Factors Associated with Strategic Corporate Decisions in Family Firms: Evidence from Sweden

• DOI: http://doi.org/10.1111/irfi.12217
• Date: 01 March 2020
• Author: Naciye Sekerci
• Published date: 01 March 2020

Factors Associated with Strategic

Corporate Decisions in Family

Firms: Evidence from Sweden*

NACIYE SEKERCI

†,‡

†

Utrecht School of Economics, Utrecht University, Utrecht, The Netherlands and

‡

Knut Wicksell Centre for Financial Studies, Lund University, Lund, Sweden

ABSTRACT

By using detailed ownership data from Sweden, we investigate the factors

associated with corporate investment decisions in family firms compared to

nonfamily firms. We find that the family owner’s portfolio diversification

level is to some extent, and the use of dual-class share mechanism by the

family owner is strongly, associated with reduced corporate investment. We

further demonstrate where entrenched family owners, holding dual-class

shares, canalize their firm free cash flows to: they prefer to distribute it as div-

idends with catering motivations. They opt to pay higher dividends over

increasing corporate investment, which indicates some evidence of private

benefits of control.

JEL Codes: G32; G34; G35; G39

Accepted: 10 June 2018

I. INTRODUCTION

Family firms are an economic phenomenon throughout the world. La Porta

et al. (1999) and Faccio and Lang (2002) report that they are more common

than widely held firms in Western Europe. They are also observed more in con-

tinental Europe than in the US, UK, and Japan (Sraer and Thesmar 2007).

* I thank Sudipto Dasgupta (Editor), Henrik Cronqvist (Associate Editor), the anonymous referee,

S. Abraham (Avri) Ravid, José Miguel Gaspar, Ola Bengtsson, Laurent Bach, Benjamin Maury, Hos-

sein Asgharian, Clas Wilhborg, Alan Morrison, Sridhar Arcot, Tom Aabo, Anders Vilhelmsson, Niclas

Andren, Frederik Lundtofte, Martin Holmén, Martin Strieborny, Ettore Croci, Fredrik

NG. Andersson, Cristina Cella, Kristoffer Milonas, Hande Karabiyik, and Woochan Kim and the par-

ticipants at the 2nd National PhD Workshop in Finance at the Swedish House of Finance (SHoF)

and the 32nd International Conference of the French Finance Association (AFFI2015), as well as

those at the seminar series at ESSEC Business School, Aarhus University, University of Southern Den-

mark, University of Gothenburg, Bogazici University, Istanbul Technical University and Lund Uni-

versity, for useful comments and suggestions. I also thank Swedish House of Finance (SHoF) for

providing a stimulating research environment during hand-collection of the ownership data from

the database by SIS Ägarservice AB, which is run by Modular Finance AB (Holdings) since 2016;

hence, the database is called Modular Finance AB throughout the paper. All errors are mine.

© 2018 The Authors. International Review of Finance published by John Wiley & Sons Australia, Ltd on

behalf of International Review of Finance Ltd. 2018

This is an open access article under the terms of the Creative Commons Attribution License, which permits

use, distribution and reproduction in any medium, provided the original work is properly cited.

International Review of Finance, 20:1, 2020: pp. 45–75

DOI: 10.1111/irfi.12217

Although the family firm literature provides quite some international evidence

on the valuation and performance of family firms, as well as the influence of

family owners on some different corporate decisions

1

,

2

we still lack evidence on

what factors are related to strategic corporate decisions in family firms. More-

over, the blockholder literature provides evidence of the impact of owners’port-

folio composition and dual-class share ownership on corporate decisions and

firm value (e.g., Cronqvist and Nilsson 2003 and Lyandres et al. 2015). How-

ever, the implications of family owners’portfolio diversification level as well as

dual-class shares use on strategic corporate decisions are not evident in the

literature.

Accordingly, this paper investigates the ownership, as well as firm-related fac-

tors, associated with corporate investment decisions in family firms and non-

family firms. We argue that the portfolio diversification level of family owners, as

well as dual-class share mechanism used by family owners, would be related to

the level of corporate investment for the following two reasons. First, more

diversified owners tend to increase corporate risk as they are able to diversify

their portfolios by themselves. Faccio et al. (2011) show that large diversified

owners prefer less corporate risk, measured by corporate earnings volatility.

3

Moreover, Anderson et al. (2012) find that family owners tend to invest less in

research and development—less corporate investment is perceived as lower cor-

porate risk

4

—supporting the well-accepted view about family owners, that they

are risk averse. Risk aversion of family owners are well portrayed in the litera-

ture. Family owners have strong motives for the continuity of family business

1 International evidence on family firms is mainly from the US, Anderson and Reeb (2003a),

Anderson et al. (2012), Anderson and Reeb (2003b), Anderson et al. (2009), Anderson

et al. (2003), Pérez-Gonzalez (2006), Villalonga and Amit (2006), Palia et al. (2008), Li and

Ryan Jr. (2015); from Sweden, Cronqvist and Nilsson (2003) and Heaney and Holmén (2008);

from France, Sraer and Thesmar (2007) and Bach (2010); from Denmark, Bennedsen

et al. (2007); from Switzerland, Isakov and Weisskopf (2014); from Germany, Andres (2008);

from Japan, Nguyen (2011); from Italy, Amore et al. (2011); and from Colombia, Gonzalez

et al. (2013). Finally, Maury (2006) offers cross-country evidence.

2 In the literature, apart from family performance papers, family firms are mainly analyzed in

relation to the following dimensions: corporate financial policies with a focus on capital

structure (Anderson and Reeb 2003b; Amore et al. 2011 and Gonzalez et al. 2013), corporate

diversification (Anderson and Reeb 2003b), corporate opacity (Anderson et al. 2009), manage-

ment compensation (Palia et al. 2008), and corporate investment (Anderson et al. 2012).

3 The underlying idea here is that “the expected utility of any risk-averse investor decreases

with increased variance of her wealth. If a controlling shareholder is risk-averse and poorly

diversified, an increase in firm-specific risk will decrease her expected utility”(Faccio et al.,

2011, pp. 3602). Similarly, undiversified large shareholders are expected to support conserva-

tive corporate investments assuming that the utility of these shareholders is lower than that

of diversified shareholders (Paligorova 2010).

4 In the literature, both capital expenditures and research and development expenditures

(henceforth “R&D”) are considered to be long-term, and thus risky, investments; however,

R&D expenses are particularly associated with higher idiosyncratic risk compared to capex

(e.g., Anderson et al. 2012).

© 2018 The Authors. International Review of Finance published by John Wiley & Sons

Australia, Ltd on behalf of International Review of Finance Ltd. 2018

46

International Review of Finance