Download the effect of founding family influence and insider holding on

THE EFFECT OF DIFFUSION OF FOUNDING FAMILY
INFLUENCE AND INSIDER HOLDING ON FIRM VALUE: THE
MODERATING EFFECT OF PYRAMIDAL OWNERSHIP
Sanjay Goel *
Labovitz School of Business and Economics
University of Minnesota Duluth
412 Library Drive
Duluth MN 55812-3029, USA
Phone (1) 218-726-6574
FAX (1) 218-726-7578
E-mail: [email protected]
Trond Randøy
Agder University
Bygg H, Serviceboks 422
N-4604 Kristiansand, NORWAY
Phone (47) 3814 1525
Fax (47) 3814 1027
E-mail: [email protected]
Virginia Blanco
Universidad de Burgos
C/Parralillos s/n
09001 Burgos, SPAIN
Phone (34) 947 259035
Fax (34) 947 258960
E-mail: [email protected]
*Corresponding author
An earlier version of this paper was presented at 2007 Family Enterprise Research
Conference, Monterrey, Mexico. Peter Jaskiewicz, Torsten Pieper, Ranjan Karri, Juan
Bautista Delgado, Juan Manuel de la Fuente and Esther de Quevedo, provided valuable
comments on an earlier version. They are of course not responsible for any errors that
remain. Sanjay Goel and Virginia Blanco thank Blekinge Institute of Technology,
Ronneby, Sweden, and Agder Maritime Research Foundation, Kristiansand, Norway,
for research assistance and support during Autumn 2006, which made the collaboration
among the authors possible.
THE EFFECT OF DIFFUSION OF FOUNDING FAMILY
INFLUENCE AND INSIDER HOLDING ON FIRM VALUE: THE
MODERATING EFFECT OF PYRAMIDAL OWNERSHIP
ABSTRACT
Insights from agency theory and the theory of altruism are used to empirically
examine the relationship between founder descendant board membership and the market
value of publicly traded firms in Norway, Sweden, and Spain. We argue that both
economic incentives and positive altruism drive the board room behavior of persons
associated with inherited wealth. Consequently, founder descendant board membership
may reduce agency costs in public firms by ensuring the continuity of the founder’s
strategic vision. We also hypothesize a non-linear relationship between insider holding
and firm value in firms with a descendant board member, arguing that both market
discipline and altruistic behavior can be key competitive advantage for familyinfluenced firms. We also hypothesize an efficiency based argument for a positive
influence of pyramid ownership structures on the performance of firms with descendant
board membership. This suggests that pyramids favor the creation of firm value in
second and later generation family firms. Evidence from 254 firms in the three nonAnglo-American countries largely supports the presented hypotheses.
Keywords: family firms; founder descendant board membership, corporate
governance, insider ownership, pyramid ownership structure, Spain, Scandinavia
1. INTRODUCTION
A popular assertion about family firms is that by the third generation the firm is
heading for decline (Ward, 1987). Recent studies also suggest that it is paramount to
distinguish between founding influence (i.e. first-generation family influence) and
descendant influence (i.e. influence of the family via second or later generations).
Several authors (Morck, Shleifer and Vishny, 1988; McConaughy, Walker, Henderson
and Mishra, 1998; Anderson and Reeb, 2003; Adams, Almeida and Ferreira, 2005;
Fahlenbrach, 2006; Villalonga and Amit, 2006a and Barontini and Caprio; 2006) agree
that family firms are better performers than are non-family firms when the founder
remain active within the firm –in any of the positions he/she holds in the firm. However,
the impact of descendant influence on firm value is controversial. Extant theory
provides argument that both favor and disfavors descendant influence in family firms.
