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Public, founding family-controlled firms (FFCFs) represent an organizational form between the diffusely owned, manager-controlled firm and the closely-held private firm. The unique relationship between the founding-family CEO and the firm holds the potential for improved monitoring and top managerial incentives. This study examines the operating efficiency and the relative value of such firms.
Controlling for managerial ownership level, size, industry, and investment opportunities, we find that FFCFs operate more efficiently and have higher relative values than non-FFCFs. In one comparison, the firms are matched in terms of managerial ownership level, size, and industry. In the other, the most diffusely owned firms of similar size in the same industry as the FFCFs are selected for comparison. We find corporate efficiency and value unrelated to the managerial ownership level but related, instead, to who the owner-managers are. That is, what is significant is whether the owner-managers are founders or related to the company founders. Both founders and their descendants run their firms more efficiently than managers without founding family ties, although descendants run firms more efficiently than founders. Finally, we observe that the value of founder-controlled firms is negatively related to the firm's age.
FFCFs constitute from 21 percent to 60 percent of public companies, depending on the definition of family control.(1) In spite of the economic importance of FFCFs, the financial literature has little to say about how family control affects the way a firm is run. It has focused instead on the impact of ownership control on corporate value and, more recently, on the effect of an increase in ownership concentration associated with corporate takeovers. References to the expected impact of family control on firm performance and efficiency and any evidence regarding it seem to be almost an afterthought.
Managerial Ownership and Corporate Value
The possibility of misalignment between manager and owner interests is well recognized. Jensen and Meckling (JM) (1976) brought the issue to the forefront of financial economics. They argue that the value of the firm is positively related to the level of managerial ownership because of reduced agency costs.(2)
The JM position is not universally accepted. Demsetz (1983) and Demsetz and Lehn (1985) argue that the level of managerial ownership is endogenous to the firm. Since the optimal level of managerial ownership depends on such factors as firm size, regulation, and risk, the level of managerial ownership does not affect firm value.(3)
Stulz (1988) refines the JM argument, hypothesizing that managerial ownership in excess of 50 percent of the firm insulates managers from hostile takeover and results in a curvilinear relationship between managerial ownership and firm value - values initially rise as ownership becomes more concentrated and then fall due to management's insulation.(4)
Empirical evidence does not resolve the issue. Demsetz and Lehn (1985) find no significant relationship between firm value and managerial ownership level. Morck, Shleifer, and Vishny (1988) find that Tobin's Q first increases with board ownership (0 to 5 percent), then declines (5 percent to 25 percent), and then increases slightly (beyond 25 percent). McConnell and Servaes (1990) find a curvilinear relationship between Tobin's Q and insider ownership (measured by officers' and directors' holdings). Q-values rise until insider ownership reaches 40-50 percent and fall thereafter.(5)
Takeovers and Corporate Efficiency
Takeovers concentrate ownership and control among small groups of managers and buyout specialists. This concentration is generally followed by improvements in operating efficiency and increases in firm value. Kaplan (1989), Smith (1990), and Muscarella and Vetsuypens (1990) find evidence of improved efficiency following either a leveraged buyout or a management buyout.
The work on corporate efficiency and value changes after takeovers suggests a reduced agency cost explanation for the improvement. The reduction in agency costs is attributed to the concentration of ownership and control created by the takeover.
The Impact of Founder and Family Control on Firm Value and Other Characteristics
Fama and Jensen (1983) suggest that family relationships among owner-managers should reduce agency costs. They comment that agency problems between top managers and shareholders can be reduced if the residual claimants and the decision agents are the same. In other words, when ownership and control rest with the same individual, the need for costly monitoring by outside shareholders is reduced, thus increasing firm value. They note that family-controlled firms fall under this characterization of ownership and control: "Family …