship between each strategy by presenting a goal for setting low-level strategy.

Business strategy is a means of comprehensive business management and aims to efficiently maximize the firm’s profit. The overall decision-making process of a firm can affect the firm’s performance. Lee [98] and Seo [99] argued that strategic differences have a significant effect on management performance, observed as financial and non-financial performance. Gong [100] conducted an empirical analysis of the effects of the four strategy types identified by Miles and Snow [31] on business performance and suggested that all strategies have a positive effect on business performance.

Wernerfelt [101] argued that a firm’s differentiated resources and capabilities are a major factor determining the relationship between business strategy and business performance, according to the resource-based theory, which is built by combining the unique resources and capabilities acquired over a long period of time. Grant [102] emphasized that a firm’s core competencies influence the firm’s performance by using a strategy to gain a competitive advantage. Lee and Kim [103] presented the results of an empirical analysis showing that the management strategies pursued by companies affect business performance, using the manufacturing industry as an example.

Kim et al. [104] asserted that a firm pursuing a differentiation strategy improves its financial performance by improving its non-financial performance. Although the business strategy pursued by a firm is generally recognized as a major factor in determining the business performance of a firm, the research results suggest that various types of strategies may have different effects on the business performance of a firm. In addition, Kim and Han [105] empirically revealed that the results of measuring and analyzing business performance by the growth stage of a firm, according to various types of management strategies, show significant differences in growth stages.

Shin [106] researched and analyzed the ways that business strategy affects business performance, according to the suitability of the budget system used for business management. As a result, companies pursuing a cost advantage strategy showed a high level of diagnostic use of the budget system, which had a positive effect on business performance. It was also argued that the differentiation strategy had a significant positive (+) effect on the business performance as the interaction was higher. Kim [107] examined the effect of strategic differences in organizational learning on management performance. No significant relationship was found between the cost advantage strategy and the diagnosis management system. On the other hand, the relationship between differentiation strategy and interaction management control system was found to be significant. It was argued that management performance could be improved in terms of cost and flexibility by inducing organizational learning through interaction.

Yoo [108] presented the correlation with profitability indicators as a result of the finding that in the correlation between the type of competitive strategy pursued by companies and management performance, it was reported that companies pursuing cost advantage strategies will value market share, and companies pursuing differentiation strategies have high competitiveness. Porter [88] argued that, among competitive strategies, a differentiation strategy contributes to the improvement of a firm’s profitability, but the market share may decrease because the burden of investment cost may be higher than that of a cost advantage strategy. In addition, Seon and Lee [109] empirically analyzed the influence of the determinants of management strategies for the management improvement of small business owners. Among them, it was found that a cost business strategy had an effect on business performance, but that a marketing differentiation strategy had no effect. However, it was argued that both the marketing differentiation strategy and the cost business strategy had a positive (+) effect on the firm’s business performance.

Choi et al. [110] presented the argument that a marketing differentiation strategy has a significant positive (+) effect on the performance of SMEs in a study on the performance of SMEs. Park et al. [111] argued that the differentiation strategy of small business owners had a positive effect on business performance, whereas the low-priced strategy had no significant effect.

In the field of accounting, research has been conducted in terms of capital cost, future performance, and qualitative aspects of accounting information by classifying them into prospector, defender, and analytical strategies recently suggested by Miles and Snow [31,39,40]. Bentley et al. [112] found that business strategy plays an important role in the relationship between managerial compensation and business performance. In the prospector strategy, non-financial information has a more important influence on the value of a firm than financial information, such as for a new market or product. It is suggested that the prospector strategy causes agency problems, and that information asymmetry can be large. Houqe and Monem [113] found that, unlike in a prospector strategy, a defender strategy is under pressure from shareholders to create sustainable performance. As a result, the defender strategy is expected to have a higher probability of earnings management than the prospector strategy. In addition, since the prospector strategy affects the firm value due to non-financial information, such as growth potential and new product development, rather than financial factors, it is expected that this strategy will reduce opportunistic behavior through management earnings. In addition, Rhu et al. [39] observed that there would be a difference in the cost of capital, depending on the strategy of a firm. They suggested that the prospector strategy has a higher level of agency problems and information asymmetry than the defender strategy because company governance is more decentralized. Therefore, the cost of capital is also expected to be high, as the prospector strategy has a relatively high operating risk and is more likely to fall into financial trouble with growth. In addition, Choi et al. [40] show that the quality of accounting earnings is low, and the possibility of management earnings is high because the prospector strategy has high transparency of financial information, creates agency problems due to the decentralization of governance, and has high earnings volatility.

Previous studies in this field are insufficient to empirically analyze the relationship between business strategy and corporate value. We argue that several circumstances can provide a reason for the impact of a business strategy on a firm’s value. For example, strategic differences can affect corporate value from various perspectives, such as the cost of capital, information asymmetry, future excess earnings, performance, growth, governance, and accounting transparency [22,24,25,39,40,45,46,107,108,109,110]. Therefore, we intend to empirically analyze the relationship between management strategy and corporate value. We would also like to suggest that managerial ability and compensation could be important variables in this relationship.

2.2. Research Hypothesis

A firm’s business strategy is an important factor influencing investment activities, organizational structure, resource allocation, firm-wide goals, and vision [114]. Doo et al. [115] observed that the business life cycle and market competition as an economic environment in which firms are faced will have an important influence on business strategy among internal decision-making. It was analyzed that a business strategy suitable for such a business environment can increase management efficiency. Business strategy aims to efficiently maximize business performance as a means of comprehensive business management and can contribute to improving business performance through overall company decision-making.

Gong [100] presented evidence that business strategies affect company performance by classifying them into four types of strategies, as identified by Miles and Snow [31]. Seo [99] argued that business strategies, such as differentiation and cost advantage, had a significant effect on the observed management performance in terms of both financial and non-financial performance. Lee and Kim [103] presented the results of an empirical analysis, reporting that the business strategy pursued by a firm will directly affect business performance, using the manufacturing industry as an example. Grant [102] emphasized that a company’s performance is affected by a strategy that can gain a competitive advantage, based on the firm’s core competencies.

Rhu et al. [39,114] classified business strategies into prospector and defender types and suggested that there are differences in firm characteristics according to these strategies. First, the defender strategy focuses on creating continuous performance, but there are many substitutes, and the strategy is not differentiated, so it may be difficult to create future growth potential or extra profits. However, this strategy can increase management transparency due to a conservative accounting treatment and high quality of accounting information and may demonstrate lower information asymmetry or agency problems than prospector strategies. In addition, it was found that the defender strategy has a low cost of capital due to low uncertainty, such as new products and new market development [39]. On the other hand, the forward-looking strategy has no substitutes for items such as new products and can increase the firm value due to the creation of differentiated performance, but it may have a relatively high operating risk due to uncertainty [32,34,35,36,37,38].

These strategic differences basically reflect the growth level and characteristics of the firm, establish an appropriate strategy and divide it according to firm, business, and sector. Since these strategies are reflected in the characteristics of the firm, it is difficult to explain the difference in firm value using appropriate strategic differences.

Miles and Snow [31] found that in companies pursuing a prospector strategy, the manager has a lot of discretionary power so there is a variety of management choices. The managers of companies pursuing this strategy are rich in ideas, aggressive, innovative, willing to try new choices, and have no stereotypes in their actions. Therefore, these managers seek innovative growth from a long-term perspective, even if it involves risks, rather than short-term performance. However, managers with a tendency to pursue defender strategies pursue operational efficiency and focus on short-term performance rather than new investments, which may make it difficult to increase company value.

