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Published in: Review of Managerial Science 1/2020

29-05-2018 | Original Paper

Does family involvement monitor external CEOs’ investment decisions?

Authors: Isabel-María García-Sánchez, Jennifer Martínez-Ferrero, Emma García-Meca

Published in: Review of Managerial Science | Issue 1/2020

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Abstract

This paper examines two closely related issues: first, the impact of a professional chief executive officer (CEO) on family investment decisions; and second, how the organizational context (family involvement and board effectiveness) interacts with the external CEO risk-bearing attitude to affect investment intensity in family firms. Using a sample composed of 103 family firms from 13 countries for the period 2008–2015, our results support the negative impact of non-family CEOs on family investment levels, especially when they are of longer tenure. However, our results note that family involvement moderates CEO risk aversion propensity, increasing the levels of investment needed to preserve socioemotional and financial goals in family firms. Therefore, this paper extends the knowledge on the determinants of investment intensity in family firms by simultaneously considering non-family CEO characteristics as well as the organizational context variables of family firms.

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Footnotes
2
Global Family Business Index posits in their website the following: “The 32% cut-off is motivated by the observation that in OECD countries on average 30% of the votes are sufficient to dominate the general assembly of a publicly listed company. This is because on average only roughly 60% of the votes are present in the general assembly. To be more conservative in our classification we decided to use the 32% cut-off, which is also more conservative than most academic studies who often use a 25% or 20% cut-off. The assessments in this index are based on data for 2015. Companies for which no complete and reliable data for 2015 was available were skipped from the index”. See more at http://​familybusinessin​dex.​com/​.
 
3
We include Religion, a multinomial variable, due to Pe’er (2016) evidenced that religiosity in a firm’s environment influences decision making of organizations when initiating and evaluating corporate development strategies and hence leading to uneven distribution of economic activity.
 
4
We follow the previous approach of García-Sanchez et al. (2015) and Martínez-Ferrero and García-Sánchez (2017) and group all the cultural dimensions into a global variable, “Culture”. This is created by calculating the mean value of the six dimensions by country: (1) “Power_distance”, which is a numerical variable that represents the level of hierarchy within a society; (2) “Individualism”, which is a numerical variable that reflects the prevalence of individual values compared with group values; (3) “Masculinity”, which is a numerical variable that represents the level of male orientation; (4) “Uncertainty_avoidance”, which is a numerical variable that identifies the level of uncertainty avoidance; (5) “Long_term_orientation”, which is a numerical variable that represents the orientation of a society towards the future; and (6) “Indulgence”, which is a numerical variable that expresses the extent to which a society is socialized. We use the regional score of each of Hofstede’s cultural dimensions because the country scores are relative owing to societies being compared with each other (Akman 2011). Accordingly, we consider the value of the dimensions related to power distance and indulgence but the inverse value of the dimensions related to power distance, individualism, masculinity and uncertainty avoidance. Thus, the higher the level of the “Culture” variable, the higher the level of cultural system development and therefore the greater the pressure of the normative force.
 
5
There is a lack of effect when the coefficient is around 0.000.
 
6
ExternalCEO → (coef. − 0.001, p < 0.05 for “INVEST”; coef. − 0.030, p < 0.05 for “Capital_Invest”; and coef. − 0.001, p < 0.05) for “NonCapital_Invest”). Tenure → (coef. − 0.010, p > 0.10 for “INVEST”; coef. − 0.914, p > 0.10 for “Capital_Invest”; and coef. − 0.002, p > 0.10) for “NonCapital_Invest”).
 
7
ExternalCEO → (coef. − 0.016, p < 0.05 for “INVEST”; coef. − 0.749, p < 0.05 for “Capital_Invest”; and coef. − 0.006, p < 0.05) for “NonCapital_Invest”). Tenure → (coef. − 0.001, p > 0.10 for “INVEST”; coef. − 0.010, p > 0.10 for “Capital_Invest”; and coef. − 0.001, p > 0.10) for “NonCapital_Invest”).
 
8
Despite of the variable significance is lower than 0.10, the effect is almost inexistent.
 
9
For each model, we provide the R2: 30.71, 19.71 and 20.32%, respectively.
 
10
We have hand-collected data about CEO and chairman of family firms. By reviewing each CEO and chairman, we have checked if they are from the family business founder or controller. In relation to the family ties of the CEO, we conducted an exhaustive search of information to check whether it belonged to the founding company or the family company that controls the percentage of votes to the company. However, we could not to review this information for all the board members or managers. Future research aims to analyze each manager and director individually in order to identify ties with the founding family.
 
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Metadata
Title
Does family involvement monitor external CEOs’ investment decisions?
Authors
Isabel-María García-Sánchez
Jennifer Martínez-Ferrero
Emma García-Meca
Publication date
29-05-2018
Publisher
Springer Berlin Heidelberg
Published in
Review of Managerial Science / Issue 1/2020
Print ISSN: 1863-6683
Electronic ISSN: 1863-6691
DOI
https://doi.org/10.1007/s11846-018-0290-3

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