For instance, agency theory suggests that managerial ownership is – as is the case of
family ownership in public firms – aligns management interests to increase firm value
(Jensen and Meckling, 1976). It has also been suggested that family involvement can
also have a positive influence on firm value, due to extended time horizons, family ties
(that allow for social control), quality of relations (based on trusts and altruism), and a
desire to develop a long-term reputation (of firm and family), (James, 1999; Miller and
Le Breton-Miller, 2005; Karra, Tracey and Phillips, 2006). However, in case of family
ownership the managerial position is also susceptible to entrenchment and nepotism –
as the owning family can recruit from a restricted labor pool for both board members
and top managers (Burkart, Panunzi and Shleifer, 2003). The issue has not received
unequivocal support either. For instance, McConaughy et al., (1998) and Sraer and
Thesmar (2006) show that family firms with descendant CEO are better performance
than non-family firms. Anderson and Reeb, (2003) and Barontini and Caprio (2006),
however, suggest that descendants serving as CEO have no effect on market
performance. And, Morck et al., (1988) and Villalonga and Amit, (2006a) find that firm
value is destroyed when a descendant of the founding family serves as a CEO (see also
Smith and Amoako-Ado, 1999; Pérez-González, 2006; Hillier and McColgan, 2005).
The scarce evidence over the influence of descendant family members on the board is
also controversial. For instance, Barontini and Caprio (2006) show that family firms
perform better than non-family ones when descendants sit on the board, whereas
Villalonga and Amit (2006a) report that firm value is destroyed when a founder’s
descendants serve as Chair. In this paper we focus on investigating this link, with
specific focus on the use of pyramid ownership structures by family firms.
The purpose of this paper is to address the effect of descendant board influence
on firm value. Furthermore, we analyze the influences that a descendant board member
has on the relation between ownership structure and value creation. Additionally, we
also analyze the potential impact that a specific control enhancing mechanism, pyramid
ownership structure, has on the value of firms with descendant board membership. We
theorize that a family descendant’s board membership has, on balance a positive effect
on firm value. In addition, we hypothesize an inverted u relationship between insider
ownership and performance in firms with descendant board membership influence.
Finally we suggest that there is a positive impact of pyramids on firm value within firms
with descendant board membership.
Whereas the widely held public firm has historically been the focus of corporate
governance research, the common organizational form among listed firms in most
countries, is the closely held firm (La Porta et al., 1999; Shleifer and Vishny, 1997;
Faccio and Lang, 2002). We empirically test for a firm value effect of descendant board
membership by using a sample of Swedish, Norwegian and Spanish publicly traded
companies. Firms from Anglo-American countries, whose laws originate in the
common-law tradition, tend to protect shareholders considerably more than continental
European countries, whose legal rules originate in the civil-law (La Porta et al., 1998).
With weak protection of minority shareholders, concentrated ownership may be the
only governance mechanism that limits expropriation by managers (Shleifer and
Vishny, 1997). However, the lower level of minority shareholder protection allows
large shareholders more discretion – and a greater potential for expropriation from
minority shareholders – (Franks, Mayer and Rossi, 2004). This makes Scandinavia and
Spain an especially useful empirical context when testing the potential negative and
positive effects of one specific kind of closely held public firms, those with descendant
family influence. Given the fact that a large share of public companies around the world
are controlled by families, and sooner or later ownership control is inherited (PérezGonzález, 2006), this issue is of great practical importance. Again this issue is
especially germane in Scandinavia and Spain, where there is a larger proportion of firms
with pyramidal ownership structures, which allow an entity (family or non-family) to
control conglomerates by holding a minority of shares. We also address this issue in this
paper.
2. THEORETICAL BACKGROUND
Family influence offers the firm both advantages and disadvantages. One of the main
arguments for the existence of the family firm advanced by earliest extant literature is
the coincidence between control and management decisions (Jensen and Meckling,
1976; Dalton and Daily 1992), which supposedly reduces the agency costs of separation
of ownership and control. Although this argument could be applied to any kind of
closely held firms, the strong ties that unite family members give advantages in
monitoring and disciplining agents (such as board members) inside the family firm
(Fama and Jensen, 1983; Mustakallio, Autio and Zahra, 2002). In addition ownermanagement alignment in family firms, makes these firms patient investors with a long
time horizon (Kang, 2000; Sraer and Thesmar, 2006). The essence (or main objective)
of the family business is to transfer the firm to the next generation (Litz, 1995;
Churchill and Hatten, 1987) with the intention to keep the private benefits that the
family obtains from the control of the company (Demsetz and Lehn, 1985; Holz-Eakin,
Joulfaian and Rosen, 1993). The desire to keep control across generations makes family
members value not only the present rents but also the future rents that successor could
obtain from the firm. So, when family members take decisions they consider a longer
time horizon than a non-family member that discount the value of future rents.
