Academic journal article Journal of Small Business Management

Founding Family Controlled Firms: Performance, Risk, and Value

Academic journal article Journal of Small Business Management

Founding Family Controlled Firms: Performance, Risk, and Value

Article excerpt

An agency theory framework is used to test the effects of founding family control on firm performance, capital structure, and value. Both the finance and management literatures regarding the relationship between firm control and firm value are explored. Controlling for size, industry, and managerial ownership, the results suggest that firms controlled by the founding family have greater value, are operated more efficiently, and carry less debt than other firms.

While it has generally been accepted that family-controlled businesses differ from professionally managed firms, little empirical research has been done to support and advance our understanding of this premise (Daily and Dollinger 1991). The small amount of existing research, however, does suggest that there are key differences. For example, Fama and Jensen (1983) propose that family controlled businesses should be more efficient than professionally run firms because the costs of monitoring are less in a family controlled firm. Daily and Dollinger (1991) found that there are a number of valid differences between non-family controlled firms and family controlled firms. Non-family controlled firms tend to be larger, have lower mortality rates, use different strategies, and rely more on formal control systems than do family controlled firms.

In the United States, it is estimated that as much as 60 percent of the Gross Domestic Product is generated by family-controlled businesses (Bellet et al. 1995). Often these are thought to be "microfirms" (Carsrud 1994)--mom and pop operations. It is estimated, however, that family owned businesses make up approximately 35 percent of Fortune 500 firms (Carsrud 1994). Furthermore, some estimate that in 80 percent of all businesses, a controlling family has a significant say in the company's strategic direction (Carsrud 1994; Kets de Vries 1993). Yet little attention has been given to the effect of family control on the business, and only recently has the definition of a family business been systematically addressed.

A review of both the finance and management literatures regarding the relationship between firm control and firm value suggests three general research questions: (1) Do founding family controlled firms (FFCFs) have a greater value than other firms? (2) Are FFCFs run more or less efficiently than other firms? and (3) Are FFCFs less risky than other firms?

Related Literature

Efficiency, Risk, and PrincipalAgent Conflicts

The finance literature has little to say about how family control affects how a firm is operated. Research has focused on the impact of ownership control on corporate value, following the leads of Jensen and Meckling (1976) and Fama and Jensen (1985). Empirical work has focused on the effect of the increased ownership concentration associated with corporate takeovers on corporate efficiency (for example, see Kaplan 1989; Smith 1990; Muscarella and Vetsuypens 1990; and Gibbs 1993), and the relationship between ownership structure and capital structure (for example, see Masulis 1988; Grossman and Hart 1986; and Leland and Toft 1996).

The terms "ownership control," "ownership concentration," and "management (managerial) ownership" are used somewhat similarly in the literature and deserve a brief comment in the interest of clarity. In a corporation, shareholders are the owners, and ultimately they can determine the course of the firm. The extent of the shareholders' influence (ownership control) depends on their relative stakes in the firm, as well as on how actively they participate in the activities of the firm. A share-holder with 50 percent of the shares plus one more share can exercise total control the firm if he or she wants, because this individual can outvote all the other shareholders combined. However, an individual does not need this level of ownership to exercise a great deal of influence over the firm, because influence can also depend on how active a role that individual plays, how credible the shareholder is, and how concentrated the other shareholdings are. …

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