There are competing theoretical explanations and conflicting empirical evidence for the initial public offering (IPO) underpricing phenomenon in family firms. The behavioral agency model predicts that loss-averse family firms discount their shares more than nonfamily firms to minimize losses of socioemotional wealth (SEW). Conversely, the endowment effect in prospect theory suggests that family owners maximize their financial wealth (FW) by including SEW in perceptions of firm value and demanding a higher IPO price to relinquish it. We reconcile these seemingly incompatible predictions by examining dynamic properties of the reference point in decision framing. Conceiving IPO pricing as a two-stage gamble, we theorize that initial SEW losses entailed by the listing decision increase the disposition of family owners to underprice IPO shares to possibly offset these losses, or "break even." We thereby advance the behavioral agency model with the aversion to loss realization logic to explain how family owners' decision frames and preferences change during the IPO process, depending on initial losses of current SEW and new expectations of future SEW. Our analysis of 1,807 IPOs in Europe supports our theoretical expectations, clarifying the trade-off between FW and SEW and explicating the dynamic properties of mixed gambles in family firms. 1073

No abstract

No abstract

Research Question/Issue This study investigates the performance, investment, and financing patterns of family firms after they go public. Research Findings/Insights Despite the common claim that most initial public offerings (IPOs) are motivated by growth considerations, we find that the operating performance of family firms declines after going public relative to non‐family issuers and comparable private firms. This effect is long‐lasting and not due to earnings management before the IPO. We also document that family firms do not differ from other firms in terms of investment activities, but they experience a smaller decrease in leverage. Theoretical/Academic Implications The contributions of this study are threefold. First, it delves into the incentives of controlling families when facing the IPO decision. Second, while financial investors' ability to effectively time IPO decisions has been previously documented, this study shows that families, despite peculiar incentives, take their firms public before a performance decline. Third, it examines the behavior of family firms concerning the usage of IPO proceeds. Practitioner/Policy Implications Families accept diluting their stake in an IPO when they know that firm performance is about to deteriorate. This increases the relative attractiveness of the non‐pecuniary benefits of control, most of which remain with the family, over financial wealth, whose future value is expected to decrease.

No abstract