In addition to the possible benefit of reduced agency costs due to incentive
alignment, family firms may gain from employment relationships based on altruism and
trust (Karra, Tracey and Phillips, 2006). Altruism refers to decisions that are made for
selfless reasons to benefit others, rather than decisions made for selfish reasons typically
assumed by classical economics literature (Lunati, 1997). Altruism within the family
could lead to superior employment contracts by reducing the necessity of excessive
monitoring and incentives-based pay, and by offering credible threat of sanctions from
other family members (Chami and Fullenkamp, 2002; De Paola and Scoppa, 2001;
Randøy and Nielsen, 2002). Moreover, family members’ longer time horizon (relative
to non-family members), including the long-term reputation of the family, makes them
more likely to cooperate and make decisions that maximize firm value in the long run
(Walsh and Seward, 1990; James, 1999; Anderson and Reeb, 2003).
However, extant theory also points out the disadvantages of family influence.
For instance, the interests of the family in a publicly traded firm with family influence
are not necessarily the same as those of the minority shareholders (Allen and Panian,
1982). This is even more so in non-Anglo-American countries –where minority
shareholder protection is less developed. As a consequence, minority investors who do
not share the controlling family’s interests could be affected by the family’s
expropriation of wealth (Anderson and Reeb, 2004). Other agency-related costs result
from bias in favouring family interests over the economic interests (such as non-family
shareholders), because of loyalty and a sense of filial duty toward the family (Schulze,
Lubatkin, Dino and Buchholtz, 2001; Schulze, Lubatkin and Dino, 2003; Gomez-Mejia,
Larraza-kintana and Makri, 2003), exposing these firms to managerial entrenchment
(Gomez-Mejia, Nuñez-Nickel and Gutierrez, 2001; Thomsen and Pedersen, 2000).
Whereas the founding entrepreneur may possess the vision and managerial skills which
led to the establishment of the firm in the first place, the same vision and skills may not
be possessed by the descendant. Stewardship perspective on this issue also highlights
the dark side of altruism that can actually encourage agency problems (Corbetta and
Salvato, 2004; Eddleston and Kellermans, 2007) especially among descendants of the
family firm founder.
However, it is critical to determine the precise position that a descendant
occupies in the firm to determine the direction of effect (positive or negative) on firm
value. By appointing a descendant as the CEO, the shareholders are deprived of access
to market for managerial talent (Bukart et al., 2003; Becker, 1974; 1981; Schulze et al,
2001). This access is hampered partly because of a perception of the family firm’s
natural inclination to favour candidates related to the family. This perception could
reduce the quality of applicants for key managerial positions in the firm. A marketselected non-descendant CEO is likely to provide the firm with better managerial talent,
as well as the flexibility to go back to the market if the talent does not deliver results.
On the other hand, board members usually provide an overall vision, hire key
strategic managers, assess the strategy-setting process, audit the overall strategy of the
firm, and monitor the firm’s management in executing that strategy. For this reason, we
propose that a descendant director is likely to effect performance positively. Family
board members are expected to create value for other shareholders through acting as
effective monitors of family and non-family top executives; whereby their large
undiversified equity position, historical presence in the firm, and role as a preserver of
family reputation, provide strong incentives for descendant board members (Demsetz
and Lehn, 1985). A descendant family director may be better able to preserve and
continue the family’s overall vision and long-term goals than a non-family board
member (Ward and Aronoff, 1994; Litz and Kleysen, 2001; Athanassiou, Crittenden,
Kelly and Marquez, 2002). A descendant board member, being hierarchically at a
higher level than the CEO, provides opportunities for close monitoring and long-term
mentoring (as the family tends to be in the business for a long time). Overall, family
representation on the board could play a moderating role in the agency conflict between
large shareholders and minority ones.
3. HYPOTHESES
Board members (as agents) have a fiduciary responsibility to the firm’s owners
(the principals), and in that role are de facto the final monitor of managerial behavior of
the top management team, including the CEO. A prerequisite for an effective board
member is incentive alignment with that of all shareholders. Alignment of board
members’ incentives with those of the owners may occur via two means: altruism and
economic incentives. Altruism involves a selfless adoption of owners’ objectives. It is
self-reinforcing and also motivated by self-interest, since it allows individuals to
achieve both others’ and their own selfish objectives simultaneously (Lunati, 1997).
