Top

Small Business Economics

Published in:

01-08-2013

Inherited corporate control and returns on investment

Authors: Johan Eklund, Johanna Palmberg, Daniel Wiberg

Published in: Small Business Economics | Issue 2/2013

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

This paper contributes to the literature on management in family firms by investigating how succession in family firms affects returns on investment. The identities of the chief executive officer (CEO) and the chairman of the board (COB) were used to establish whether the management of the firm can be characterized as founder, descendant, or external management. A unique, unbalanced panel data set on listed Swedish firms covering the period from 1990 to 2005 was used in the analysis. The results show that founder management has a positive effect on the returns on investment in family firms, whereas descendant management has a negative impact. An external CEO as a successor in family firms leads to more efficient investment policies with increased firm value as a result. That is, when studying corporate governance in family firms it is important to account for what type of management the firm has. Further studies are required to understand the relationship between ownership, control, management, and firm performance.

previous article The global financial crisis and small- and medium-sized enterprises in Japan: how did they cope with the crisis?

next article Long-term debt maturity and financing constraints of SMEs during the Global Financial Crisis

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Bianco et al. (2012) and Bjuggren and Palmberg (2010) are two recent exceptions. Bianco et al. (2012) studied investment decisions in family firms while Bjuggren and Palmberg used an approach similar to the one employed in this paper, investigating the role of family control on investment performance.

In this study, a firm is considered to be a family firm if the controlling owner is the founder, a descendant of the founder or another member of the founder’s family with 20 % control (see Sect. 3.2 for further discussion of the definition of family firms).

Villalonga and Amit (2010) refer to these benefits and costs as “competitive advantages” and the “private benefits of control.” Bertrand and Schoar (2006) refer to “efficiency based theories” and “cultural views” as reasons for family ownership and control. According to the cultural view, the focus shifts from value to utility maximization for the founding family (see p. 75 for further discussion).

See Burkart et al. (2003) for a formal description of the concept of “amenity potential” and a more detailed description of how it differs from the private “benefits of control.” The main difference is that the private benefits of control are costly for the firm’s minority shareholders.

For a discussion of measurement problems associated with Tobin’s q see Lewellen and Badrinath (1997).

See Gugler et al. (2004b, p. 513) for a detailed discussion on the concepts of infra-marginal and marginal returns on capital.

For example, Villalonga and Amit (2006) define a family firm as a firm in which the founder, a blood relative, or an in-law act as the CEO or as a block-holder, whereas La Porta et al. (1999) uses various levels of control (10 and 20 % of voting rights) in identifying family firms. Both Dyer (2006) and Chrisman et al. (2004) consider the family’s involvement in management of the firm and the family’s desire to maintain control of the firm.

Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2003). Founding family ownership and the agency cost of debt. Journal of Financial Economics, 68(2), 263–285.CrossRef

Anderson, R. C., & Reeb, D. M. (2003). Founding-family ownership and firm performance: Evidence from the S&P 500. Journal of Finance, 58(3), 1301–1328.CrossRef

Andres, C. (2008). Large shareholders and firm performance: An empirical examination of founding-family ownership. Journal of Corporate Finance, 14(4), 431–445.CrossRef

Astrachan, J. H., & Shanker, M. C. (2003). Family business’ contribution to the US economy: A closer look. Family Business Review, 16(3), 211–219.

Barontini, R., & Caprio, L. (2006). The effect of family control on firm value and performance: Evidence from continental Europe. European Financial Management, 12(5), 689–723.CrossRef

Bennedsen, M., Nielsen, K. M., Pérez-González, F., & Wolfenzon, D. (2007). Inside the family firm: The role of families in succession decisions and performance. The Quarterly Journal of Economics, 122(2), 647–691.CrossRef

Berle, A. A., & Means, G. C. (1932). The modern corporation and private property. New York: Harcourt, Brace & World.

Bertrand, M., & Schoar, A. (2006). The role of family in family firms. Journal of Economic Perspectives, 20, 73–96.CrossRef

Bhattacharya, U., & Ravikumar, B. (2001). Capital markets and the evolution of family businesses. Journal of Business, 74(2), 187–219.CrossRef

Bianco, M., Bontempi, M.E., Golinelli, R., & Parigi, G. (2012). Family firms’ investments, uncertainty and opacity. Small Business Economics. doi:10.1007/s11187-012-9414-3.