Park et al. [116] suggested that business strategies affect the future growth and sustainability of SMEs. In particular, if SMEs carry out a prospector strategy that is closely related to innovation or creation, the firm’s performance and value will increase. The reason for this is that SMEs are small and have a short maintenance period, so it is difficult to expect economies of scale or learning effects that can reduce costs. In particular, SMEs, unlike large firms, have difficulty maintaining stable and continuous performance and cannot make huge capital expenditures. Given the limited resources of these SMEs, a prospector strategy may be more appropriate than a defender strategy to increase the firm’s future growth potential or value. Therefore, SMEs can expect greater future growth potential and higher company value than defender strategies.

Hypothesis 1.

The prospector strategy will have a more positive (+) effect on the firm value than the defender strategy for SMEs.

A manager’s disposition, characteristics, and abilities play an important role in the long-term and short-term goals of a firm, investment decision-making, and financial operative soundness. In other words, managerial characteristics can be an important factor in determining firm value [13,71].

However, the separation of the ownership and management of a firm can lead to opportunistic behaviors to expand the manager’s private interests. In other words, managers can create agency problems that reduce the wealth of shareholders for their own benefit. This can suggest the need for a managerial compensation system that motivates high-quality managers and allows them to perform their duties voluntarily without causing moral dilemmas [17,50,51].

This managerial compensation system can be largely explained from two perspectives. It can be viewed as either the managerial competence hypothesis or the managerial vested interest hypothesis. Capable managers increase company value through efficient operation and performance creation, while managerial compensation can positively contribute to company value [117].

However, according to the vested interest hypothesis, managers are only interested in performance that is closely related to rewards and will distort business performance or engage in opportunistic behavior to ensure high rewards, which can lead to a decrease in company value due to management transparency or agency problems. However, excellent managers receiving high rewards may pursue investments, activities, and show self-confidence related to their reputation or career, and these behaviors may have a negative impact on firm value. In addition, it was believed that managers receiving a high level of compensation have great discretion, and this could lead to the distortion of information for their own personal gain and undermine the firm’s value through company investment activities [54].

Firms in Korea have different governance structures from other countries [58]. For Kim [54], the remuneration of family groups in Korean firms is higher than that of professional managers, and the content of the calculation standards and methods of the management’s remuneration is left to the firm’s discretion. Therefore, there is a lack of a reward system based on performance and there are many firms that do not have a reward system linked to business performance [60]. Firms also give incentives to managers at the end of the year, and the standards for determining the number of incentives are the same in most firms. Such managerial compensation can explain various relationships with company values in Korea, therefore, the following hypotheses can be established.

In this study, the effect of strategic differences on firm value is an important factor; among the characteristics of managers, managerial compensation can have a mediating or moderating effect. In particular, the level of compensation for managers plays a role in weakening the agency problem between shareholders and managers and enhancing the efficiency of investment activities [51], so business strategies are expected to affect company value. In addition, managers believe that there would be differences in basic risk propensity with shareholders [118]. If managers tend to avoid risk to maintain their position, shareholders are likely to disperse company assets and make risky priority investments [54]. An important factor that can motivate and induce managers to reduce agency problems between managers and shareholders is the compensation system [35]. Therefore, in order to pursue a strategy that maximizes the wealth of shareholders in decision-making in investment activities, the performance and compensation system of managers are expected to play an important role. The level of compensation of managers is expected to contribute to the creation of performance through an investment that maximizes shareholder value by allocating resources according to the strategy and implementing it according to the plan [50,51]. It may be suggested that business strategy positively contributes to firm value according to managerial compensation.

However, if a manager’s reward is opportunistic behavior that maximizes his/her private profit pursuit, it is difficult for the manager’s reward to be related to the increase in firm value due to the success of the business strategy. Therefore, it may be suggested that managerial compensation may have a positive but ultimately negative effect on the success of a business strategy.

In addition, the level of managerial compensation may have a negative effect on the firm value of a prospector strategy with a decentralized organization and a high level of information asymmetry, compared to a defender strategy. In other words, if managerial compensation causes agency problems as opportunistic behavior, if managerial compensation is high, the firm value of the prospector strategy will be lower than that of the defender strategy. In particular, since SMEs are closed and the level of information asymmetry is lower than that of large firms, this relationship will be more clearly demonstrated.

However, if managerial compensation is due to managerial ability, the level of managerial compensation will have a positive effect on business strategy and firm value and will contribute more positively to the company value of leading strategies that depend on non-financial performance indicators rather than the defensive strategies of a stable profit structure.

Hypothesis 2-1.

There will be differences in the relationship between business strategy and company value, according to the level of managerial compensation for SMEs.

Demerjian et al. [10] measured managerial ability using indicators based on efficiency. Such a manager’s ability can influence the business performance by predicting the future, based on an overall understanding of the business, allocating, and utilizing the firm’s resources. Choi and Yang [119] considered that in the case of competent managers, actual profit adjustment could reduce the positive effect on long-term performance, and the reason was that the level of profit adjustment through real activities would be low.

In addition, regarding the manager’s ability to take into account the opportunity cost for reputation, negative opportunistic behavior, such as profit management, is expected to decrease. Francis et al. [5] considered that competent managers value their reputation and that this reputation would have low incentives for policies that could lead to negative or private profit pursuit, management uncertainty, or proxy problems. Kim et al. [120] suggested that managerial ability will reduce the opportunistic pursuit of private interests, which will reduce agency problems and management capacity. In addition, managerial ability has a high value as a human resource, so it will create high performance by pursuing company efficiency. Therefore, it is suggested that managerial ability shows a difference in investment efficiency and that external industrial environments, such as the financial crisis, are an important factor in increasing investment efficiency, even in a downturn. Therefore, the ability of managers is expected to successfully lead the company’s business strategy because it can be an important intangible resource that positively contributes to the increase in the firm’s value [3,9].

In addition, Park et al. [111] verified the effect of business strategy on future performance and growth potential for unlisted SMEs. In the case of small and medium-sized enterprises with relatively small production and short life cycles, the exploration strategy was found to have a significant effect on future performance in the case of defensive business strategies. It was found that the prospector strategy had a significant effect on future performance rather than the defensive strategy. In this study, the effect was sustained for three years after the establishment of the strategy, and it was found that the prospector strategy, through new market development and new technology or new product development, continued to increase future performance. In addition, in the case of defensive strategies, there are limitations in that it is difficult for SMEs to connect with future performance unlike large companies, such as economies of scale and learning effects. In addition, Won and Rhu [28] show that the life cycle of a firm follows the stages of introduction, growth, maturity, and decline.

These studies provided evidence that the internal and external economic situation of a firm and its business strategy impact future performance. If an appropriate business strategy is selected for the firm by recognizing the characteristics of the firm or economic situation, it becomes an important factor to maintain the firm’s performance in the future [28,111,116].

Among the characteristics of managers, managerial ability includes the ability to understand the overall characteristics of the business, make good use of internal resources, and understand the overall industry flow, not only macroeconomic information but also the ability to analyze the business being pursued by the firm, and the ability to predict the future [1,10,13,71,121]. Therefore, if the manager has excellent capabilities, it is highly likely that they will establish a business strategy suitable for the company and choose an investment plan that maximizes net realizable value [47]. In addition, it is possible to achieve strategic success by effectively utilizing, deploying, and distributing the internal resources or capabilities of a firm [47]. In addition, excellent managers have a relatively low risk of failure due to good business understanding and forecasting ability [8], so management strategies will help to create business value.