When altruism is involved in incentive alignment, achieving the owners’ objectives is
considered a reward in and of itself (Becker, 1974; 1981). This selfless service is akin to
siblings helping each other, or parents performing duties for their children. Incentive
alignment through economic incentive employs firms’ objectives as instruments to
economic gains which board members are assumed to desire. However, incentive
alignment through economic incentives is susceptible to the usual agency costs of
writing a perfect contract.
While it can be argued that altruism in family relationships can lead to some
kinds of agency problems - for instance, parents may favor their children to enhance
their own welfare (Lubatkin, Schulze, Ling and Dino, 2005) - a descendant board
member is also more likely to be driven by the vision and selfless zeal (with respect to
the family business) inherent in the founding conditions of a family founded business.
The position of descendant board member offers a combination of economic incentives
and altruistic attachment to a family firm (Steier, 2003). In other words, a descendant
board member is more likely to represent the “brighter view” of altruism (or positive
altruism), and preserve the continuity of family vision (Athanassiou et al., 2002, Ward
and Aronoff, 1994; Litz and Kleysen, 2001). Non-family managers and board members
suffer from a lack of altruism and therefore a finite time horizon problem. Because their
tenure with the firm is finite, it could lead to decisions that improve performance during
their tenure with the organization, but could be harmful in the long run. Altruism among
family members leads to adoption of strategies that solves the problem of a board
member’s finite time horizon. This occurs by linking an individual manager’s tenure
(time horizon) with that of the family’s tenure with the firm, and to family’s reputation
to the reputation of the firm (De Paola and Scoppa, 2001). Consequently, although
family interest may not always align with minority shareholders, family representation
on the board potentially provides advantages to the overall board and the firm
(Anderson and Reeb, 2004).
The discussion above suggests that positive altruism and economic incentives
are relatively non-substitutable mechanisms for incentive alignment. Using economic
incentives alone for a complex and multifaceted task could result in a multi-tasking
problem. Using altruism alone could lead to shielding incompetence with or without
intent. The relative non-substitution of altruism and economic incentives means that
among the board members, descendant board members of closely held public family
firms are likely to be more responsible and superior monitors of the firm than nondescendant Board members. Thus we propose the following:
Hypothesis 1: A descendant board member presence has a positive influence
on firm value.
As we have argued above, in the closely held firm the classic agency conflict
between owner and managers is minimized because large shareholders have strong
incentives to monitor managers. However, in these firms the agency conflict appears
between the large shareholders and the small ones because high ownership
concentration can lead to potential expropriation from minority shareholders (Villalonga
and Amit, 2006a; Coff, 1999) who do not share the private benefits of control. The
identity of large shareholders influences the relationship between ownership structure
and performance because whereas ownership concentration determines the power and
incentives of shareholders to enforce the firm’s goals, owner identity determines which
are the firm’s objectives and goals (Thomsen and Pedersen, 2000; Pedersen and
Thomsen, 2003). The major concern of family owners is to remain influential within the
firm (Casson, 1999; Chami, 1999), due to the non-pecuniary benefits that family obtain
from maintaining corporate control (Demstez and Lehn, 1985). This family logic affects
to perpetuate the business for following generations can potentially reduce agency cost
between controlling and minority shareholders. Indeed, factors such as the extended
time horizon of family members, the implicit social contracts, and other elements of
altruistic behavior could benefit firm value. On the other hand, by combining family and
business interest across generations, this can constrain the firm’s access to executive
skills and increase the conflict of interest between family’s and minority shareholders’
interests.
Empirically, Pedersen and Thomsen (2003) find that family ownership has no
effect on firm performance. But, Anderson and Reeb (2003) find a non-linear
relationship between family ownership and performance and Maury (2006) also support
a non-monotonic relationship between family control and firm performance. Our paper
examines firms with descendant board members influences. In second and later
generations family firms, the separation of ownership from control will lead the power
to enforce firm’s objectives and goals in those insider family managers who run the firm
(Schulze et al., 2003). Extant literature on the influence of insiders (Morck et al., 1988;
McConnell and Servaes, 1990; Han and Suk, 1998; Short and Keasey, 1999; Pindado
and de la Torre, 2004) show that the relationship between insiders` ownership and firm
value is not linear -because both the convergence of interest and entrenchment effect.
