The Family Behind the Family Firm Premium: Small Agency Conflicts and Large Financial Constraints

We use data from every Norwegian firm over twenty years to show that family characteristics help explain the profitability premium of family firms, shedding new light on the underlying theories. The family firm premium increases when the family owns a higher equity stake, has fewer owning members, and participates more actively in corporate governance. Less intuitively, the premium is also higher when the family has lower personal wealth, undiversified wealth, and illiquid shares. These results suggest that two important sources of the family firm premium are governance advantages due to low agency costs and financial disadvantages due to constrained funding.