How Do Family Ownership, Control, and Management Affect Firm Value?

Using proxy data on all Fortune 500 firms during 1994-2000, we establish that, in order to understand whether and when family firms are more or less valuable than nonfamily firms, one must distinguish among three fundamental elements in the definition of family firms: ownership, control, and management. Specifically, we find that family ownership creates value only when the founder serves as the CEO of the family firm or as its Chairman with a hired CEO. Control mechanisms including dual share classes, pyramids, and voting agreements reduce the founder's premium. When descendants serve as CEOs, firm value is destroyed. Our findings further suggest that the classic owner-manager conflict in nonfamily firms is more costly than the conflict between family and nonfamily shareholders in founder-CEO firms. However, the conflict between family and nonfamily shareholders in descendant-CEO firms is more costly than the owner-manager conflict in nonfamily firms.

[1]  Heitor Almeida,et al.  A Theory of Pyramidal Ownership and Family Business Groups , 2005 .

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

[3]  Marianne Bertrand,et al.  Mixing Family with Business: A Study of Thai Business Groups and the Families Behind Them , 2008 .

[4]  R. Morck,et al.  Inherited Wealth, Corporate Control and Economic Growth , 1998 .

[5]  John Mcconnell,et al.  Additional evidence on equity ownership and corporate value , 1990 .

[6]  John J. McConnell,et al.  The market value of control in publicly-traded corporations , 1983 .

[7]  A. Shleifer,et al.  Management Ownership and Market Valuation: An Empirical Analysis , 1988 .

[8]  Clifford G. Holderness,et al.  A Survey of Blockholders and Corporate Control , 2001 .

[9]  Harry DeAngelo,et al.  Managerial ownership of voting rights: A study of public corporations with dual classes of common stock☆ , 1985 .

[10]  H. Demsetz.  The Structure of Ownership and the Theory of the Firm , 1983, The Journal of Law and Economics.

[11]  Benjamin E. Hermalin,et al.  Board of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature. (Part 1: A Review of the Literature on Corporate Governance) , 2003 .

[12]  G. Jarrell,et al.  Dual-class recapitalizations as antitakeover mechanisms: The recent evidence , 1988 .

[13]  E. Lindenberg,et al.  Tobin's q Ratio and Industrial Organization , 1981 .

[14]  Brian F. Smith,et al.  Management succession and financial performance of family controlled firms , 1999 .

[15]  C. Holderness.  A Survey of Blockholders and Corporate Control. (Part 1: A Review of the Literature on Corporate Governance) , 2003 .

[16]  Larry H. P. Lang,et al.  The Ultimate Ownership of Western European Corporations , 2002 .

[17]  Paul A. Gompers,et al.  CORPORATE GOVERNANCE AND EQUITY PRICES , 2002 .

[18]  Reinier Kraakman,et al.  Stock Pyramids, Cross-Ownership, and Dual Class Equity: The Creation and Agency Costs of Separating Control from Cash Flow Rights , 1999 .

[19]  Karl V. Lins.  Equity Ownership and Firm Value in Emerging Markets , 2002, Journal of Financial and Quantitative Analysis.

[20]  Larry H. P. Lang,et al.  Dividends and Expropriation , 2000 .

[21]  Luigi Zingales,et al.  What Determines the Value of Corporate Votes , 1995 .

[22]  Randall Morck,et al.  Inherited Wealth, Corporate Control and Economic Growth: the Canadian Disease , 1998 .

[23]  B. Olivier,et al.  Florencio Lopez-de-Silanes, and Andrei Shleifer. , 1994 .

[24]  Rüdiger Fahlenbrach,et al.  Founder-CEOs and Stock Market Performance , 2003 .

[25]  Shorey Peterson,et al.  The Modern Corporation and Private Property. , 1933 .

[26]  E. Fama,et al.  Industry costs of equity , 1997 .

[27]  Henrik Cronqvist,et al.  Agency Costs of Controlling Minority Shareholders , 2003, Journal of Financial and Quantitative Analysis.

[28]  Larry H. P. Lang,et al.  The Separation of Ownership and Control in East Asian Corporations , 1999 .

[29]  Belén Villalonga.  Does Diversification Cause the 'Diversification Discount'? , 2000 .

[30]  S. Ravid,et al.  The Role of Founders in Large Companies: Entrenchment or Valuable Human Capital? , 2003 .

[31]  W. Greene.  Sample Selection Bias as a Specification Error: Comment , 1981 .

[32]  J. Heckman.  Sample selection bias as a specification error , 1979 .

[33]  M. C. Jensen,et al.  Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers , 1999 .

[34]  Randall Morck,et al.  Concentrated Corporate Ownership , 2000 .

[35]  Stephen W. Pruitt,et al.  A Simple Approximation of Tobin's Q , 1994 .

[36]  Benjamin E. Hermalin,et al.  Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature , 2000 .

[37]  A. Shleifer,et al.  Large Shareholders and Corporate Control , 1986, Journal of Political Economy.

[38]  Clifford G. Holderness,et al.  The role of majority shareholders in publicly held corporations: An exploratory analysis , 1988 .

[39]  Andrei Shleifer,et al.  Corporate Ownership Around the World , 1998 .

[40]  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 .

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

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

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

[44]  Daniel Ferreira,et al.  Understanding the Relationship between Founder-CEOs and Firm Performance , 2008 .

[45]  Stijn Claessens,et al.  Disentangling the Incentive and Entrenchment Effects of Large Shareholdings , 2002 .

[46]  Paul A. Gompers,et al.  Incentives vs. Control: An Analysis of U.S. Dual-Class Companies , 2004 .

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