Theories on Family Firms

Abstract

This thesis examines the effects of family ownership characteristics on the corporate decision-making and governance mechanisms, and how these deviate from those in widely held firms.

In the first chapter, the focus is on the effects of controlling ownership on the capital structure decision. Specifically, the analysis shows how the interaction between family owner's control considerations, conflicts of interest with minority shareholders and risk aversion impact financing decisions. I show that creditor monitoring and shareholder protection are substitute mechanisms as the family owner trades off retaining control against alleviating agency cost of equity. The model is able to generate a wide dispersion in leverage ratios, and contributes to the resolution of the zero/low leverage puzzle pointed out by Strebulaev and Young (2013), even when risky debt has additional diversification benefits.

In the second chapter, the focus is on the interaction between the control motivations of family ownership, the investment decision and the capital structure, with the aim of rationalizing family ownership under uncertainty. The analysis shows that family owners are able to internalize conflicts of interest between shareholders and creditors over investment policy and that the optimal family ownership, akin to a hybrid security, is able to costlessly implement the ex-ante value-maximising investment policy.

In the third chapter, the analysis focuses on how the controlling shareholders utilize governance mechanisms, both internal and external, to address the managerial agency problem. Contrary to the common view, the analysis shows that the presence of controlling family ownership, while unambiguously reducing the likelihood of takeovers, may strengthen (rather than impede) the disciplining effect for the market for corporate control if the firm offers high business synergy to potential acquirers. Furthermore, the analysis shows that the disciplinary effect of synergistic takeover complements the internal monitoring effort of family owners, and acts as a substitute mechanism for incentive pay. Together, the presence of inactive controlling ownership improves the operating efficiency and reduces the incentive pay in firms that offer high business synergies to potential acquirers. The finding is in contrast to the European Commission's debate that concentrated ownership stakes should be dismantled in order to facilitate the market for corporate control.