Demerjian et al. [9,10], Francis et al. [30], Hwang et al. [84], etc., measured these managerial abilities based on the efficiency of output versus input. Creation or opportunistic factors are reduced, which can be seen as an important factor to increase management transparency. In addition, it is expected that firm value can be increased through the appropriate allocation and efficient use of resources, and performance will be created by selecting the optimal investment plan necessary for the firm, based on an accurate understanding of the inside and outside of the firm. Therefore, if the manager’s ability is excellent, it is possible to suggest the possibility of positively affecting the firm value by selecting a business strategy suitable for the firm.

In particular, if the manager’s ability is high, the prospector strategy has increased uncertainty, increased information asymmetry, agency problems, management transparency, and business risk. The negative aspects of these prospector strategies respond more strongly in SMEs. A defender strategy maintains consistent and stable performance generation, does not change much, and has a low level of risk, resulting in a low cost of capital. Therefore, the relationship between business strategy and firm value, according to the manager’s ability, will show a greater difference between the prospector strategy and the defender strategy among SMEs.

Hypothesis 2-2.

There will be differences in the relationship between business strategy and firm value according to managerial ability for SMEs.

The Korean firms’ managerial compensation system is not as systematic as in the United States, and it is difficult to positively identify contributions to long-term performance or company value by focusing only on short-term performance [51,57,60]. In addition, the compensation of managers is more general than the performance, and their compensation can have a negative or non-significant effect on the firm value as it leads to self-exaltation or opportunistic behavior. However, from the manager’s competency hypothesis point of view, the manager’s compensation is proportional to the manager’s ability, and such compensation is expected to make investment decisions that maximize wealth with shareholders. In addition, managerial ability can increase future performance and firm value through appropriate resource allocation, a good understanding of business, and excellent forecasting ability. Therefore, in this study, managerial compensation and firm value can have a positive (+) effect in a group with high managerial ability. In a group with low managerial ability, it is difficult for high managerial remuneration to have a positive effect on firm value.

If the level of managerial compensation is formed according to the manager’s ability, the relationship between business strategy and firm value may be positive according to the managerial compensation. It is difficult to say that the level of compensation for managers, which is not related to the manager’s ability, is not superior to the ability to establish and execute a business strategy considering the appropriate investment, characteristics, and circumstances of the firm. Therefore, managerial compensation does not affect the firm value, or there are opportunistic behaviors, based on the vested interest hypothesis or moral behaviors pursuing private interests, that may negatively affect company value. Therefore, the following hypotheses were established.

Hypothesis 3.

There will be differences in the impact of a manager’s remuneration, according to that manager’s ability, on the relationship between business strategy and firm value for SMEs.

3. Research Design and Sample Selection

3.1. Empirical Models

We constructed Equation (1) to analyze the effect of business strategy on firm value, and if the regression coefficients a₁ and a₂ significantly appear, it is likely that the business strategy being implemented by the firm will affect the value. We applied the research methods of previous studies to examine the effect of managerial characteristics, namely, managerial ability and managerial compensation regarding firm value [55]. This research methodology seeks to find the relationship between independent variables that can affect the company value. The enterprise value was measured using Tobin’s q, which shows the difference between the market value and book value of assets that contain potential future growth. Hwang [84] analyzed the relationship between managerial ability and firm value using the method of Demerjian et al. and [35,38,52], conducting multiple regression analyses to verify the relationship between managerial compensation and firm value. The authors of [22,24,25] also measured business strategy using the Miles and Snow method, as we do in our model.

MV_t = a₀ + a₁PRO_t + a₂DEF_t + a₃Foreign_t + a₄DIV_t + a₅INS_t + a₆CHL_t + a₇SIZE_t + a₈Growth_t +a₉Beta_t + a₁₀LEV_t + a₁₁ROA_t + YD + ID_t + e_t

(1)

where:

MV_t: Firm value at the end of the current period.

PRO_t: A proxy for the prospector strategy (Miles and Snow [31]) using data from the past five periods.

DEF_t: A proxy for the defender strategy (Miles and Snow [31]) using data from the past five periods.

Foreign_t: Foreign share ratio in the current period.

DIV_t: Dividend dummy (1 if the firm paid a dividend in the current period, 0 otherwise).

INS_t: Audit opinion (1 if the audit opinion is appropriate in current period, 0 otherwise).

CHL_t: Cash holding level (operating cash flow in the current period/total assets in current period).

SIZE_t: The size of the firm(the natural logarithm of total assets at the end of current period).

Growth_t: Sales growth rate ((sales in current period)-(sales in previous period)/(sales in the previous period)).

Beta_t: Systematic risk using a 60-month monthly rate of return.

LEV_t: Debt ratio ((total liabilities at the end of the current period t)/(total assets at the end of the current period)).

ROA_t: Return on total assets ((net earnings in the current period)/(average of total assets at the end of the current period and the previous period)).

YD: Year dummy variable.

ID_t: Industry dummy variable in the current period.

We constructed the following formula to check whether the business strategy according to the manager’s compensation and ability has a different effect on company value.

MVt = a0 + a1COMPt + a2PROt + a3DEFt + a4COMPt × PROt + a5COMPt × DEFt +a6Foreignt + a7DIVt + a8INSt + a9CHLt + a10SIZEt + a11Growtht + a12Betat + a13LEVt + a14ROAt + YD + IDt + et

(2)

where COMP_t: the manager’s cash compensation in the current period

If the regression coefficient a₁ in Equation (2) has a significant positive (+) value, it is clear that the larger the manager’s compensation, the more positive the firm value. In addition, if the regression coefficients a₄ and a₅ in Equation (2) appear as significant values, it is considered likely that there is a difference in the relationship between business strategy and firm value, according to the manager’s compensation.

MVt = a0 + a1MAt + a2PROt + a3DEFt + a4Mat × PROt + a5Mat × DEFt + a6Foreignt + a7DIVt + a8INSt + a9CHLt + a10SIZEt + a11Growtht + a12Betat + a13LEVt + a14ROAt + YD + IDt + et

(3)

where MA_t: managerial ability (Demerjian et al. [9]) in the current period.

In this study, the effect of managerial ability among the managerial characteristics on firm value according to business strategy was analyzed; the formula is presented in Equation (3). If the regression coefficients a4 and a5 in Equation (3) appear as significant values, it seems that managerial ability will affect the relationship between business strategy and company value.

We classified managerial ability into high and low levels, verifying Equation (2), and analyzed whether the regression coefficients a₄ and a₅ have a significant effect. In terms of control variables, the size of the firm, debt ratio, foreign ownership ratio, and growth potential were included in the model as factors affecting the firm value. Firm size has a negative relationship with growth, and it may be difficult to generate future excess returns. Large firms may have lower financial pressures for investment or financial activities than SMEs, and, thus, may increase firm value due to the success of their investment activities. Large firms can positively contribute to firm value because they help create sustainable future performance, due to economies of scale [122]. In addition, liabilities may affect earnings as borrowings incur interest expenses. As liabilities are closely related to financial risk, they can also negatively affect firm value. Since growth potential positively contributes to firm value, the growth rate of sales was measured as a substitute for growth potential and was included in the model. Previous studies have predicted that foreign ownership will increase the firm value [123]. The dividend payout ratio is also continuous and is a factor that directly affects the firm value. Since the firm that paid dividends in the current period is more likely to pay dividends in the future, this is related to the firm value [124]. The level of cash-holding reduces the financial risk of a firm and increases the firm value by making it able to actively carry out investment activities. The level of cash-holding will establish the firm’s various management strategies, and by implementing them, the value of the firm will be increased. In order to take into account unobserved effects, such as effects by year and industry characteristics, dummy year variables and industry dummy variables should be included in the model.

