Family Firm Value Research Articles

Valuation of Family Firms: The Limitations of Accounting Information

This conceptual paper explores the extent to which reported accounting information captures unique family firm decision‐making and intangible asset factors that impact financial value. We review the family firm valuation‐relevant literature and identify that this body of research is predicated on the assumption that accounting information reflects the underlying reality of family firms. This research, however, fails to recognise that current accounting technology does not fully recognise the family firm factors in the book value of the firm or the implications for long‐run persistence of earnings. Thus, valuation models underpinning the extant empirical research, which are predicated on reported accounting information, may not fully reflect the intrinsic value of family firms. We present propositions on the interaction between accounting information, family factors and valuation as a road map for future empirical research with a discussion of appropriate methodologies.

Does family ownership create or destroy value? Evidence from Canada

Purpose – The purpose of this paper is to examine whether and how family ownership enhances or damages firm value. Design/methodology/approach – The paper studies a sample of Canadian companies listed on the Toronto Stock Exchange (TSX) between 1999 and 2007 and apply multivariate regression with firm value as a dependent variable. The paper measures firm value as Tobin ' s Q and ROA based either on net income or EBITDA. The independent variables include family firm dummy and ownership percentage. Findings – It is found that control-enhancing mechanisms which are often employed by family companies add value to companies. Furthermore, it is found that agency conflicts between ownership and management are less costly than those between majority and minority shareholders, suggesting that family ownership helps resolve the agency conflicts between ownership and management and in turn enhances firm value. Finally, it is found that family companies with founders as CEOs outperform those with descendants as CEOs. Research limitations/implications – The paper studies Canadian family firms; as such, the sample size is not relatively large. Nonetheless, the results should be generalized as Canada is one of the largest markets in the world and have high integration with the rest of the world. Practical implications – The results suggest investors should invest in family ownership firms. Originality/value – The paper shows whether firm ownership increases firm value and the determinant of family firm value.

The Effect of an Independent Blockholder on the Board of Directors

It is well-known that among family firms, some families are active in their participation in board management, having a family member serving as either CEO or chairman of the corporate board, or both. In other family firms, members of the family occupy neither of these roles, though maintaining family representation on the corporate board. Among families involved in board management, and particularly so for firms with a founder-CEO, through a combination of family, affiliated and employee directors, the family may control the votes of the board. I derive a theoretical model of family control and then use the model to empirically assess the impact of active family management and control of board votes on family firm value. Theoretically, I find that by controlling the nominating process and rewards to independent insiders, the family can control the vote whether or not they have a voting majority on the board. I find qualified empirical support for the theoretical analysis. I find no empirical support for the assertion that family control detracts from firm value.

Performance of Family Firms During the Global Financial Crisis: Does Governance Matter?

We investigate whether better corporate governance impacts the performance of family versus non-family firms during the Global Financial Crisis (GFC). If good governance matters then its impact should be amplified during times of exogenous financial shocks. Furthermore the impact of governance will be more pronounced for family firms as family firms are more resilient, have greater access to survival capital and have a longer term decision making focus. We find that the value of family firms is more sensitive to book value than earnings changes whereas better governance results in a higher earnings relationship with value during the GFC. We also find better governance, irrespective of whether the firm is family or non-family, is associated with better accounting and market performance during the GFC.

The Role of Institutional Development in the Prevalence and Value of Family Firms

We investigate the role played by institutional development in the prevalence and value of family firms, while controlling for the potential effect of cultural norms. China provides a good research lab since it combines great heterogeneity in institutional development across the Chinese provinces with homogeneity in cultural norms, law, and regulation. By decomposing family firms into their ownership, control, and management elements, we are able to test the specific predictions of the investor protection and internal markets explanations. Using hand-collected data from publicly listed Chinese firms, we find that, when institutional efficiency is low, family ownership and management increase value, while family control in excess of ownership reduces value. When institutional efficiency is high, none of these effects are significant. We conclude that institutional development plays an important role in the prevalence and value of family firms.