Bjuggren, P.-O., Eklund, J., & Wiberg, D. (2007). Ownership structure, control and firm performance: The effects of vote differentiated shares. Applied Financial Economics, 17, 1323–1334.CrossRef

Bjuggren, P.-O., & Palmberg, J. (2010). The impact of vote differentiation on investment performance in listed family firms. Family Business Review, 23(4), 327–340.CrossRef

Bjuggren, P.-O., & Sund, L.-G. (2002). A transaction cost rationale for transition of the firm within the family. Small Business Economics, 19(2), 123–133.CrossRef

Blumentritt, T. P., Keyt, A. D., & Astrachan, J. H. (2007). Creating an environment for successful nonfamily CEOs: An exploratory study of good principals. Family Business Review, 20(4), 321–335.CrossRef

Burkart, M., Panunzi, F., & Shleifer, A. (2003). Family firms. Journal of Finance, 58(5), 2167–2201.CrossRef

Casillas, J., & Acedo, F. (2007). Evolution of the intellectual structure of family business literature: A bibliometric study of FBR. Family Business Review, 20(2), 141–162.CrossRef

Chrisman, J. J., Chua, J. H., & Litz, R. (2004). Comparing the agency cost in family and non-family firms: Conceptual issues and exploratory evidence. Entrepreneurship Theory and Practice, 28(4), 335–354.CrossRef

Chua, J. H., Chrisman, J. J., & Sharma, P. (2003). Succession and nonsuccession concerns of family firms and agency relationship with nonfamily managers. Family Business Review, 16(2), 89–107.CrossRef

Claessens, S., Simeon, D., Fan, J. P. H., & Lang, L. H. P. (2002). Disentangling the incentive and entrenchment effects of large shareholdings. The Journal of Finance, 57(6), 2741–2771.CrossRef

Cucculelli, M., & Micucci, G. (2008). Family succession and firm performance: evidence from Italian family firms. Journal of Corporate Finance, 14(1), 17–31.CrossRef

Demsetz, H., & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93(6), 1155–1177.CrossRef

Dyer, W. G. (2006). Examining “the family effect” on firm performance. Family Business Review, 19(4), 253–273.CrossRef

Faccio, M., & Lang, L. H. P. (2002). The ultimate ownership of western European corporations. Journal of Financial Economics, 65(3), 365–395.CrossRef

Fama, E. F. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88(2), 288–307.CrossRef

Fogel, K. (2006). Oligarchic family control, social economic outcomes, and the quality of government. Journal of International Business Studies, 37(5), 603–622.

Gugler, K., Mueller, D. C., & Yurtoglu, B. B. (2004a). Corporate governance and the returns on investment. The Journal of Law and Economics, 47(2), 589–633.CrossRef

Gugler, K., Mueller, D. C., & Yurtoglu, B. B. (2004b). Marginal q, Tobin’s q, cash flow, and investment. Southern Economic Journal, 70(3), 512–531.CrossRef

Gugler, K., Mueller, D. C., & Yurtoglu, B. B. (2008). Insider ownership, ownership concentration and investment performance: An international comparison. Journal of Corporate Finance, 14(5), 688–705.CrossRef

Gugler, K., & Yurtoglu, B. B. (2003). Average q, marginal q, and the relation between ownership and performance. Economics Letters, 78(3), 379–384.CrossRef

Henrekson, M., & Jacobsson, U. (2012). The Swedish corporate control model: Convergence, persistence or decline? Corporate Governance an International Review, 20(2), 212–227.CrossRef

Högfeldt, P. (2005). The history and politics of corporate ownership in Sweden. In R. Morck (Ed.), A history of corporate governance around the world. Chicago: The University of Chicago Press.

James, H. (1999). Owner as manager, extended horizons and the family firm. International Journal of the Economics of Business, 6(1), 41–55.CrossRef

Jensen, M., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(42), 305–360.CrossRef

Klein, S., & Bell, F. A. (2007). Non-family executives in family businesses: A literature review. Electronic Journal of Family Business Studies, 1(1), 19–37.

