This exploratory study is intended to analyze how a combination of the resources‐based view and agency theory can provide a better understanding of the internal dynamic of the family business and its evolution. Our evidence seems to suggest that the desire to keep family control produces specific sources of value and conditions the firm's financial capacity to acquire resources. These peculiarities change between first and following generations. During the first generation, we find that less severe agency costs balance the negative effect of scarce financial structure on the family firm's value. After descendants join the firm, the increasing agency costs are compensated by the enlargement of the firm's financial structure.

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This paper studies the influence of ownership concentration, board size, and debt in firm performance of a sample of 216 companies from Spain and the United Kingdom, over a four-year period (2000-2003), with the aim of uncovering evidence on the influence of the legal environment in the design of governance mechanisms. Our findings show that the legal protection offered to investors in each country determines the use of internal governance mechanisms. The results show that ownership concentration and investor protection are substitutive mechanisms when increasing firm value, and that the latter mechanisms determine the use of the remaining governance mechanisms.

Corporate governance systems around the world are shaped by legal traditions, but the most important determinant of their effectiveness is law enforcement. Developing countries tend to have weak institutional structures and contracting environments. In this context, markets are inefficient and ownership concentration becomes the main corporate governance mechanism in order to protect property rights. How can developing countries design an optimal corporate governance system in their poor business environments? Corporate governance mechanisms are interdependent, and each country needs to search for a set of mechanisms in equilibrium—that is, an optimal combination of control and incentives—that solves its own agency problems. But another problem in developing countries is the lack of public enforcement. Just as internal mechanisms may substitute for ineffective external mechanisms, private initiatives may reinforce weak public enforcement.

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