Corporate Governance Provisions, Family Involvement, and Firm Performance in Publicly Traded Family Firms

Abstract

This study examines the moderation effects of corporate governance provisions on the link between family involvement (i.e., family ownership and family management) in publicly-traded firms and firm performance by drawing upon agency theory, with a focus on principal-principal agency issues, and the extant family governance literature. We develop and test the hypotheses on 386 of the S&P 500 firms longitudinally. Findings support the hypotheses suggesting the moderation effects of the use of provisions (a) protecting controlling owners in terms of their sustainability of controlling status, and (b) protecting management legally on the inverted U-shaped relationship between family ownership and firm performance. We also found support for the moderation effects of provisions (c) protecting controlling owners in terms of their voting rights, (d) protecting noncontrolling owners, and (e) protecting management monetarily on the inverted U-shaped relationship between family management and firm performance. By this, our study provides empirical support for the principal-principal agency perspective on the corporate governance in publicly-traded family firms. As such, it suggests new avenues of research for both the corporate governance literature, as well as for the theory of the family firm. Our study also offers insights to policy directed toward monitoring the actions of large shareholders such as family and enhancing the overall shareholder value in publicly-traded family firms. Int. J. Financial Stud. 2015, 3 195 OPEN ACCESS

Performance and Behavior of Family Firms

“…Consistent with Luo and Liu's [22] work, Memili and Misra [23] examine the S&P 500 firms and show the moderation effects of corporate governance provisions on the inverted U-shaped links between family involvement (i.e., family ownership and family management) in publicly-traded firms and firm performance by drawing upon agency theory, with a focus on principal-principal agency issues, and the extant family governance literature. Hence, both family involvement and the use of governance provisions are influential on firm performance in publicly-traded firms in the US.…”

“…The articles in this Special Issue (e.g., Lipiec [20]; San Martin-Reyna and Duran-Encalada [21]) are in line with studies showing that family ownership and management can enhance firm value since the controlling family can provide superior oversight through lengthy tenure, investment in long-term projects, or exhibit reputation concerns that diminish the possibility of questionable or irresponsible business practices (Anderson and Reeb [5]; Dyer and Whetten [26]). Nevertheless, family involvement can also result in negative firm behavior and performance, if principal-principal agency problems prevail, particularly after an optimum level of family ownership and/or management (e.g., Luo and Liu [22]; Memili and Misra [23]). …”

“…Existing research generally explores the use of various governance mechanisms and performance differences between family firms and non-family firms and among family firms by drawing upon agency theory with a focus on principal-principal agency issues (e.g., Memili [31]; Memili and Misra [23]). However, institutional factors tend to play a role in governance systems as well.…”

Percepção da Governança Familiar em uma Pequena Empresa de Turismo Rodoviário

“…For Brenes et al (2011), professionalization of the board of directors (BoDs) is very important to ensure business continuity, which may face a conflict between the family's other shareholders' goals, the controlling family may prioritize the family goals, that can be different from the non-controlling owners (Memili & Misra, 2015). Family ownership and management can increase company value, due to the vision on lengthy tenure, long-term projects, and reputation concerns.…”

“…Family ownership and management can increase company value, due to the vision on lengthy tenure, long-term projects, and reputation concerns. On the other hand, mechanisms to maintain family control or to preserve socioemotional wealth can negatively influence firm performance and adopt a risk aversion posture (Memili & Misra, 2015;Gómez-Mejía et al, 2007).…”