Family Control and Stock Market Reactions to Innovation Announcements

Abstract

Although family firms are common around the world, studies on family-controlled business are limited. Prior studies mainly focused on the influences of family ownership on overall firm performance, and the results were mixed. In this study we attempted to explore the impacts of family ownership on innovation by examining the association of family control and stock market reactions to innovation announcements. We found that firms with greater family control experienced significantly more negative stock market reactions to innovation announcements. The results further indicated that divergence of cash flow and voting rights was strongly and negatively correlated with announcementperiod abnormal returns. In addition, the findings suggested a significantly positive moderating effect of institutional ownership. The conclusions were robust under various measures of family control, and remained valid after controlling other influential factors for stock market reactions to innovation announcements.

Empirical research on Innovation in Family Business: literature review and proposal of an integrative framework

“…FBs' unique characteristics such as altruism, loyalty and trust, can foster family bond (Chang et al, 2010), promote a willingness to take risks (Chen & Hsu, 2009) and provide the flexible support necessary to exploit a firm's innovativeness successfully . However, some of these values might have the opposite effect, for instance, altruism may constrain the firm capability of selecting and evaluating valuable innovation projects (Chang et al, 2010). In fact, altruism can provoke problems of self-control (Block, 2012), assigning strategic roles to family members rather than to the most capable manager (Morck & Yeung, 2003).…”

“…From an agency perspective, we could argue that dominant family shareholders may expropriate minority non-family ones for their own interest (Block, 2012;Chang et al, 2010). Family members may take assets out of the businesses they own, and are reluctant to turn great portions of financial slack into R&D investments (Kim, Kim, & Lee, 2008).…”

“…Family Business or Family Firm (FB) is an important business form in all countries (Chang, Wu, & Wong, 2010), representing the predominant form of business organization around the world (Sharma, Chrisman, & Gersick, 2012). The study of FB has been considered a differentiated field within management (González-Ferrero, Guzmán-Vásquez, Pombo-Vejarano, & Trujillo-Dávila, 2011).…”

Family-Owned Firms and Stock Returns: Evidence from the Chinese Stock Market

“…Lipiec [12] also finds that family firms outperform non-family, but only during crisis (he studies the GFC period); before and after the crisis, non-family firms outperform. A few studies find that non-family firms outperform family firms, but in response to specific events-Chang, Wu [13], Wong, Chang [14], and Sirmon, Arregle [15]-in response to innovations, venturing announcements, and threat of imitation, respectively. Fahlenbrach [16] and Adams, Almeida [17] find that founder CEO's outperform, while Villalonga and Amit [18] finds that family firms are better off only when the founder is the CEO or Chairman.…”

“…Agency costs have been addressed in some of the studies. Chang, Wu [13] contends that family-owned boards had a significantly negative relationship with a firm's abnormal returns, due to the hiring of unqualified employees simply because they are family members. Wong, Chang [14] shows that institutional ownership has a positive effect on family-firm performance, due to mitigating the negative effects of agency costs and nepotism in family-owned firms.…”