We hypothesized that second and later generation family firms are likely to have also an
inverted u curvilinear relationship between insider holding and firm value. Such that,
family interests` coincide more with those of minority shareholders as insider ownership
increase. Indeed, these family firms first benefit both from altruism and continuity of
values across generations, as well as easy access to capital, transparency, and
monitoring by the market, and this among other reasons will increase firm value.
However, excessive insider ownership has a negative impact on firm value because very
high insider ownership is likely to deprive firm from taking advantage of a competitive
market for corporate control that helps to curb the possible negative effects of family’s
managerial entrenchment and nepotism.
Hypothesis 2: Insider holding and firm value have an inverted U curvilinear
relationship when a descendant family member is a board member.
Large shareholders often have substantial power in excess of their cash-flow
rights (La Porta et al., 1999; Claessens, Djankov and Lang, 2000 and Faccio and Lang,
2002). With separation of control-rights versus cash-flow rights the controlling
shareholder can potentially extract private benefits of control (Claessens et al., 2000).
Large shareholders can entrench themselves against pressure from the market for
corporate control or monitoring by non-controlling shareholders (Shleifer and Vishny,
1997). Thus, entrenchment is the offsetting cost (to minority shareholders) of excessive
control rights in closely held public corporations. In the family businesses context,
Claessens, Djankov, Fan, and Lang, (2002), Villalonga and Amit (2006a) and Barontini
and Caprio (2006) find that mechanisms to increase control-rights held by the family are
penalized by the market in firm valuation. In other words, family control rights are not
costless to the family. However, Villalonga and Amit (2006b) show that the different
mechanisms to produce control rights generate different benefits and costs in the family
firms.
The common devices to produce control rights are dual share classes with
differential voting rights, ownership pyramids, cross-holdings and voting agreements.
Within these devices, European firms commonly use pyramid ownership structures, by
which owners gain control rights in excess of ownership rights by means of several
layers of control of public firms (Faccio and Lang, 2002). Pyramid firms facilitate
entrenchment because there is no contestable market for corporate control – outside the
top of the pyramid. Even more, firms controlled by pyramid ownership structures are
vulnerable to wealth transfer among pyramid corporations – at the expense of minority
shareholders (Claessens et al., 2000; Lins, 2003; Morck and Yeung, 2004). Thus, one
can expect to see reduced firm value in the presence of pyramid ownership structures
(Malatesta and Walkling, 1988).
Hypothesis 3: Pyramid ownership structure affects firm value negatively.
"A pyramid is a structure in which an apex shareholder, usually a very wealthy
family, controls a single company, which may or may not be listed. This company then
holds control blocks in other listed companies " (Morck and Steier, 2005, p.4). One
classic example is the Swedish Wallenberg family, that through the family controlled
public firm Investor (by the Wallenberg family and the Wallenberg Foundations), has
direct or indirect controlling ownership positions in a number of large firms such as
Ericsson, Electrolux, ABB, SKF, Astra (for details see: Högfeldt 2005, p. 526).
Following our theoretical arguments on positive altruism, we argue that the
potential negative effect of a pyramid structure on minority shareholders interests can
disappear by the family’s active involvement coming from descendant board
membership. As descendant board member is likely to be partly driven by family
altruism, any potential negative effect of an entrenchment descendant board member is
likely to be muted compared to that of a non-descendant board member, who is not
driven by altruism. Family bonds are produce powerful contexts and subtle incentives
for active monitoring of descendant board members by other family members.
Furthermore, the main difference between the family and the non-family firms is the
specific utility function of the firm’s decision makers (Fuente, Quevedo, Blanco and
Delgado, 2005). One main interest of the family firm is the trans-generational
succession of the firm. In this way, pyramids structures are a way to assure family
control and, whereby, to maximize the family utility. Pyramid structures could be used
by family owners to diffuse family values and family capital (including reputation) at
lower ownership threshold throughout the corporation. Because pyramid structures
enable control of firms at lower ownership threshold, they could support corporations of
larger size to benefit from the overall benefits of family influence. Indeed, previous
literature has suggested that this mechanism could not be an indication of the desire to
expropriate minority shareholders, but rather an indication of the resistance to the
dilution of family control that come with family and firm growth (Villalonga and Amit,
2006a, 2006b) or a way to maximize the family firms` internal sources of financing
sharing the benefits of the new firm with the minority shareholders of the original
family firm (Almeida and Wolfezon, 2005). Such that, pyramids could have a beneficial
effect on the value of second and later generation firms because helping to keep family
control will also preserve the continuity of the specific sources of value that the family
has established during the first generation. In particular, pyramids can be used as a
capital-efficient mechanism by which family could transmit the specific competitive and
survival advantages generated by the family influence across diverse businesses, while
at the same time harnessing capital from broader capital market. Thus, via a pyramid, a
family attempts to monetize the value of its “familiness” and lowers its overall cost of
capital, while allowing non-family capital access to the positive value differential
between family versus non-family management and control. Based on above we
therefore suggest that:
Hypothesis 4: When a descendant family member is a board member pyramids
are beneficial to firm value.
