Previous work on firm ownership structure suggests that organizations in which ownership and control are combined may be undervalued relative to the market investment rule because decision makers have an incentive to forgo investment projects that managers in firms with specialized ownership find profitable. However, the specialization of ownership and decision-making functions may result in substantial agency costs. This paper shows that these tradeoffs may not exist in family firms. The extended horizons characteristic of family businesses may provide the necessary incentives for decision makers to invest according to the market rule while limiting agency costs that arise when ownership and control are separated. Family ties, loyalty, insurance, and stability are expected to be effective in lengthening the horizons of managers and in providing the incentives for family managers to make efficient investments in the family business.Family Firms, Governance, Extended Horizons, Managerial Decisionmaking,

No abstract

The degree to which the family dominates as a form of business organization depends in part on whether a business's operations favor the implicit informal personal relationships of families or the explicit formal impersonal contractual relationships characteristic of market‐oriented organizations. In some situations family identity trust personal ties and the monitoring functions that family relationships provide promote greater incentives for success than explicit formal contracts. In other cases formal relationships can provide a more effective means of linking workers within the firm even when the workers are family members.

No abstract

No abstract