Corporate divestitures and family control

Abstract

This paper investigates the relationship between divestitures and firm value in family firms. Using handcollected data on a sample of over 30,000 firm-year observations, we find that family firms are less likely than non-family firms to undertake divestitures, especially when these companies are managed by family rather than non-family-CEOs. However, we then establish that the divestitures undertaken by family firms, predominantly those run by family-CEOs, are associated with higher post-divestiture performance than their non-family counterparts. These findings indicate that family firms may fail to fully exploit available economic opportunities, potentially because they pursue multiple objectives beyond the maximization of shareholder value. These results also elucidate how the characteristics of corporate owners and managers can influence the value that firms derive from their corporate strategies. AbstractThis paper investigates the relationship between divestitures and firm value in family firms. Using hand-collected data on a sample of over 30,000 firm-year observations, we find that family firms are less likely than non-family firms to undertake divestitures, especially when these companies are managed by family-rather than non-family CEOs. However, we then establish that the divestitures undertaken by family firms, predominantly those run by family-CEOs, are associated with higher post-divestiture performance than their non-family counterparts. These findings indicate that family firms may fail to fully exploit available economic opportunities, potentially because they pursue multiple objectives beyond the maximization of shareholder value. These results also elucidate how the characteristics of corporate owners and managers can influence the value that firms derive from their corporate strategies.Keywords: family firms, divestitures, corporate strategy, agency theory, CEOs  We are very grateful to Alfonso Gambardella and two anonymous reviewers for their helpful comments and suggestions. We would also like to thank Laurence Capron, Alex Edmans, Phanish Puranam, David Reeb, and seminar participants at the

To Merge, Sell, or Liquidate? Socioemotional Wealth, Family Control, and the Choice of Business Exit

“…However, recent attempts have been made to theoretically (see Gómez-Mejía et al, 2011) and empirically consider the distinguishing features of family involvement to proxy the relative weight given to SEW in firm decisions. Such features include the presence of family owners and managers (e.g., Chrisman & Patel, 2012; Patel & Chrisman, 2014), having a family CEO at the helm (e.g., Berrone et al, 2010; Feldman et al, 2016), and intergenerational involvement (e.g., Chirico, Sirmon, Sciascia, & Mazzola, 2011; Chrisman et al, 2012). Accordingly, we included the following indicators of family involvement: (a) percentage of family owners (number of family owners / number of total owners, where owners are those who declare part ownership to the tax authorities), ranging from 0% to 1%; (b) percentage of family members managing the business (number of family managers / number of managers), ranging from 0% to 1%; (c) presence of a family CEO, a dummy variable coded as 0 or 1; and (d) intergenerational involvement, that is, the presence of multiple generations that own and manage the firm, ranging from 0 to 2.…”

“…Thus, in line with the SEW protection model based on BAM (Gómez-Mejía et al, 2011), given that the accumulated endowment includes not only financial assets but also a high level of SEW for family owners, the nonfinancial aspects of the firm will suffer a substantial loss if the owners exit the business. When family owners are confronted by the strategic choice of exit or continuation, the SEW model makes an unambiguous prediction: Family owners are more likely to resist exit and extend the life of the firm (Feldman, Amit, & Villalonga, 2016). In contrast, nonfamily owners, for whom nonfinancial utilities are less relevant (e.g., dynastic succession), are more likely to exit and use the dismissed resources to other ends (Fleming & Moon, 1995; Mitchell, 1994; Sullivan et al, 1997).…”

The Pre-Deal Phase of Mergers and Acquisitions: A Review and Research Agenda

“…A growing research stream has examined the impact of different forms of ownership on M&A initiation. Family owners, for instance, are less likely to initiate deals (Miller, Le Breton-Miller, & Lester, 2010) because they are more risk averse and prefer stability to prevent disruption in the firm legacy (Feldman, Amit, & Villalonga, 2016). State ownership has been argued to reduce M&A purely motivated by market expansion (Greve & Man Zhang, 2017).…”

The Role of Management Ownership in Bank Governance: Evidence from Taiwan

“…However, Adiguzel (2013) finds that family ownership reduces the monitoring effectiveness of independent boards. Moreover, Feldman et al (2016) indicate that because family firms may pursue multiple objectives in addition to, or other than, the maximization of shareholder value, they may fail to exploit all the available favorable opportunities, and so do not outperform nonfamily firms ( e.g., Miller et al 2007;Filatotchev et al 2005;Holderness and Sheehan 1988;Zhou 2012). …”