Emotional Returns and Emotional Costs in Privately Held Family Businesses: Advancing Traditional Business Valuation

This article introduces a formula to assess the total value of privately held family businesses from the owner's perspective. It is argued that the total value of a business is not only composed of its financial worth and private benefits, as is usually assumed by traditional financial theory, but that emotional components also have an impact on valuation. In particular, it is assumed that emotional returns (ER) positively affect total value, whereas emotional costs (EC) negatively affect total value. Even though every stakeholder faces emotional costs and returns, it is solely the family business owner who ultimately decides on the worth of a business and consequently factors ER-EC into his or her valuation. The presented formula provides a better understanding of investment decisions in family businesses and a more accurate valuation of these businesses.

[1]  Peter Wright,et al.  AGENCY CONFLICT AND CORPORATE STRATEGY: THE EFFECT OF DIVESTMENT ON CORPORATE VALUE , 1997 .

[2]  Anthony M. J. Stanger,et al.  The Small Enterprise Financial Objective Function: An Exploratory Study , 1996 .

[3]  James A. Roberts,et al.  Demographics and money attitudes: a test of Yamauchi and Templers (1982) money attitude scale in Mexico , 1999 .

[4]  S. Harris,et al.  Vision salience and strategic involvement: implications for psychological attachment to organization and job , 1994 .

[5]  Flemming Hansen,et al.  Emotions, Advertising and Consumer Choice , 2007 .

[6]  Pramodita Sharma,et al.  Strategic Divestments in Family Firms: Role of Family Structure and Community Culture , 2005 .

[7]  R. Kaplan,et al.  The balanced scorecard--measures that drive performance. , 2015, Harvard business review.

[8]  L. Gómez-Mejia,et al.  Socioemotional Wealth and Business Risks in Family-controlled Firms: Evidence from Spanish Olive Oil Mills , 2007 .

[9]  L. Gómez-Mejia,et al.  The Role of Family Ties in Agency Contracts , 2001 .

[10]  David Dugdale,et al.  Non-financial performance measurement in manufacturing companies , 2005 .

[11]  Aneel Keswani,et al.  The Relationships between Sentiment, Returns and Volatility , 2006 .

[12]  Andrew Postlewaite,et al.  Confidence-Enhanced Performance , 2001 .

[13]  Terence Connolly,et al.  Regret in economic and psychological theories of choice , 2006 .

[14]  K. Petroni,et al.  OWNERSHIP AND PERFORMANCE IN CLOSE CORPORATIONS: A NATURAL EXPERIMENT IN EXOGENOUS OWNERSHIP STRUCTURE , 2002 .

[15]  E. Nowak,et al.  Private Benefits and Minority Shareholder Expropriation - Empirical Evidence from IPOs of German Family-Owned Firms , 2001 .

[16]  M. Lubatkin.  A Theory of the Firm Only a Microeconomist Could Love , 2005 .

[17]  J. L. Pierce,et al.  Toward a Theory of Psychological Ownership in Organizations , 2001 .

[18]  Kevin J. Murphy,et al.  Performance Pay and Top Management Incentives , 1990 .

[19]  S. Zahra,et al.  Family Business Research: A Strategic Reflection , 2004 .

[20]  H. Demsetz,et al.  Ownership Structure and Corporate Performance , 2001 .

[21]  R. Pollak.  A Transaction Cost Approach to Families and Households , 1985 .

[22]  Paul E. Spector,et al.  Stress in the workplace: a comparison of gender and occupations , 1999 .

[23]  Ronald Bosman,et al.  Emotional Hazard in a Power-to-Take Experiment , 2002 .

[24]  Richard G. McFarland,et al.  Perceiving Emotion in the Buyer–Seller Interchange: The Moderated Impact on Performance , 2007 .

[25]  M. C. Jensen,et al.  Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit , 1976 .

[26]  H. Demsetz,et al.  The Structure of Corporate Ownership: Causes and Consequences , 1985, Journal of Political Economy.

[27]  K. Yamauchi,et al.  The development of a Money Attitude Scale. , 1982, Journal of personality assessment.

[28]  Tatiana Nenova,et al.  The value of corporate voting rights and control: A cross-country analysis , 2003 .

[29]  J. Astrachan.  Family Firm and Community Culture , 1988 .

