Family Firms

The topic of family firms focuses on a widely popular ownership form of public and private companies around the world (La Porta, Lopez-de-Silanes, and Shleifer, 1999; Faccio and Lang, 2002). Family firms are typically defined as companies in which the founder or a member of his/her family is a blockholder, officer, or director, either individually or as a group (Anderson and Reeb, 2003; Villalonga and Amit, 2006).

There are two competing effects of family ownership and control on firm value. Investors often assign a premium to family firms, especially when founders serve as CEOs, due to expectations that families can reduce owner-manager agency costs via monitoring of the firm’s management, as well as mitigate the short-termism problem. Families may also have strong incentives to preserve their socio-emotional wealth invested in the firm, such as family name and reputation, as well as family networks in business and politics. On the contrary, according to the entrenchment effect, families may extract private benefits of control from their firm, especially when family control goes beyond ownership with the help of control enhancing mechanisms, such as dual class shares or pyramids, and when the control is retained by the founder’s heirs for many generations.

In recent years, one of the main challenges for family firms is succession that is becoming more complex due to changes in family, management and governance systems. Evaluating different governance models, planning succession and creating long-term value for family firms are never ending challenges with academic, business and policy relevance. With the ageing of the population of entrepreneurs, business transfers due to family firm succession constitute a large part of transactions volume, and hence easing business transfers is mentioned, for example, as one of the priorities in the Entrepreneurship 2020 Action Plan of the European Commission. (See the ECGI conference “SMEs, Families and Capital Markets”, in June 2020.)

For related content, see also the topic page on Dual Class Firms.

 

Queries, suggested inclusions and other ideas?

Contact Anete Pajuste

Research Member

Professor of Finance, Head of Accounting and Finance Department

The topic of family firms focuses on a widely popular ownership form of public and private companies around the world (La Porta, Lopez-de-Silanes, and Shleifer, 1999; Faccio and Lang, 2002). Family firms are typically defined as companies in which the founder or a member of his/her family is a blockholder, officer, or director, either individually or as a group (Anderson and Reeb, 2003; Villalonga and Amit, 2006).

There are two competing effects of family ownership and control on firm value. Investors often assign a premium to family firms, especially when founders serve as CEOs, due to expectations that families can reduce owner-manager agency costs via monitoring of the firm’s management, as well as mitigate the short-termism problem. Families may also have strong incentives to preserve their socio-emotional wealth invested in the firm, such as family name and reputation, as well as family networks in business and politics. On the contrary, according to the entrenchment effect, families may extract private benefits of control from their firm, especially when family control goes beyond ownership with the help of control enhancing mechanisms, such as dual class shares or pyramids, and when the control is retained by the founder’s heirs for many generations.

In recent years, one of the main challenges for family firms is succession that is becoming more complex due to changes in family, management and governance systems. Evaluating different governance models, planning succession and creating long-term value for family firms are never ending challenges with academic, business and policy relevance. With the ageing of the population of entrepreneurs, business transfers due to family firm succession constitute a large part of transactions volume, and hence easing business transfers is mentioned, for example, as one of the priorities in the Entrepreneurship 2020 Action Plan of the European Commission. (See the ECGI conference “SMEs, Families and Capital Markets”, in June 2020.)

For related content, see also the topic page on Dual Class Firms.

 

Queries, suggested inclusions and other ideas?

Contact Anete Pajuste

Research Member

Professor of Finance, Head of Accounting and Finance Department