How can Selling Families increase their Firms’ Valuation? Non-Family Managers as Signal of Quality

Abstract

Based on agency theory and the resource based view, prior research has explained the differences in family firm valuation by differentiating among other factors the level of family involvement in management. However, the important case of fully professionalized managements in family firms, and its association with firm valuations, has not been explored. To fill this research gap, I draw from the acquisition context and argue based on signaling theory that the absence of family managers in family firms generates a relevant, costly, and visible signal for potential acquirors to infer more positive and less negative family firm characteristics, resulting in higher price paid by acquirors. Furthermore, I argue that the signal is expected to be interpreted more positively by financial institutions and investment firms and further strengthened in situations characterized by a high degree of information asymmetry – in particular, by lower statutory disclosure standards and non-industry relatedness between acquirors and targets. Based on a sample of German and Italian acquisitions, I find support for most of the developed hypotheses in line with signaling theory. The results provide evidence for the view that firm valuation is not only driven by family firm heterogeneity but also different investor heterogeneity.