4. DATA AND METHODS
Our sample includes non-financial companies in three European countries
(Sweden, Norway and Spain). The sample companies were publicly traded for at least
two out of the three-year study period (1996-1999). We randomly selected 299 publicly
traded firms from all countries. The initial sample of 299 companies was reduced to 254
firms useable firm observations (81 Swedish, 101 Norwegian and 72 Spanish), due to
incomplete information (missing ownership or incomplete accounting data). The
applied sample represents 719 firm-year observations. In order to verify the presence of
one or more founder descendant on the board of directors, we compile information from
different sources: (1) corporate websites, and web searches about company history and
family relationships, (2) various news sources, (3) and telephone interviews to firms`
investor relations department. All other variables were accesses through secondary
sources.
Our measure of firm value - our dependent variable – is the firm’s log
transformed q-value on December 31, 1996, 1997, and 1998. The q-value is measured
as the ratio of market to book value of the firm’s equity. The natural log transformation
was performed in order to reduce problems of heteroscedasticity. The appeal of this
measure is that it reflects the current value of expected future performance (Perfect and
Wiles, 1994; Chung and Pruitt, 1994; McFarland, 1988). The measure for Descendant
Board Member is a binary variable that equals 1 if descendant(s) of the original
founder(s) holds a position in the Board of Directors. Pyramid is a binary variable that
equals 1 if a public corporation owns more than 25% of the firm, or if a public
corporation that is owned more than 50% by a non-public firm, owns the firm (Note:
Anglad et al., 2002 and Santana and Aguilar, 2004 provide a more extensive overview
of corporate control mechanism in Sweden and Spain, respectively). To capture the
potential non-linear relationship between insider ownership and firm value, we include
the level of insider ownership and the square of the level of insider ownership as
independent variables.
CONTROL VARIABLES
Past research indicates that the Q-ratio is affected by firm size (Dalton, Daily,
Johnson and Ellstrand, 1999), firm age (Mayer, 1997), and firm’s industry affiliation
(Baysinger and Butler, 1985). Firm size relates to possible scale economy effects, and
firm age relates to changes caused by firm life cycle changes (Smith, Mitchell and
Summer, 1985). Firm size is measured by taking the logarithm of total revenues of each
year, as the size alone was not normally distributed. Firm age is measured by the
logarithm of the number of years between the observation year and the firm’s founding
year. Based on well-established current literature we also control for the extent of the
debt used and blockholder ownership as other forms of governance mechanisms (via
monitoring). We also included a dummy variable to control for the possible differences
between the Scandinavian and the Spanish context. In summary, we control for firm
size, firm age, firm’s industry, debt ratio, blockholder ownership, and firm’s country
affiliation.
We employ a two-way fixed effects model for our regression analysis in order to
isolate any specific effect of our choice of countries, observation years and changes in
country and year specific macro conditions on the dependent variable. The fixed effects
are dummy variables for each year and country, as well as, country-year interactions
were included. The method of pooling cross-sectional and time series data is susceptible
to multicollinearity, heteroscedasticity and autocorrelation (Kmenta, 1997). To make
sure that multicollinearity is not a problem in the regression models, we calculated the
Variance Inflation Factors (VIF) for all variables in the models. The VIF statistics do
not indicate any multicollinearity concerns. Furthermore, we control for serial
correlation and heterostedasticity using the Huber White Sandwich Estimator for
variance.
5. RESULTS
Table 1 reports the means, standard deviations, and correlations among the
variables. The multivariate results displayed in Table 2 show the main and interaction
effects of our hypothesized variables on the dependent variable firm value (Q-ratio).
