Papers

Family Ownership

Belén Villalonga and Raphael Amit
Winter 2020

ABSTRACT
This article reviews the existing literature about the most prevalent form of corporate ownership around the world: ownership by individuals—particularly founders—and families. We summarize the existing evidence about the prevalence and persistence of family ownership around the world, along with its impact on performance—both financial and non-financial—relative to other types of corporate ownership. We discuss how and why these empirical facts and findings come about—why owners in general, and family owners in particular, are critical drivers of firm behaviour and performance, and how they are able to exercise their influence over corporations in which other shareholders, such as institutional investors, and other stakeholders can also play an important role.

Family Firms and the Stock Market Performance of Acquisitions and Divestitures

Emilie R. Feldman, Raphael Amit, and Belén Villalonga
April 2019

ABSTRACT
This paper explores the stock market performance of acquisitions and divestitures where both, one, or neither of the companies in the transaction are family firms. We find that acquirer shareholder returns are highest when family firms buy businesses from non-family firm divesters, especially when family CEO acquirers buy businesses from non-family CEO divesters. Additionally, divester shareholder returns are highest when family firms sell businesses to non-family firm acquirers, especially when family CEO divesters sell businesses to non-family CEO acquirers. These findings reveal that it is important to consider the characteristics of both the acquiring and divesting firms when analyzing acquisition and divestiture performance, and that the expected gains to family firm acquisitions and divestitures are driven by transactions in which the counterparties are non-family firms.

Corporate Divestitures and Family Control

Emilie R. Feldman, Raphael Amit, and Belén Villalonga
March 2016

ABSTRACT
This 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. Copyright © 2014 John Wiley & Sons, Ltd.

Governance of Family Firms

Belén Villalonga, Raphael Amit, María-Andrea Trujillo, and Alexander Guzmán
December 2015

ABSTRACT
We review what the financial economics literature has to say about the unique ways in which the following three classic agency problems manifest themselves in family firms:(i) shareholders v. managers; (ii) controlling (family) shareholders v. non-controlling shareholders; and (iii) shareholders v. creditors. We also call attention to a fourth agency problem, unique to family firms: the conflict of interest between family shareholders and the family at large, which can be thought of as the “super-principal” in a multi-tier agency structure akin to those found in other concentrated ownership structures where the controlling owner is the state, a bank, a corporations, or other institutions. We then discuss the solutions or corporate governance mechanisms that have been devised to address these problems and what research has taught us about these mechanisms’ effectiveness at solving these four conflicts in family firms.

The Role of Institutional Development in the Prevalence and Performance of Entrepreneur and Family-Controlled Firms

Raphael Amit, Yuan Ding, Belén Villalonga, and Hua Zhang
April 2015

ABSTRACT
We investigate the role played by institutional development in the prevalence and performance of firms that are owned and/or managed by entrepreneurs or their families, while controlling for the potential effect of cultural norms. China provides a good research lab since it combines great heterogeneity in institutional development across its provinces with homogeneity in cultural norms, law, and regulation. Using hand collected data from publicly listed Chinese firms, we find that, when institutional efficiency is high, entrepreneur- and family-controlled firms are more prevalent and exhibit superior performance than non-family firms. We find that the positive effects of family ownership and the negative effects of family control in excess of ownership that have been documented in earlier studies around the world are only significant in high-efficiency regions, and only for family-controlled firms proper, but not for entrepreneur-controlled firms. Institutional development also helps reconcile the divergence of results across prior studies regarding the performance impact of founders and their families as managers and not just owners. When institutional efficiency is high, the sign of the management effect is entirely contingent of whether the Chairman or CEO is the entrepreneur himself/herself (positive) or a family member (negative); when institutional efficiency is low, the effect is positive in both cases, and more strongly so in the case of a family member serving as CEO.

Financial Performance of Family Firms

Raphael Amit and Belén Villalonga
2014

INTRODUCTION
Family business is one of the fastest growing areas of research within management and related fields such as finance. The main reason for this growth is the increased realization among the academic community that most companies around the world are family controlled, that they are systematically different from other firms, and that those differences are manifested in the relative performance of both groups of firms. In other words, family businesses matter – very much, and to very many people.

Until recently, however, family business research was perceived as a niche topic affecting a small group of companies, published by a small group of researchers in an even smaller set of specialized outlets, and therefore of limited interest to the academic community at large. It wasn’t until a few studies put family businesses in the broader business context by presenting rigorous empirical evidence about the prevalence and performance of family businesses relative to non-family businesses that top academic journals opened their doors to family business research, giving it the visibility it deserves.

In this chapter we review the evolution of this research, from its antecedents to its current state. Based on our review, we identify what we see as the main drivers of variation in the cumulative evidence about family business financial performance. We then proceed to analyze the challenges associated with the measurement of performance in family businesses, and propose feasible ways to address some of those challenges.

2012 Family Governance Report: Sources and Outcomes of Family Conflict

Raphael Amit and Rachel Perl
July 2012

ABSTRACT
In this study, which focuses on family businesses, we investigate the relationship between the family domain and the business domain. More specifically, we examined the sources of conflict among family members, i.e. family conflict, and how this type of conflict affects Top Management Team dynamics. In understanding the source of family conflict, we found that clarity of family business leadership and perceptions of procedural fairness were associated with decreased family conflict. Need norm and equity norm—resources distribution norms which describe how family resources are distributed among family members—were  both associated with increased family conflict. When examining the effect of family conflict on the Top Management Team, we found that family conflict decreases Top Management Team commitment, Top Management Team information sharing and Top Management Team risk-taking propensity.

