When does entrepreneurial self‐efficacy enhance versus reduce firm performance?

Abstract The entrepreneurial self‐efficacy of lead founders has been generally considered to be a robust predictor of the performance of their firms. Few studies, however, have considered variables that might moderate this relationship. The current study attempts to fill this gap in the literature by examining two possible moderators of the effects of entrepreneurial self‐efficacy on firm performance: dispositional optimism and environmental dynamism. Results indicate that these factors do indeed moderate the effects of entrepreneurial self‐efficacy; in fact, a three‐way interaction between self‐efficacy, optimism, and environmental dynamism was observed with respect to firm performance. Consistent with predictions, in dynamic environments, the effects of high entrepreneurial self‐efficacy on firm performance were positive when combined with moderate optimism, but negative when combined with high optimism. In stable environments, in contrast, the effects of self‐efficacy were relatively weak, and were not moderated by optimism. Overall, results suggest that high self‐efficacy is not always beneficial for entrepreneurs and may, in fact, exert negative effects under some conditions. Copyright © 2008 Strategic Management Society.