[30]  Yew-Kwang Ng,et al.  A Case for Happiness, Cardinalism, and Interpersonal Comparability , 1997 .

[31]  John Pawle,et al.  Measuring Emotion—Lovemarks, The Future Beyond Brands , 2006, Journal of Advertising Research.

[32]  K. Poels,et al.  How to Capture the Heart? Reviewing 20 Years of Emotion Measurement in Advertising , 2006 .

[33]  Susan J. Lambert,et al.  The combined effects of job and family characteristics on the job satisfaction, job involvement, and intrinsic motivation of men and women workers , 1991 .

[34]  W. Michael Hanemann,et al.  Willingness To Pay and Willingness To Accept: How Much Can They Differ? Comment , 2003 .

[35]  Luigi Zingales.  The Value of the Voting Right: A Study of the Milan Stock Exchange Experience , 1994 .

[36]  J. Shogren,et al.  Resolving Differences in Willingness to Pay and Willingness to Accept , 1997 .

[37]  J. H. Davis,et al.  TOWARD A STEWARDSHIP THEORY OF MANAGEMENT , 1997 .

[38]  Paul Hanouna,et al.  Value of Corporate Control: Some International Evidence , 2001 .

[39]  Lex Donaldson,et al.  Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns , 1991 .

[40]  J. Grote.  Conflicting Generations: A New Theory of Family Business Rivalry , 2003 .

[41]  Ronald C. Anderson,et al.  Founding-Family Ownership and Firm Performance: Evidence from the S&P 500 , 2003 .

[42]  Lars Norden,et al.  The Role of Non-Financial Factors on Internal Credit Ratings , 2002 .

[43]  Atulya Sarin,et al.  Agency Problems, Equity Ownership, and Corporate Diversification , 1997 .

[44]  C. Rusbult.  Commitment and Satisfaction in Romantic Associations: A Test of the investment Model , 1980 .

[45]  J. Astrachan,et al.  The Importance of Integrated Goal Setting: The Application of Cost-of-Capital Concepts to Private Firms , 2004 .

[46]  John A. Davis,et al.  Generation to Generation: Life Cycles of the Family Business , 1997 .

[47]  Russell W. Belk,et al.  Attachment to Possessions , 1992 .

[48]  E. Sadler‐Smith,et al.  The Role of Intuition in Strategic Decision Making , 2009 .

[49]  I. Fisher,et al.  The Money Illusion. , 1929 .

[50]  Clifford G. Holderness,et al.  Private benefits from control of public corporations , 1989 .

[51]  V. N. Awasthi,et al.  IMPACT OF CORPORATE INSIDER, BLOCKHOLDER, AND INSTITUTIONAL EQUITY OWNERSHIP ON FIRM RISK TAKING , 1996 .

[52]  John R. Nofsinger.  Social Mood and Financial Economics , 2005 .

[53]  E. Fama,et al.  Separation of Ownership and Control , 1983, The Journal of Law and Economics.

[54]  Ernst G. Maug,et al.  Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control? , 1998 .

[55]  K. Eisenhardt,et al.  Exploring the Black Box: An Analysis of Work Group Diversity, Conflict and Performance , 1999 .

[56]  P. Bolton,et al.  An incomplete contracts approach to financial contracting , 1992 .

[57]  E. Fama,et al.  Agency Problems and Residual Claims , 1983 .

[58]  L. Sjöberg,et al.  Money Attitudes and Emotional Intelligence , 2006 .

[59]  Shaker A. Zahra,et al.  Creating Wealth in Family Firms through Managing Resources: Comments and Extensions , 2003 .

[60]  Thomas M. Zellweger,et al.  Risk, Return and Value in the Family Firm , 2006 .

[61]  David M. Kreps.  Intrinsic Motivation and Extrinsic Incentives , 1997 .

[62]  K. Surysekar.  A note on the interaction effects of non-financial measures of performance , 2003 .

[63]  G. Becker.  A Theory of Social Interactions , 1974 .

[64]  J. J. Jacobs,et al.  When a Car Makes You Smile: Development and Application of an Instrument to Measure Product Emotions , 2000 .

[65]  Z. Hoque.  Linking environmental uncertainty to non-financial performance measures and performance: a research note , 2005 .