We analyzed the data using the value relevance model and found the following limitations. There is a methodological problem with the direct valuation of capital, and the goal of the FASB does not include a capital valuation. The value relevance model has the disadvantage that it is difficult to interpret in general because it can be applied only in very limited situations. Since the model either ignores the cost of information or does not allow for information asymmetry, interpreting the results can also be problematic [125,126].

3.2. Measurement of Variables

3.2.1. Managerial Compensation

In this study, the average of the cash compensation per executive was used for the measurements related to the manager’s compensation, and the cash compensation per manager was calculated by subtracting the average from the calculated value, in consideration of the annual inflation rate. Since most of the previous studies up to now have heteroscedasticity according to scale, the natural logarithm of the value was taken and calculated. Although compensation for managers exists not only in monetary compensation but also in stocks, in Korea, stock compensation is not fully disclosed due to domestic circumstances, so this study referred to the data from previous domestic studies. Only cash remuneration was used as a measure of the manager’s compensation [61,127]. The reasons for using the cash reward variable in previous studies are as follows. First, the ratio of cash compensation to total compensation is relatively high. Second, because the effect of accounting earnings on cash compensation is greater than the stock price, cash compensation is used to verify the informational power of accounting earnings [128]. Therefore, in this study, the compensation of managers was limited to cash compensation, consisting of the sum of the executive salaries and bonuses. The manager’s compensation amount was measured and analyzed by taking the natural logarithm of the manager’s per capita cash compensation (salary + bonus). The amount of cash compensation paid was taken to be the value obtained by subtracting the amount of cash compensation for one manager of the firm from the average value for each year, in order to control the natural increase by year.

3.2.2. Managerial Ability

Managerial ability in this study was determined by Demerjian et al. [10], who divide it into two steps and calculate it using the managerial ability measurement value. Demerjian et al. [10] regarded the managerial efficiency measure in terms of the manager’s ability. A measure of the firm’s efficiency was generated using the data envelopment analysis method. Regarding the efficiency of the entire firm as calculated by the data envelopment analysis method, the characteristic part of the firm that can affect the efficiency of the firm was removed through Tobit regression analysis. The residual (ε) was regarded as a measure of managerial ability.

Step 1: DEA measurement model to measure efficiency.

In the first stage:

$$\mathrm{FE}v\mathsf{\theta }=\frac{Sales}{v_{1}SCost+v_{2}SnA+v_{3}Tang+v_{4}Itang}$$

(4)

where:

$\mathrm{FE}v\mathsf{\theta }$: Firm efficiency by data development analysis;

sales: Sales;

SnA: Selling and administrative expenses;

Tang: Property, plant and equipment subject to:

Itang: Intangible property.

The average, standard deviation, maximum, and minimum values of the efficiency index measured by the above formula are as follows for each industry.

The average overall firm efficiency score is 0.914, and the standard deviation is 0.106. When looking at firm efficiency by industry, the average efficiency of the lowest industry was 0.833 (chemicals and chemical manufacturing, excluding pharmaceuticals), and the highest average industry efficiency was 0.968 (non-metallic mineral product manufacturing). The efficiency scores of firms according to industry shown in

Table 1. Efficiency scores of firms according to industry.

Industry	N	Average	Std.	Max	Min
DEA score	1615	0.914	0.106	1.000	0.392
Food manufacturing	108	0.970	0.039	1.000	0.834
Pulp, paper, and paper products manufacturing	90	0.956	0.045	1.000	0.813
Chemicals and chemical product manufacturing	201	0.833	0.113	1.000	0.541
Manufacturing of medical substances and pharmaceuticals	172	0.866	0.153	1.000	0.392
Manufacturing of rubber products and plastic products	83	0.899	0.095	1.000	0.638
Non-metallic mineral product manufacturing	83	0.968	0.038	1.000	0.853
Primary metal manufacturing	172	0.884	0.156	1.000	0.399
Manufacturing of electronic parts, computers, images, and communication equipment	136	0.913	0.081	1.000	0.689
Other machinery and equipment manufacturing	130	0.941	0.069	1.000	0.739
Automobile and trailer manufacturing	175	0.941	0.047	1.000	0.811
General construction	48	0.964	0.046	1.000	0.822
Wholesale and product brokerage	142	0.952	0.064	1.000	0.731
professional service	75	0.930	0.080	1.000	0.740

.

Step 2: Measurement of managerial ability through Tobit regression.

In the second stage, the firm efficiency, measured by the data envelopment analysis method, includes the managerial ability of each firm according to the firm’s specific factors.

$$F{E}_{i,t}=a+{\beta }_{1}L{A}_{i,t}+{\beta }_{2}M{S}_{i,t}+{\beta }_{3}FCF{I}_{i,t}+{\beta }_{4}Ag{e}_{i,t}+{\beta }_{5}B{S}_{i,t}+{\beta }_{6}F{C}_{i,t}+YD+e_{i,t}$$

(5)

where:

FE_i,t (Firm efficiency): measurement of firm efficiency by the DEA analysis method.

LA_i,t: Natural log value of total assets.

MS_i,t: Sales/total sales of other firms in the same industry.

FCFI_i,t: 1 if free cash flows (operating earnings − △operating capital-investment = capital expenditure) are greater than 0, or are not 0.

Age_i,t: The duration of the firm.

In order to divide and separate the efficiency attributable to the manager, the residuals remaining after removing those characteristics classified as firm-specific characteristics from the firm efficiency, measured by the data envelopment analysis method by executing Tobit regression analysis, including the effect of each industry and year characteristic. The result was regarded as a measure of managerial ability. Demerjian et al. [9] stated that assets, market share, free cash flow, company age, business segment, and foreign currency-related elements of company characteristics, such as “Foreign Currency” were removed from the firm’s efficiency calculation, as measured through data envelopment analysis. Among these measures, managers with superior ability control the size of firms because they can be employed in large firms [129]. In addition, it can be expected that managers of firms with high market share and large firms will be able to negotiate more effectively than other firms while supporting the manager’s ability when negotiating with raw material suppliers and customers. In addition, the management of a firm with sufficient cash is measured by free cash flow, although the control was necessary because it was possible to effectively make a decision to obtain a positive net present value by keeping its ability constant. Since the investment cost will be different for each life cycle in the life cycle of a firm, it is expected that this will affect the manager’s strategy for the initial investment cost and decision-making. In addition, as the industry becomes more diversified, the experience of organizational operation requires a great deal of knowledge, and, in the case of executives who are employed in novel industries, there is a possibility of reduced attention due to increased workload, so diversification will cause difficulties in allocating resources efficiently [130,131]. Therefore, in this model, the number of business divisions is used to consider the degree of diversification of individual firms. Finally, to account for foreign exchange trading, this is measured by dividing the value of the foreign exchange account by its total sales. Since a firm that is more affected by exchange rate fluctuations will face complex and diverse decision-making due to various circumstances, the sum of the absolute size of the accounts of foreign currency conversion earnings and foreign currency loss, foreign exchange gain, and foreign exchange loss accounts for the percentage of total sales in the income statement. The higher the ratio, the more affected it is by the exchange rate. Therefore, the model including these factors was constructed as follows, and the residual estimated in Equation (5) was used as an alternative measure of managerial ability. The managerial ability (MA) scores, by industry is shown in

Table 2. Managerial ability (MA) scores, by industry.

