FOUNDING FAMILY OWNERSHIP AND FIRM PERFORMANCE: EVIDENCDE FROM THE S&P 500
The main of this paper is to evaluate the relation between firm performance and family ownership. There was a lot of belief that family ownership structure was very inefficient and less profitable as compared to the other ownership structures. Many reasons have been put forward for the same: owners may choose nonpecuniary consumption and draw resources away from profitable projects. Families often limit executive management positions to family members thereby restricting the more able and qualified individuals. Thus, prior literature has suggested that this ownership structure leads to a poor performance.
On the other hand, combining ownership and control can be used to eliminate managerial expropriation. A family’s historical presence and control of management and director posts allows them influence and maintain their control over the firm. At the same time, families have a long investment horizon, which leads to greater investment horizon. Hence, this leads to the question if family ownership structure enhances or hinders the performance of a firm. The research is based on a sample of firms from the S&P 500 from 1992 and 1999. It was seen that family firms constitute over 35% of the S&P 500 industrials and on average, families own nearly 18% of their undiversified equity.
The potential costs of family ownership are as follows; when founding families have substantial ownership then they may have the power and take decisions that benefit themselves at the expense of the firms performance. Their aims and objectives differ from the others. This would also reduce the probability of bidding by other agents, thereby reducing the value of the firm. Families are also capable of expropriating wealth from the firm through excessive compensation, related party transactions and special dividends. This has an impact on the company’s future growth plans and capital expansion...
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