Family Control of Firms and Industries

Belén Villalonga and Raphael Amit
Autumn 2010

ABSTRACT
We test what explains family control of firms and industries and find that the explanation is largely contingent on the identity of families and individual blockholders. Founders and their families are more likely to retain control when doing so gives the firm a competitive advantage, thereby benefiting all shareholders. In contrast, nonfounding families and individual blockholders are more likely to retain control when they can appropriate private benefits of control. Families are more likely to maintain control when the efficient scale is small, the need to monitor employees is high, investment horizons are long, and the firm has dual-class stock.

Top Management Teams in Family-Controlled Companies: ‘Familiness’, ‘Faultlines’, and Their Impact on Financial Performance

Alessandro Minichilli, Guido Corbetta, and Ian C. MacMillan
March 2010

ABSTRACT
This article examines the affect of family management on performance of the company. We examine how familiness can provide further insights beyond the classical demographic measures of top management teams (TMTs) in explaining variations in firms’ financial performance. We combine arguments on the ‘bright’ and ‘dark’ side of family involvement in the firm; we complement positive predictions on family involvement with negative predictions and develop family firm-specific measures of TMTs’ familiness. Results indicate that while the presence of a family CEO is beneficial for firm performance, the coexistence of ‘factions’ in family and non-family managers within the TMT has the potential to create schisms among the subgroups and consequently hurt firm performance. We find support for a hypothesized U-shaped relationship between the ratio of family members in the TMT and firm performance. Additional evidence related to interactions between firm listing and CEO type on firm performance is then presented and discussed.

Benchmarking the Single Family Office: Identifying the Performance Drivers

Raphael Amit and Heinrich Liechtenstein
November 2009

ABSTRACT
A Single Family Office (SFO) is a professional organization, owned and controlled by a single wealthy family,* dedicated to managing the personal and financial affairs of family members. In addition to investment management services, SFOs’ activities often include a range of financial, accounting, legal, educational and personal services which are dedicated and tailored to the exclusive needs of family members. SFOs vary substantially in the scope of activities, in the Assets Under Management (AUM), in the activities that are carried out in house versus those that are outsourced and in other aspects. Given the highly confidential and private nature of SFOs, there has not been a reliable and robust source of information that relates SFO performance to a broad range of SFO practices including governance, documentation, investment management processes, communication, human resources issues, education, succession planning and technology. In this survey, we have responded to the request of families to build upon our 2007 study (reported in Single Family Offices: Private Wealth Management in the Family Context) in order to benchmark the operations of SFOs around the world. While plans for this follow-up study were already under way in the summer of 2008, the global economic crisis of late 2008 and early 2009 added another valuable dimension in exploring how SFOs were affected by the widespread and dramatic downturn. By examining at a high level of granularity the governance and management processes of family offices, we wish to illuminate the relationship between the financial performance of SFOs and a broad range of operational aspects, thereby allowing families to learn from each other while maintaining total anonymity and confidentiality.

How are U.S. Family Firms Controlled?

Belén Villalonga and Raphael Amit
August 2008

ABSTRACT
In large U.S. corporations, founding families are the only blockholders whose control rights on average exceed their cash flow rights. We analyze how they achieve this wedge, and at what cost. Indirect ownership through trusts, foundations, limited partnerships, and other corporations is prevalent but rarely creates any wedge (a pyramid). The primary sources of the wedge are dual-class stock, disproportional board representation, and voting agreements. Each control-enhancing mechanism has a different impact on value. Our findings suggest that the potential agency conflict between large shareholders and public shareholders in the United States is as relevant as elsewhere in the world.

Single Family Offices: The Art of Effective Wealth Management

Heinrich Liechtenstein, Raphael Amit, M. Julia Prats, and Todd Millay
January 2008

ABSTRACT
Single family offices (SFOs) are professional organizations dedicated to managing family wealth and family matters. Despite the substantial and growing importance of SFOs, however, there is little systematic knowledge of how they are structured and what services they deliver to families. Because SFOs typically focus on the private affairs of one family, there is little comparative information available about the range of SFO types and the key differentiators among the variety of SFOs existing today. This chapter begins to fill this gap by presenting the results of an international pilot study based on over 40 personal interviews and 138 follow-up surveys with the heads of SFOs managing US $100m or more in investable assets across the United States, Europe and Asia. The project reveals several learning points on how to run an SFO effectively across continents and generations.

How Do Family Ownership, Control, and Management Affect Firm Value?

Belén Villalonga and Raphael Amit
Journal of Financial Economics 80, pp 385-417.
May 2006

ABSTRACT
Using proxy data on all Fortune 500 firms during 1994-2000, we find that family ownership creates value only when the founder serves as the CEO of the family firm or as its Chairman with a hired CEO. Dual share classes, pyramids, and voting agreements reduce the founder’s premium. When descendants serve as CEOs, firm value is destroyed. Our findings suggest that the classic owner-manager conflict in non-family firms is more costly than the conflict between family and non-family shareholders in founder-CEO firms. However, the conflict between family and non-family shareholders in descendant-CEO firms is more costly than the owner-manager conflict in non-family firms.

Single Family Offices: Private Wealth Management in the Family Context

Raphael Amit, Heinrich Liechtenstein, M. Julia Prats, Todd Millay, and Laird P. Pendleton

INTRODUCTION
Single family offices (SFO) are professional organizations dedicated to managing the personal fortunes and lives of very wealthy families. Tracing their lineage back to the Roman major domus (head of the house) and the Medieval major-domo (chief steward), the modern SFO began to take shape in the mid-19th century, with the development of private banks and trust companies formed to help the Industrial Revolution’s entrepreneurs manage their wealth. Their charge was—and still is—to protect their particular family’s investments and assets for both current and subsequent generations. Since the beginning, affluent families have been attracted to SFOs, rather than to commercial banks, investment companies or other wealth optimization services, because of their promise of exclusivity, privacy and customization.