Industry	N	Average	Std.	Max	Min
MA score	1615	0.001	0.075	0.385	−0.200
food manufacturing	108	0.010	0.039	0.087	−0.107
Pulp, paper, and paper products manufacturing	90	−0.003	0.043	0.105	−0.145
Chemicals, chemical product manufacturing	201	−0.007	0.135	0.385	−0.200
Manufacturing of medical substances and pharmaceuticals	172	0.009	0.086	0.294	−0.196
Manufacturing of rubber products and plastic products	83	0.011	0.086	0.196	−0.171
Non-metallic mineral product manufacturing	83	−0.002	0.034	0.058	−0.095
Primary metal manufacturing	172	−0.007	0.061	0.168	−0.171
Manufacturing of electronic parts, computers, images, and communication equipment	136	−0.008	0.071	0.121	−0.196
Other machinery and equipment manufacturing	130	0.006	0.066	0.093	−0.161
Automobile and trailer manufacturing	175	−0.006	0.042	0.081	−0.149
General construction industry	48	0.005	0.042	0.063	−0.118
Wholesale and product brokerage	142	0.019	0.047	0.159	−0.137
Professional service	75	0.000	0.081	0.115	−0.180

.

3.2.3. Business Strategy

Comprehensive business strategies were measured as follows, according to the method used in previous studies [31,36,39,40,100,112,132]. In order to measure the theoretical characteristics suggested by Miles and Snow [31], Bentley et al. [112] and others used approximately six measurement elements.

First, we determined the six factors to be measured separately according to type and characteristic, and then determined the six factors by calculating the measurement values of the previous five years for each firm-year as a simple average. Second, the six factors measured by each firm and year were ranked by the industry to which the firm and year belongs, and then classified them into 5 levels, giving 5 points to the highest level and 1 point to the lowest level.

We summed up the scores for each measure and classified 6 to 13 points as defender strategic samples. We also selected the prospector strategy to be 23 to 30 points and the sample belonging to a score that was not included was defined as an analytic strategy. Business strategy indicators is shown in

Table 3. Business strategy indicators.

Indicators	Measurement
R & D	R & D expenses/Sales
Efficiency	(Number of employees × 1,000,000)/Sales
Growth rate	MB ratio
Marketing investment	Sales and general management expenses/Sales
Organizational decentralization	(Number of employees in period t − Number of employees in period t − 1)/Number of employees in period t − 1
Capital intensity	(−1) × (Tangible assets – Land − Assets under construction)/Total assets in the period t − 1

.

3.2.4. Firm Value

In order to measure company value, to empirically analyze the effect of managerial ability, manager’s compensation, and business strategy on the relationship with company value, in this study, the proxy variable of firm value was defined as follows.

$$M{V}_t=\frac{Marketvaluwofcommonstockattheendoftheperiod t}{Totalassetsattheendofperiodt-1}$$

3.2.5. Control Variables

Firm size refers to the number of sales or the total assets of a firm. In this study, the total asset value was taken in the form of a natural logarithm as a proxy for the firm size. The debt ratio, which can be linked to performance due to funding restrictions, was calculated by dividing the current period by the total assets of the current period. Growth potential refers to the degree of growth rate, and indicators of growth potential include the sales growth rate, asset growth rate, and profitability growth rate. However, this study uses the sales growth rate, which has generally been used in previous studies. The sales growth rate was used as the value obtained by subtracting the sales of the previous period from the sales of the current period and dividing the sales of the previous period. The cash holding level was calculated by dividing the operating cash flow by the total assets. Other control variables include dividends or audit opinion, and an industry and year dummy is added to control the impact of specific industries and years.

3.3. Samples and Data

In this study, data from the Korea Listing Council TS 2000 was used to measure the level of compensation for managers, and financial and stock price data were collected using KIS-VALUE. Non-financial businesses were collected among listed corporations with a December settlement of accounts. The sample selection period was over 7 years from 2011 to 2017, inclusive. Data from 2011 were provided from a database that provides the level of compensation for managers, and the period was selected. However, for the business strategy, data were collected and used from after 2005 in terms of the measurement method. Firms with fewer than 20 samples by industry per year were excluded in terms of managerial competence. In addition, a total of 1615 samples were excluded; the selection procedure is shown in

Table 4. The selection process of sample companies.

Sample Selection	Firm-Year Count
Small and medium enterprises listed in non-financial industries (2011–2017)	5251
Same year—samples of fewer than 15 companies in the industry	(2219)
Other variable measurement data insufficient samples	(1320)
Removing extremity	(97)
Final sample	1615

.

4. Empirical Analysis—Results

4.1. Descriptive Statistics and Correlation Analysis

In this study, the effect of a manager’s ability, a manager’s compensation, and business strategy on the relationship with firm value was proved. In addition, the results of the effects of managerial compensation and managerial ability, which are key variables, on the relationship between business strategy and firm value are presented.

The descriptive statistics of key variables were analyzed, and the results are presented in

Table 5. Descriptive statistics.

Variable	Average	Std Dev	Median	Minimum	Maximum
MVt	0.641	0.514	0.490	0.101	3.888
COMPt	−0.105	0.679	−0.145	−3.079	2.603
MAt	0.001	0.075	0.008	−0.200	0.385
PROt	0.362	0.481	0.000	0.000	1.000
DEFt	0.273	0.446	0.000	0.000	1.000
Foreignt	7.788	12.001	3.180	0.000	89.300
DIVt	0.703	0.457	1.000	0.000	1.000
INSt	0.998	0.050	1.000	0.000	1.000
CHLt	0.054	0.057	0.036	0.000	0.467
SIZEt	26.342	1.028	26.250	23.881	29.923
Growtht	0.028	0.208	0.019	−0.858	3.078
Betat	0.748	0.509	0.709	−1.206	12.670
LEVt	0.410	0.193	0.400	0.033	0.980
ROAt	0.023	0.078	0.027	−0.570	0.782

Note: Variables definition; ${\mathrm{MV}}_{\mathrm{t}}$: Firm value [$\frac{Market value of common stock at the end of the period}{totalassetsattheendofperiodt-1}$]; ${\mathrm{MA}}_{\mathrm{t}}$: managerial abilities (Demerjian et al. [9]); ${\mathrm{COMP}}_{\mathrm{t}}$: managerial compensation natural log value; PRO_t: A proxy for Prospector strategy (Miles and Snow [31]); DEF_t: a proxy for defender strategy (Miles and Snow [31]); ${\mathrm{Foreign}}_{\mathrm{t}}$: foreign ownership ratio in period t.; ${\mathrm{DIV}}_{\mathrm{t}}$: dividend payout in period t (1 if firm paid dividend, if not 0); ${\mathrm{INS}}_{\mathrm{t}}$: audit opinions in period t (1 if the audit opinion is appropriate, 0 otherwise); ${\mathrm{CHL}}_{\mathrm{t}}$: the level of cash holdings in period t (operating cash flow in period t/total assets in period t); ${\mathrm{SIZE}}_{\mathrm{t}}$ firm size in period t (the natural logarithmic value of the total asset in period t); ${\mathrm{Growth}}_{\mathrm{t}}$: the growth rate of sales in period t: [$\frac{\left(sales in period t\right)-\left(salesinperiodt-1\right)}{salesvolumeinperiodt-1}$]; $Bet{a}_t$: systematic risk using 60-month monthly returns; ${\mathrm{LEV}}_{\mathrm{t}}$: leverage in period t [$\frac{totalleverageattheendofperiodt}{totalassetsattheendofperiodt}$]; ${\mathrm{ROA}}_{\mathrm{t}}$: total asset ratio in period t [$\frac{netearningsinperiodt}{averageoftotalassetsattheendoftheperiodtandt-1}$]; ${\mathrm{YD}}_{\mathrm{t}}$: year dummy variable in period t; ${\mathrm{ID}}_{\mathrm{t}}$: industry dummy variable in period t.