Hypothesis 1 predicted a positive relationship between the presence of a descendant on
the board of directors and firm value. In the main effects model, having a descendant
board member had a significant positive effect on firm value (p<0.05). In the full model,
the effect remains positive but non significant (p=0.22). These results indicate that
founding family descendant board membership leads to a higher firm value – for all
shareholders.
The expected signs of coefficients on the variables insider ownership and insider
ownership2 were found. That is, the coefficient for insider ownership is significant and
positive in the control model (p< 0.01), as well as, in the main and full effects model
(p< 0.05). Furthermore, the coefficient for insider ownership2 is significant and negative
in both the main effects and full models (p<0.001). These results confirm the
hypothesized inverted u curvilinear relationship between insider ownership and firm
value in companies with descendant board membership influence predicted in
hypothesis 2. Finally, Hypothesis 3 predicted a loss in firm value due to pyramid
ownership structure. This effect was true but not significant in the main effect model
(p=0.24). However, the full model shows a marginally significant (p<0.10) negative
effect from pyramid ownership. In hypothesis 4, we tested for the interaction of the
descendant board member influence with the pyramid variable, and as predicted the
effect was significant (albeit marginally) and positive (p<0.10).
6. DISCUSSION
This study is addresses the issue of benefits of family involvement empirically
following insights from prior theoretical arguments and empirical work in this area
(Schulze et al, 2001, 2003; Chrisman, Chua and Sharma, 2005; Eddleston and
Kellermans; Corbetta and Salvato, 2004), in the presence of pyramidal ownership in
non-anglo-saxon markets. We find that descendant influence by the means of a board
membership has a significant and positive effect on firm value. The results from this
sample suggest that the presence of a descendant in the board of directors might
facilitate continuity of entrepreneurial vision and mission, and reducing the finite time
horizon problem of non-family board members. Descendant board members potentially
have a more active monitoring function. They add value to the firm by being driven
both by economic incentives, as well as positive altruism toward other owners of the
firm.
Earlier studies show an inverted u curvilinear relationship between family
ownership and firm value (Anderson and Reeb, 2003; Maury, 2006). With succession,
growing ownership dispersion will differentiate those family members who hold
management positions inside the family businesses from those family members who
only are owners. Therefore, we test that the inverted u curvilinear relationship holds
between insider ownership and firm value in firms with descendant board members
influence. Our results show that as insider ownership increases firm value increases, but
when insider ownership becomes excessive the value of the firm starts decreasing. This
is an interesting finding, because second and later generation family firms can balance
the need for continuity of their values and vision, and attract outside capital, while
increasing the value of the firm as long as insider’s ownership is not so high that
damages the external market discipline.
Our findings confirm that excessive control rights, through pyramid ownership
structure, provide incentives to controlling shareholder to extract private benefits from
the expropriation of wealth from minority shareholders. However, we also found that
pyramid benefits value creation within these companies with descendant board
membership influence. This finding is consistent with earlier research in pyramidal
ownership in family firms (Villalonga and Amit, 2006a, 2006b; Almeida and
Wolfenzon, 2005), which indicates that the presence of this mechanism has benefits in
family firms because pyramids are not so much an indication of the ability to
expropriate minority shareholders as it is of a way to maintain the family’s control as
the firms expands. We suggest that family businesses use the element of control that
pyramids provide to maintain and preserve the genuine value creating opportunities that
family influences confers. And, in addition, pyramids allow to extant the benefits of
family influences into the pyramids corporations. Therefore, families can obtain benefits
of control without expropriating these benefits from minority shareholders.
In summary, this study suggests that founding family influence on firm
performance has the potential to last beyond the firm’s founders. We test these
hypotheses in a sample of three European countries with lower level of external
investors´ protection than the Anglo-American countries. Our finding supports the idea
that the family firms could be an efficient substitute for the weak legal protection of
minority shareholders (Burkart, Panunzi and Shleifer, 2003; Martin de Holan and Sanz,
2006), as long as they incorporate some market discipline in their governance.
