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Founding-Family Ownership and Firm Performance: Contrary to our conjecture, we find family firms perform better than nonfamily firms.
Additional analysis reveals that the relation be- tween family holdings and firm performance is nonlinear and that when fa- mily members serve as CEO, performance is better than with outside CEOs. Overall, our results are inconsistent with the hypothesis that minority share- holders are adversely affected by family ownership, suggesting that family ownership is an effective organizational structure.
Fama and Jensen note that combining ownership and control allows concentrated shareholders to exchange profits for private rents.
Demsetz argues that such owners may choose nonpecuniary con- sumption and thereby draw scarce resources away from profitable projects. Shlei- fer and Vishny observe that the large premiums associated with superior- voting shares or control rights provide evidence that controlling shareholders seek to extract private benefits from the firm.
More generally, firms with large, undiversified owners such as founding families may forgo maximum profits be- cause they are unable to separate their financial preferences with those of outside owners.
All errors are our own. La Porta, Lopez-de-Silanes, and ShleiferBebchuckand Shleifer and Wolfenzon study Founding family ownership and firm performance legal protections for outside shareholders impact ownership structure.
Pagano and Roe11 note how the presence of other large blockholders can re- duce the concerns of controlling shareholder wealth expropriation. Bennedsen and Wolfenzon analyze closely held firms, while Morck, Strangeland, and YeungJohnson et al.
Overall, anecdotal accounts and prior literature suggest that con- tinued founding-family ownership in U. The notion that large, concentrated shareholders are inherently less efficient is not a universal view.
Demsetz and Lehn note that combining ownership and control can be advantageous, as large shareholders can act to mitigate man- agerial expropriation.
For instance, the family's historical presence, large undi- versified equity position, and control of management and director posts place them in an extraordinary position to influence and monitor the firm.
Beyond monitoring and control advantages, James posits that families have longer investment horizons, leading to greater investment efficiency.
Steinshows how the presence of shareholders with relatively long investment horizons can mitigate the incentives for myopic investment decisions by managers. If families have advantages in disciplining and monitoring managers, extended in- vestment horizons, and provide specialized knowledge, the question of whether founding-family presence hinders or facilitates firm performance becomes an em- pirical issue.
We explore the relation between founding-family ownership and firm perfor- mance in large public firms. Using accounting and market measures of firm per- formance, we conduct a time-series cross-sectional comparison of family and nonfamily firms.
Our analysis also investigates the association between active family control holding the CEO position and firm performance. Finally, we ex- amine the impact of other large equity blockholders in the presence of family ownership and the discrepancy between family ownership and control rights on firm performance.
To the best of our knowledge, this is the first large sample study to examine the relation between founding-family holdings and performance in large U. For example, in firms where the family does not have outright majority ownership, their control of board seats is 2.
We find this subset accounts for In this study, we consider both passive and active control and find that a sub- stantial portion of the performance difference is associated with passive control. For example, Newsweek notes that at least three times during the late s, the Chandler family Times Mirror got "sweet deals" that were unavailable to other shareholders.
Thus, as the CEO of Hewlett-Packard recently noted, founding families have concerns and interests of their own, such as stability and capital preserva- tion, that may not align with the interests of other investors or the firm see The Wall Street Journal Contrary to the notion that family ownership is detrimental, we find stronger firm performance in family firms than in nonfamily firms.
We find these results are relatively unaffected by the consideration of other blockholders or by the discrepancy between the fa- mily's ownership and control rights.
We also present evidence that the relation between founding-family holdings and firm performance is nonmonotonic; per- formance first increases as family ownership increases but then decreases with increasing family ownership. Differentiating between young firm age less than 50 years and old family firms firm age greater than 50 yearswe find that both groups exhibit better firm performance relative to nonfamily firms.
Our investigation also indicates differential performance in family firms based on CEO status. Specifically, we find that CEOs who are family members founders or founder descendants exhibit a positive relation to accounting profitability measures.
Market performance however appears to be better only in the presence of founder CEOs and outside hired-hand CEOs; founder descendants serving as CEO have no effect on market performance. Although we posit that family ownership mitigates managerial opportunism, an alternative explanation for the performance difference is that families in poorly performing firms or foreseeing poor performance are more likely to sell their shares and exit the firm.
To distinguish between these alternative explana- tions, we use instrumental-variable IV regressions to examine the nature of causality between family ownership and firm performance. The estimates from the IVregressions are consistent with our primary result that family ownership is associated with superior firm performance.
Still, both the agency and family- exit issues could contribute to the documented differences between family and nonfamily firms.Tsao et al. / Founding-Family Ownership and Firm Performance et al., ). These findings maintain that FCPFs are more efficient and .
Corporate governance is the mechanisms, processes and relations by which corporations are controlled and directed. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, .
Their combined citations are counted only for the first article. Founding‐family ownership and firm performance: evidence from the S&P RC Anderson, DM Reeb. The journal of finance 58 (3), Founding-family ownership, corporate diversification, and firm leverage.
We investigate the relation between founding‐family ownership and firm performance. We find that family ownership is both prevalent and substantial; families are present in one‐third of the S&P and account for 18 percent of outstanding equity. They are the next corporate leaders—the superstars of family business dynasties rising to the top of the business world.
CampdenFB, working in association with judges from business schools and the Family Business Network, and supported by Ernst & Young, has come up with the definitive list of the top 40 next generation leaders under the ago . In “Founding-Family Ownership and Firm Performance: Evidence From the S&P ,” slated for publication in the Journal of Finance, Ronald C.
Anderson and David M. Reeb report that companies with significant levels of founding-family ownership or control typically outperform industry peers.