. In Table 5, the average value of managerial ability is 0.001, and the average value of manager’s compensation is −0.105, which is a degree of deviation from the average of the total manager’s compensation by year; a negative value may exist. In addition, the averages of the measurement of the prospector strategy and the measurement of the defender strategy, which are general measures of business strategy, were 0.362 and 0.273, respectively. The defender strategy is 27%, and the sample that does not fall into this category is at 37%, which can be seen as representing a firm pursuing an analytical strategy. The average size is 26.342, the average debt ratio is 0.410, and the average sales growth rate, which is a measure of growth potential, is 0.028. Firms that paid dividends in the current period accounted for 70%, while the average foreign ownership ratio was 7.788%. The averages of the audit opinion, beta, and cash holding levels were 0.998, 0.748, and 0.054, respectively.

In this study, the correlations of key variables were analyzed and the results are presented in

Table 6. Correlation between the variables.

	MVt	COMPt	MAt	PROt	DEFt	Foreignt	DIVt	INSt	CHLt	SIZEt	Growtht	Betat	LEVt
COMPt	0.170 **	1
MAt	0.176 **	0.095 **	1
PROt	0.176 **	0.051 *	0.003	1
DEFt	−0.174 **	−0.003	0.030	−0.462 **	1
Foreignt	0.186 **	0.163 **	0.041	0.054 *	−0.046	1
DIVt	0.106 **	0.300 **	0.042	−0.034	0.037	0.139 **	1
INSt	0.026	0.058*	0.021	0.012	0.003	0.016	0.049 *	1
CHLt	0.240 **	0.024	0.062 *	0.054 *	−0.029	0.195 **	0.030	0.001	1
SIZEt	−0.036	0.464 **	0.034	−0.022	0.009	0.297 **	0.208 **	0.028	−0.065 **	1
Growtht	0.110 **	0.029	0.093 **	0.057 *	−0.072 **	0.017	0.046	0.050*	0.018	0.007	1
Betat	0.017	0.023	0.011	−0.063 *	0.036	−0.058 *	−0.107 **	−0.016	−0.009	0.054 *	−0.021	1
LEVt	−0.301 **	−0.062 *	−0.033	0.022	−0.068 **	−0.165 **	−0.331 **	−0.105 **	−0.270 **	0.140 **	0.084 **	0.179 **	1
ROAt	0.221 **	0.178 **	0.125 **	−0.028	0.056*	0.099 **	0.383 **	0.156 **	0.075 **	0.174 **	0.147 **	0.064 **	0.282 **

Note: The table presents Pearson correlations. *, ** indicate statistical significance at 5% and 1%, respectively.

. First, the manager’s compensation and firm value had a significant positive (+) relationship (r = 0.170, p = 0.000), while managerial ability also showed a significant positive (+) relationship with firm value (r = 0.176, p = 0.000). The prospector strategy showed a significant positive relationship with the firm value, and the defender strategy showed a significant negative relationship (r = 0.176, p = 0.000, r = −0.174, p = 0.000). In addition, growth potential, foreign ownership ratio, ROA, and cash holding level all showed a significant positive (+) relationship with firm value, and the debt ratio (r = −0.301, p = 0.000) showed a significant negative (−) relationship with firm value.

4.2. Regression Results

We classified business strategies into prospector strategies and defender strategies, to analyze their impact on firm value, and the results are presented in

Table 7. The impact of business strategies on firm value.

Variable	ai (t-Value)
PROt	0.137(5.329) ***
DEFt	−0.123(−4.428) ***
Foreignt	0.005(4.701) ***
DIVt	−0.039(−1.423)
INSt	−0.315(−1.459)
CHLt	0.859(4.267) ***
SIZEt	−0.002(−0.180)
Growtht	0.262(4.936) ***
Betat	0.065(2.924) ***
LEVt	−0.519(−7.815) ***
ROAt	1.025(6.590) ***
Adj. R2(N), VIF	0.326(1615), 1.487

Note: This table reports the impact of business strategies on firm value. *** indicates statistical significance at 1%.

.

In Table 7, it can be seen that the prospector strategy had a significant positive (+) correlation with the firm value. These results suggest that the type of industry with firms pursuing a prospector strategy will not be a mature industry but instead a rapidly changing and unpredictable industry. Therefore, companies pursuing a prospector strategy are more likely to be “the first” to gain a competitive advantage in the industry and will lead to successful performance creation; the development of new products will lead to commercial success and spearhead the market, exceeding the demand. If demand is high, this strategy can make a profit.

Conversely, the defender strategy was found to have a significant negative (−) effect on the firm value. A defender strategy is a strategy that creates performance by reducing costs. Cost reduction can increase current performance, but it is difficult to follow up with sustainable future performance [133]. According to the conservative accounting treatment, if expenses are deferred for the current period and revenue is recognized in the current period, future performance may be adversely affected [134]. In addition, a reduction in costs for cost reduction may have a negative impact on firm value due to the contraction in firm investment activities. Therefore, among the business strategies, the defender strategy was found to have a negative effect on firm value, while the prospector strategy was found to have a positive effect on the relationship with firm value.

Park et al. [135] predicted that a prospector strategy for SMEs would increase future performance, sustainability, and growth potential more than a defender strategy. The reason is that it is realistically difficult for SMEs to reduce costs due to large-scale capital expenditures. Compared to large enterprises, small and medium-sized enterprises (SMEs) find it difficult to sell in bulk, in terms of distribution channels and methods, and this cannot be used to reduce costs. SMEs have the advantage of being able to respond quickly due to their small size and it being easy to change the overall business strategically, suggesting that a prospector strategy with new items or new products may be more suitable for them than for large enterprises that are in the mature or stable stage. Therefore, it is easier for SMEs to increase their value by selectively adopting a prospector strategy than large enterprises, as they have more relevance to future performance.

In this study, the effect of manager’s compensation on business strategy and firm value was demonstrated, and the results are presented in

Table 8. The impact of managerial compensation on the relationship between business strategy and firm value.

MVt = a0 + a1COMPt + a2PROt +a3DEFt + a4COMPt × PROt + a5COMPt × PROt + a6Foreignt + a7DIVt + a8INSt + a9CHLt + a10SIZEt + a11Growtht + a12Betat + a13LEVt + a14ROAt + YD + IDt + et
Variable	ai(t-Value)
COMPt	0.055 (2.048) **
PROt	0.138 (5.397) ***
DEFt	−0.120 (−4.325) ***
COMPt × PROt	0.150 (4.155) ***
COMPt × DEPt	0.038 (0.984)
Foreignt	0.005 (4.808) ***
DIVt	−0.070 (−2.535) **
INSt	−0.347 (−1.630)
CHLt	0.820 (4.144) ***
SIZEt	−0.038 (−2.862) ***
Growtht	0.256 (4.921) ***
Betat	0.063 (2.897) ***
LEVt	−0.488 (−7.471) ***
ROAt	1.010 (6.599) ***
Adj. R2 (N), VIF Max.	0.350 (1615), 2.015

Note: This table reports differences in the relevance of the impact of managerial compensation on firm value. **, *** indicate statistical significance at 5%, and 1%, respectively.

