How does the founding family matter in corporate governance? A study of the entrenchment heterogeneity among S&P 1,500 firms

Abstract

Drawing on principal-principal agency theory and the socioemotional wealth (SEW) perspective, this paper explores the motivations and mechanisms regarding the founding family’s contingent choices of governance provisions that facilitate managerial entrenchment, which can potentially threaten firm performance. By investigating S&P 1,500 firms between 2007 and 2017 and employing quasi-experimental treatment effects analyses, this study finds that family firms are less likely to utilize the E-index provisions than non-family firms in general. Further, family firms tend to adopt more E-index provisions when the first generation of the founding family remains involved in the firm. However, as these firms age, they rely less on the E-index provisions to entrench family managers. Consequently, this paper expands current research on the governance of publicly-traded family firms by illustrating the differences between family and non-family firms as well as the impact of transgenerational family governance on the use of entrenchment mechanisms over time.