Academic journal article Entrepreneurship: Theory and Practice

Preserving Socioemotional Wealth in Family Firms: Asset or Liability? the Moderating Role of Business Context

Academic journal article Entrepreneurship: Theory and Practice

Preserving Socioemotional Wealth in Family Firms: Asset or Liability? the Moderating Role of Business Context

Article excerpt

We ask whether choices aimed at preserving socioemotional wealth (SEW) represent an asset or a liability in family-controlled firms. Specifically, we consider one major SEW-preserving mechanism--having as chief executive officer (CEO) a member of the controlling family--and hypothesize that this choice is (1) an asset in business contexts, such as industrial districts, in which tacit rules and social norms are relatively more important, but (2) a potential liability in contexts like stock exchange markets, where formal regulations and transparency principles take center stage. The results from our empirical analysis confirm these hypotheses.

Introduction

The socioemotional wealth (SEW) perspective recognizes that the uniqueness of family firms resides in having nonfinancial, as well as financial, objectives that affect how problems are framed and what actions are taken (see Gomez-Mejia, Cruz, Berrone, & De Castro, 2011, for a comprehensive review). In other words, family principals tend to make decisions that enhance or preserve the stock of affect-related value invested in the firm (Berrone, Cruz, Gomez-Mejia, & Larraza-Kintana, 2010; Gomez-Mejia, Haynes, Nunez-Nickel, Jacobson, & Moyano-Fuentes, 2007). SEW has proved valuable in predicting differences in the strategic choices of family firms compared with nonfamily firms with respect, for instance, to corporate and technological diversification (e.g., Berrone et al.; Gomez-Mejia, Hoskisson, Makri, & Campbell, 2011), proactive stakeholder engagement and environmental management (Berrone et al.; Cennamo, Berrone, Cruz, & Gomez-Mejia, 2012), and, generally, risk-taking choices (Gomez-Mejia, Cruz, et al., 2011; Gomez-Mejia et al., 2007).

When it comes to predicting the performance effects of SEW-preserving choices, or differences across family firms, the theory does not go much further than saying that family principals can take decisions to preserve SEW even when these harm financial performance. However, preserving SEW may also be positive for financial performance, and this effect may vary across family firms. If the SEW paradigm aspires to become a "complete" theory of family firms, it must be able to predict when SEW-based choices will improve or impair firm performance. This requires a delineation of factors that condition the impact of those choices.

Our study offers a first attempt to examine the SEW-financial performance relationship as a function of the environment in which the firm operates. Building on the recommendation of contingency theory to consider successful performance as the result of a proper fit between organizational structure/choices and contextual variables (Hofer, 1975; Powell, 1992; Thompson, 1967), we propose that choices to preserve SEW will enhance financial performance when there is a proper alignment (or fit) between the family's SEW objectives and the prevailing institutional logics (formal and informal norms) characterizing the environment, and will hinder financial performance when such a fit is missing. Heeding warnings against the risks of an "oversocialized" perspective (Gomez-Mejia, Wiseman, & Dykes, 2005), we begin by considering variation in some aspects of the institutional environment while keeping other factors constant. Specifically, within the same national context (Italy), we consider the formal or informal prevailing character of the institutional environment. North (1990, p. 3) defines institutions as "the humanly devised constraints that structure human interaction," which include formal rules, such as laws and regulations, and informal constraints, such as customs, norms, and cultures. While in most business contexts formal and informal institutions coexist and reinforce each other, the relative importance of the formal or informal component imposes different constraints on firms operating therein (Peng & Jiang, 20 I0; Sauerwald & Peng, 2013), providing insights into the conditions under which the effects of SEW preservation choices on performance might be expected to vary. …

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