La Porta, R. L., Lopez-de-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. The Journal of Finance, 54(2), 471–517.CrossRef

Landes, (2006). Dynasties: Fortunes and misfortunes of the world’s greatest business families. New York: Viking.

Le Breton-Miller, I., Miller, D., & Steier, L. (2004). Toward an integrative model of effective FOB succession. Entrepreneurship Theory and Practice, 28, 305–328.CrossRef

Lewellen, W. G., & Badrinath, S. G. (1997). On the measurement of Tobin’s Q. Journal of Financial Economics, 44(1), 77–122.CrossRef

Maury, B. (2006). Family ownership and firm performance: Empirical evidence from western European corporations. Journal of Corporate Finance, 12, 321–341.CrossRef

Miller, D., & Le Breton-Miller, I. (2006). Family governance and firm performance: Agency, stewardship, and capabilities. Family Business Review, 19(1), 73–87.CrossRef

Miller, D., Le Breton-Miller, I., Lester, R. H., & Cannella, A. A., Jr. (2007). Are family firms really superior performers? Journal of Corporate Finance, 13(5), 829–858.CrossRef

Morck, R., & Nakamura, M. (2007). Business groups and the big push: Meiji Japan’s mass privatization and subsequent growth. Enterprise and Society, 8(3), 543–601.CrossRef

Morck, R., Stangeland, D. A., & Yeung, B. (2005a). Inherited wealth, corporate control and economic growth: The Canadian disease? In M. Randall (Ed.), Concentrated corporate ownership, national bureau of economic research conference volume (NBER). Chicago: The University of Chicago Press.

Morck, R., Wolfenzon, D., & Yeung, B. (2005b). Corporate governance, economic entrenchment, and growth. Journal of Economic Literature, 43(3), 655–720.CrossRef

Morck, R., & Yeung, B. (2003). Agency problems in large business groups. Entrepreneurship Theory and Practice, 27, 367–382.CrossRef

Mueller, D., & Reardon, E. (1993). Rates of return on corporate investment. Southern Economic Journal, 60(2), 430–453.CrossRef

Pérez-González, F. (2001). Does inherited control hurt firm performance? Unpublished working paper. Columbia University.

Pérez-González, F. (2006). Inherited control and firm performance. The American Economic Review, 96(5), 1559–1588.CrossRef

Shleifer, A., & Summers, L. H. (1988). Breach of trust in hostile takeovers. In A. J. Auerbach (Ed.), Corporate takeovers: Causes and consequences. Chicago, IL: University of Chicago Press.

Shleifer, A., & Vishny, R. W. (1986). Large shareholders and corporate control. Journal of Political Economics, 94, 461–488.CrossRef

Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737–783.CrossRef

SIS Ownership Data Corporation. (1990–2005). Owners and power in Sweden’s listed companies. Halmstad: Bulls Graphics AB.

Smith, B. F., & Amoako-Adu, B. (1999). Management succession and financial performance of family controlled firms. Journal of Corporate Finance, 5(4), 341–368.CrossRef

Villalonga, B., & Amit, R. (2006). How do family ownership, control and management affect firm value? Journal of Financial Economics, 80(2), 385–417.CrossRef

Villalonga, B., & Amit, R. (2009). How are U.S. family firms controlled? The Review of Financial Studies, 2(8), 3047–3091.CrossRef

Villalonga, B., & Amit, R. (2010). Family control of firms and industries. Financial Management, Autumn, 2010, 863–904.CrossRef

Title: Inherited corporate control and returns on investment
Authors: Johan Eklund
Johanna Palmberg
Daniel Wiberg
Publication date: 01-08-2013
Publisher: Springer US
Published in: Small Business Economics / Issue 2/2013
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-012-9432-1

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 2/2013

Capital structure of SMEs in Spanish regions

SME takeovers as a contributor to regional productivity gaps

Productivity, wages and intrinsic motivations

What do we know about the capital structure of small firms?

Long-term debt maturity and financing constraints of SMEs during the Global Financial Crisis

The more business owners, the merrier? The role of tertiary education