. The analysis was conducted by including both the manager’s compensation and business strategy in the model. As a result of the analysis, it was found that both the manager’s compensation and business strategy affect the firm value. According to the manager’s compensation rate, the prospector strategy showed a significant positive (+) relationship with firm value. However, it was found that managerial compensation had no effect on the relationship between the defender strategy and firm value. The prospector strategy has high operating risk and high uncertainty, so the manager’s responsibility or role is relatively high. In particular, small and medium-sized enterprises (SMEs) may find it difficult to raise funds, so if the operating risk is high, the financial difficulties may be aggravated. However, if the manager’s compensation is high because the manager has excellent competency levels or ability, this strategy is highly likely to generate excess returns in the future through accurate business diagnosis. In order for a prospector strategy to succeed among business strategies, the strengths of the manager are important. In the financial situation of SMEs, business failures can lead to bankruptcy, so managers must actively conduct business. If the manager’s compensation increases their passion for work, a leading strategy that may require active behavior due to relatively high risk among business strategies can create firm value. Unlike business strategies, the defender strategy aims to maintain a stable and sustainable business, so managers seek current stability rather than investments with high uncertainty. These results indicate that the need for the manager’s discretionary ability for success is lower than the prospector strategy that leads to change because the current system is maintained, rather than relying on the manager’s arbitrary ability or determination. Since the defender strategy is a strategy that prioritizes cost reduction over the prospector strategy, the financial situation or the firm’s economic environment may also be worse than in a prospector strategy that requires a large investment. Therefore, the defender strategy may have a relatively lower firm value than the prospector strategy, and the role of the manager may be relatively reduced.

In this study, the effect of managerial ability on business strategy and firm value was analyzed, and the results are presented in

Table 9. The impact of managerial ability on the relationship between business strategy and firm value.

MVt = a0 + a1MAt + a2PROt + a3DEFt + a4MAt × PROt + a5MAt × DEFt + a6Foreignt + a7DIVt + a8INSt + a9CHLt + a10SIZEt + a11Growtht + a12Betat + a13LEVt + a14ROAt + YD + IDt + et
Variable	ai(t-Value)
MAt	0.713 (3.180) ***
PROt	0.131 (5.167) ***
DEFt	−0.124 (−4.489) ***
MAt × PROt	0.711 (2.212) **
MAt × DEFt	−0.604 (−1.695) *
Foreignt	0.005 (4.694) ***
DIVt	−0.041 (−1.500)
INSt	−0.272 (−1.272)
CHLt	0.811 (4.079) ***
SIZEt	−0.005 (−0.425)
Growtht	0.240 (4.588) ***
Betat	0.065 (2.959) ***
LEVt	−0.518 (−7.908) ***
ROAt	0.935 (6.060) ***
Adj. R2 (N), VIF	0.345 (1615), 2.670

Note: This table reports the impact of managerial ability on the relationship between business strategy and firm value. *, **, *** indicate statistical significance at 10%, 5%, and 1%, respectively.

.

In order to analyze the effect of managerial ability on the relationship between business strategy and firm value, we added an interaction variable and analyzed it. As a result of the analysis, it was found that managerial ability positively contributes to the relationship between prospector strategy and firm value among business strategies. The prospector strategy actively engages in new investment activities, and it was expected that high performance will not negatively impact future performance due to overconfidence or inefficient investment if the manager’s ability is excellent. On the other hand, it was not possible to confirm the difference in the effect of managerial ability on the relationship between the defender strategy and firm value. Hambrick and Snow [33] conducted stable sales activities in the existing market rather than taking risks in a defender strategy. If such a strategy is implemented, the business will be standardized, and the results will be stable. Therefore, in the case of a defender strategy that pursues cost advantage, it is possible to expand the market and it is considered that the level of value relevance due to managerial ability is lower than that of a prospector strategy with a high growth level. In other words, in SMEs pursuing a prospector strategy, managers often need to make arbitrary decisions and have more options than SMEs pursuing a defender strategy. These strategic characteristics are important to the manager’s ability. Managerial ability here means an excellent ability to analyze current business trends and predict future success [9].

Therefore, the role of the manager is important for a prospector strategy with a relatively wide range of decision-making and high uncertainty. In a prospector strategy, the better the manager’s ability, the more likely he or she will make a correct decision by making a choice that maximizes performance and accuracy. Therefore, it can be confirmed that managerial ability, in particular, positively contributes to the relationship between prospector strategy and firm value.

In this study, the effect of manager’s compensation on the relationship between business strategy and firm value was verified by dividing the group into high and low managerial ability groups; the results are presented in

Table 10. The effect of compensation according to the level of managerial ability on the relationship between business strategy and firm value.

MVt = a0 + a1COMPt + a2PROt + a3DEFt + a4COMPt × PROt + a5COMPt × DEFt + a6Foreignt + a7DIVt + a8INSt + a9CHLt + a10SIZEt + a11Growtht + a12Betat + a13LEVt + a14ROAt + YD + IDt + et
Variable	MAt ≥ 0	MAt < 0
	ai(t-Value)	ai(t-Value)
COMPt	0.057 (1.460)	0.047 (1.351)
PROt	0.181 (4.856) ***	0.022 (0.505)
DEFt	−0.162 (−3.938) ***	−0.082 (−2.376) **
COMPt × PROt	0.216 (4.137) ***	0.002 (0.035)
COMPt × DEFt	0.064 (1.134)	0.011 (0.238)
Foreignt	0.004 (2.352) **	0.005 (4.243) ***
DIVt	−0.081 (−1.977) **	−0.055 (−1.575)
INSt	−0.552 (−1.182)	−0.283 (−1.377)
CHLt	0.964 (3.505) ***	0.323 (1.170)
SIZEt	−0.014 (−0.724)	−0.064 (−3.827) **
Growtht	0.242 (3.530) ***	0.202 (2.440) ***
Betat	0.068 (2.399) **	0.070 (1.970) **
LEVt	−0.634 (−6.653) ***	−0.358 (−4.267) ***
ROAt	0.891 (4.383) ***	1.314 (4.938) ***
Adj. R2 (N), VIF	0.396 (897), 3.145	0.263 (718), 3.325

Note: This table reports differences in the relevance of business strategy and firm value between groups with high and low managerial abilities, along with the impact of managerial compensation on firm value. **, *** indicate statistical significance at 5%, and 1%, respectively.

.