The main limitations of our study also suggest the future directions of this line
of research. While this study explores differences in firm value and performance
between firms with descendant board members and non-descendant board members,
future studies may wish to explore differences within the descendant group. These
studies can model family firm-specific independent variables, such as social,
demographic and educational background of the board members, his or her age, size and
composition of the founding family, number of family members involved in the firm, as
well as the extent of their involvement. In addition, within-group studies of the strength
of altruism-based relationships, and the degree of substitution they offer from agency
costs could be other useful areas of research. Family business research has over the
years developed several unique constructs that have no analogues outside family
business, and hence within-group studies would be able to develop a richer theory in
this area by incorporating these constructs.
We also suggest that implications of combining altruism and agency should be
explored beyond the current study’s context of public family firms. In particular, the
crisis of corporate governance in some public firms in the USA, despite high levels of
incentive alignments through compensation and stock options, and professed greater
transparency and regulatory controls, call for developing trust and confidence in
corporate leadership. We believe that processes that lead to development of altruism and
trust outside family relationships are worth exploring (Eshel, Sansone, and Shaked,
1999), in order to develop more general prescriptions of value-added governance
models for public corporations.
In summary, this paper extends our understanding of corporate governance of
family firms, ownership structure and firm value, with implications for corporate
leadership in these firms. With an appropriate board structure (Anderson and Reeb,
2004), the family influenced public firm may be able to combine the advantages of
corporate governance based on altruism, providing multi-generational continuity, and
access to efficient managerial labor and capital markets. Our results support the
proposed model of firm performance. Based on the main findings of this study, several
useful areas of future research are outlined.
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TABLE I
PEARSON CORRELATION MATRIX
Variables
Mean
S.D.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
1. Q-ratio (ln)
.704
.776
2. Debt of total assets (%)
.527
.221
-.011
3. Firm age (ln)
3.671
.987
-.161(**)
.129(**)
4. Firm size (ln)
10.042
2.049
-.077(*)
.301(**)
.384(**)
5. Blockholder ownership (%)
45.993
21.699
-.113(**)
.025
.001
.016
6. Insider ownership (%)
27.234
28.104
-.103(**)
.039
-.027
-.155(**)
.296(**)
.720
.448
-.109(**)
.365(**)
.040
.032
-.132(**)
.205(**)
8. Pyramidal Ownership
.180
.387
-.071
-.178(**)
-.007
.011
.251**
.042
-.255(**)
9. Descendant Board Member
.210
.407
.023
-.028
.040
-.018
.054
.180(**)
.010
7. Country (
* p< .05 (two-tailed)
** p< .01 (two-tailed)
(8)
.010
TABLE II
THE EFFECT OF DESCENDANT BOARD MEMBER ON FIRM VALUE
Dependent variable:
Q-ratio (Ln transformed)
Predicted
sign
Controls only
Controls and
main effects
Controls, main and
interaction effects
.531
(.172) **
.471
(.179) **
.479
(.179) **
Firm age (ln)
-.056
(.031) †
-.057
(.031) †
-.057
(.031) *
Firm size (ln)
-.041
(.015) **
-.034
(.016) *
-.037
(.015)*
Country (Spain=0; Scandinavia=1)
-.785
(.110) ***
-.774
(.113) ***
-.753
(.115) ***
-.002
(.011)
-.001
(.001)
-.000
(.001)
Controls
Debt of total assets (%)
Blockholder ownership (%)
Main effects
Descendent Board Member
+
.125
(.059) *
-.127
(.117)
Insider ownership (%)
+
.007
(.003)*
.005
(.003)
Insider ownership2 (%)
-
-.001
(.001)***
-.000
(.000)*
Pyramidal Ownership
-
-.104
(.069)
-.167
(.080) *
Interaction effects
Descendent Board Member x
Insider ownership (%)
+
.016
(.007)*
Descendent Board Member x
Insider ownership2 (%)
-
-.000
(.001)*
Descendent Board Member x
Pyramidal Ownership
+
.329
(.164) *
Number of observations (Firm-years)
R-square
F-Statistics (Significance)
Change F-Statistics
(model over model to the left)
719
719
719
.305
.325
.332
22.086***
18.685***
16.510***
4.839***
2.662*
Industry controls, year dummies and county x year interaction are not reported.
Beta values reported, and t-statistics in parentheses.
†
p< .10 (two-tailed)
* p< .05 (two-tailed)
** p< .01 (two-tailed)
*** p< .001 (two-tailed)