As shown in Table 10, it was not possible to confirm whether the manager’s compensation itself had an effect on the firm value when the manager’s compensation was classified based on the manager’s ability. In other words, it could not be concluded that the manager’s compensation increased the firm value by itself by motivating the manager, reflecting the manager’s ability. Even in a group of highly capable managers, managerial compensation did not positively contribute to firm value. As a result, it can be emphasized that the manager’s compensation is basically due to the manager’s own ability, and that the manager’s ability plays a more important role in the firm value than the manager’s compensation rate. Although the manager’s ability can be proportional to the level of that manager’s compensation, it was confirmed that the manager’s compensation alone cannot be a factor influencing their effect on firm value. Among the various business strategies, the prospector strategy was found to increase firm value in the group with excellent managerial ability. However, it was found that the prospector strategy had a negative effect on firm value in the group with a low level of managerial ability. These results confirm that the role of managerial ability is important for prospector strategy to increase firm value. The reason that a prospector strategy has a negative effect on firm value in a group with low managerial ability is that a prospector strategy has a high operating risk and uncertainty, so managerial ability is important. This is because it makes it difficult for a firm to maintain sales and survive, and it is accompanied by predictions that make it difficult to ensure future performance. In addition, it was found that the prospector strategy had a different effect on firm value according to the manager’s compensation in the group with high managerial ability. It has been shown that strategies with high relative risk and high uncertainty can increase the value of a firm only when managers receive high rewards. It can be suggested that the prospector strategy of SMEs should have high managerial ability and, accordingly, the compensation level should be high, so that the prospector strategy can further increase the firm’s value. However, the defender strategy was found to have a negative effect on firm value, which can be approached from two perspectives. Firms that implement a defender strategy may have a relatively low firm value due to other factors within the firm itself because they do not have the economic strength to make active and uncertain investments or may have a bad financial situation. In general, even if the debt ratio is controlled, the level of firm value may be low because the future prospects are bleak. Shareholders have an investment style that favors risk-taking rather than risk-averse investing. Therefore, the gap between the book value and market value of stocks for a defender strategy may be lower than for a prospector strategy, with relatively high operating risk. Accordingly, firms that implement a defender strategy may have little relevance to share price increases. It is difficult to explain the difference in firm value in the defender strategy rather than in the prospector strategy, which is an aggressive strategy in which the level of managerial ability is likewise aggressive. Among the business strategies, the defender strategy can affect the firm value, but the manager’s compensation does not have a significant meaning in this relationship.

5. Discussion

Management influences the performance of a firm [81,136]. and can be an important intangible resource differentiating it from other companies [3,6,9]. Such managerial abilities have been studied from various perspectives, such as business strategy, investment activities, company value, business performance, and capital cost [53,77,85]. In this study, the previous studies were expanded to examine how a manager’s compensation and managerial ability affect a company’s value through business strategies. In addition, the purpose of this study was to examine the effect of business strategies related to important decision-making by managers regarding company value.

The higher the level of compensation for the firm’s managers, the more the agency problem will be alleviated, and this may be a motive or inducement regarding the firm’s performance or value. In addition, if the firm’s managerial ability is excellent, it is clear that future performance can be created by selecting an investment plan that has excellent business understanding and predictive ability and can increase net realizable value by reflecting market conditions appropriately [9]. Therefore, such managerial ability will establish a suitable strategy by considering the internal and external circumstances of the firm, appropriately selecting a business strategy, and creating firm value through the allocation of internal resources and efficient investment and production.

The sample was analyzed by selecting 1615 non-financial companies among listed corporations with a December settlement of accounts from 2011 to 2017 that satisfied several conditions; the results of the analysis are as follows.

First, the prospector strategy was found to have a positive (+) effect on the firm value, while the defender strategy had a negative (−) effect on the firm value. These results show that a prospector strategy focusing on long-term performance gives higher firm value than a defender strategy pursued by firms that focus on stability and short-term performance or that have reached maturity or decline due to saturation. Since SMEs that carry out a prospector strategy have to make many intangible investments, their firm value may be greater because their financial situation or economic environment may be better than that of SMEs that implement a defender strategy in an effort to reduce costs. The prospector strategy may be a strategy preferred by shareholders with risk-like investment tendencies. Firms that invest in SMEs’ stocks rather than in bonds or other investment options are investors who favor risk rather than risk aversion, so SMEs may prefer to pursue a prospector strategy. In addition, unlike large enterprises, SMEs have a structure in which it is difficult to generate excess profits by reducing costs through economies of scale or learning effects. Therefore, SMEs can achieve strategic success if they pursue a prospector strategy by reflecting the firm’s characteristics.

Second, in the case of firms pursuing a prospector strategy among several business strategies, it was confirmed that the firm value increased according to the characteristics of the managers. If the manager’s compensation is high, the manager’s ability may be high; regarding investment activities, they may select an investment plan that maximizes the future net present value. Therefore, the differentiated investment activities of a prospector strategy are expected to contribute to future performance and increase firm value. On the other hand, defender strategies can be seen as stable and standardized decision-making in which managers are risk-averse. This strategy may focus on the firm’s current performance, making it difficult to generate increased returns in the future. In addition, it was found that managerial ability increases the value of prospector-strategy firms. In terms of managerial ability, investment activities in prospector strategies with various business options due to their excellent future forecasting ability, business understanding ability, and financial or financial management capabilities increase the future net present value [9,10]. In the case of a defender strategy, it was difficult to identify a difference in firm value according to the manager’s ability. As a result, management’s passive decision-making was unsuitable to reflect the expectations of shareholders’ risk-seeking investment behavior.

Finally, it was found that managerial compensation did not affect company value when management ability was controlled. In other words, if the manager’s compensation is not due to the manager’s ability, it is clear that this is not positive in terms of the firm value. In the group with high managerial ability, it was found that the prospector strategy, among the various management strategies, had a positive effect on firm value. On the other hand, in the group with low managerial ability, it was found that the prospector strategy had a negative effect on firm value. These results suggest that managerial ability plays an important role among those factors that can lead to the success of prospector strategies in SMEs that lack internal and external resources. Managerial skills should be able to generate maximum profits with minimum resources and to utilize internal and external resources efficiently and well. It may also be suggested that this ability refers to the ability to analyze current business trends, future forecasts, economic environment, etc., and plays an important role in the success of prospector strategies with high operating risk and uncertainty.

Taken together, these results can be seen as identifying an important factor that increases the value of small and medium-sized enterprises (SMEs) when pursuing a prospector strategy among management strategies. It also showed that, unless the manager’s compensation is based on the manager’s ability, the manager’s compensation in SMEs does not positively contribute to firm value.

Our research results also suggest policy implications concerning managerial remuneration. Managerial compensation is an important factor influencing the value of SMEs. Therefore, there is a need for the Korean government to expand the scope of compensation disclosure to other corporations in recent years. In addition, SMEs may have great information asymmetry because they have few stakeholders and lack experts for analysis. In this regard, the lack of information on small and medium-sized enterprises (SMEs) can lead to investors making mistakes in determining stock prices. Therefore, we emphasize the importance of policies on managerial compensation disclosure.

This study verified the relationship between managerial ability, managerial compensation, business strategy, and firm value. Since managerial ability was measured using the efficiency index of Demerjian et al. [9], the interpretation of managerial ability is inevitably limited. Future studies should be conducted based on the development of various measures of managerial ability. It seems that the results of this study, that the prospector strategy has higher firm value than the defender strategy for SMEs, should not be applied too broadly. The best business strategy for a firm is established by reflecting the firm’s characteristics. The business strategy suitable for a particular firm should be interpreted in each situation, but this study did not fully consider such a point. Therefore, it is considered that future research should be cautious in its approach to interpretation and the development of performance measures for management strategies. Finally, the enterprise value was measured by approaching the difference between the market and the book value. In reality, a firm’s value can be meaningful at the same rate of increase as the rate of return. In addition, small and medium-sized enterprises (SMEs) may have greater information asymmetry than large enterprises, so future growth potential or performance rather than enterprise value may be a more important variable that can replace a blanket company value. In the future, we suggest the need to conduct research into management characteristics and management strategies for SMEs, not only in terms of firm value but also in terms of future growth potential or performance.