Family Firm Heterogeneity and Corporate Policy: Evidence from Diversification Decisions

• Author: Ann‐Kristin Achleitner,Markus Ampenberger,Christoph Kaserer,Thomas Schmid
• Published date: 01 May 2015
• DOI: http://doi.org/10.1111/corg.12091
• Date: 01 May 2015

Family Firm Heterogeneity and Corporate

Policy: Evidence from Diversif‌ication Decisions

Thomas Schmid*, Markus Ampenberger, Christoph Kaserer, and

Ann-Kristin Achleitner

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This paper empirically tests how founders and their families affect business segment diversif‌i-

cation. We contribute to the literature by studying the distinct effects of family ownership, management, and supervision on

diversif‌ication strategies.

Research Findings/Insights: We use a large panel dataset of listed German f‌irms. Our results indicate a sharp

contrast between f‌irms owned by families and those in which the family holds an active management position. Firms

owned by families have higher levels of diversif‌ication. However, the opposite is true for f‌irms managed by families.

Furthermore, other large shareholders perform a monitoring role and induce family owners to concentrate on their core

business.

Theoretical/Academic Implications: This paperclearly conf‌irms that family f‌irms comprise a heterogeneousgroup of f‌irms.

Thus, empirical research in this area should carefully distinguish the impact of different channels (i.e., management vs.

ownership) families may use to inf‌luence corporate decision making. For diversif‌ication decisions, we can even show

that family ownership and management have an opposite impact. Founding families have to trade off the desire to

preserve f‌inancial wealth (via diversif‌ication) with the risk of losing control and endangering their socioemotional wealth

(SEW).

Practitioner/Policy Implications: For policy makers, our results underline that family f‌irms are not a homogeneous group

of f‌irms. Hence, it is important to consider their heterogeneity in the political discussion. For example, needs and prefer-

ences of family managed f‌irms may differ substantially from those of family owned f‌irms. Equity investors and debt

providers should also be aware of this family f‌irm heterogeneity.

Keywords: Corporate Governance, Family f‌irms, Family ownership, Family management, Diversif‌ication

INTRODUCTION

For decades, the literature on corporate governance has

focused on the paradigm of widely held f‌irms (Berle &

Means, 1932). Under this paradigm – at least in publicly

listed f‌irms – salaried managers rather than controlling

family owners/managers dominate decision making. This

view has been revised by La Porta, Lopez-de-Silanes, and

Shleifer (1999) who concluded that most corporations have

controlling shareholders, most notably the founders of these

f‌irms and their families. Today, it is widely recognized that

family f‌irms are the most prevalent type of organization

around the globe. This is true for small and medium-sized

privately held f‌irms, but also for the majority of larger f‌irms

listed on the stock market (Bennedsen & Nielsen, 2010;

Claessens, Djankov, & Lang, 2000; Faccio & Lang, 2002; La

Porta et al., 1999).

Acknowledging the importance of family capitalism for

the world’s economies both in mature and developing coun-

tries, it is not surprising that family f‌irms and their gover-

nance structures have received increasing academic

attention in recent years (Sharma, Chrisman, & Gersick,

2012). In addition, founding families are considered as

“unique” controlling shareholders with respect to some of

their attributes like long-term orientation and the desire to

pass the family business on to future generations, risk aver-

sion to maintain family wealth, stakeholder orientation, and

*Address for correspondence: Thomas Schmid,Department of Financial Management

and Capital Markets, TechnischeUniversität München, Arcisstrasse 21, 80333 Munich,

Germany. Tel:+49 89 289 25179; Fax: +49 89 289 25488; E-mail: t.schmid@tum.de

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12091

Corporate Governance: An International Review,2015, 23(3): 285–302

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an (additional) focus on non-f‌inancial goals. Furthermore,

family owners are often actively involved in the day-to-day

management of the family business. These are just some of

the distinct characteristics of family f‌irms that have built the

foundation for increasing academic interest in exploring dif-

ferences between family and non-family f‌irms.

While early research focused on differences between

family and non-family f‌irms,1more recent empirical work

acknowledges that family f‌irms constitute a heterogeneous

group of f‌irms (e.g., Chua, Chrisman, Steier, & Rau, 2012;

Miller, Le Breton-Miller, & Lester, 2011; Sharma et al., 2012).

Thereby, one important aspect is that the def‌inition of a

family business has a strong impact on the results of empiri-

cal studies (e.g., Chrisman, Chua, & Sharma, 2005; Miller, Le

Breton-Miller, Lester, & Canella, 2007; Sharma et al., 2012;

Westhead & Cowling, 1998). In fact, as outlined by Schulze

and Gedajlovic (2010), the infant literature on family f‌irms

suffers from a lack of a widely accepted def‌inition of what

constitutes a family business. It is thus not surprising that

recent familyf‌irm literature has increasingly focused on how

different family f‌irm characteristics, such as ownership and

management, or the degree of family inf‌luence, affect corpo-

rate policy choices (e.g., Miller et al., 2011). Sharma et al.

(2012) point out that “it behooves us to deepen our knowl-

edge of variables related to the family system so we will

better understand why, when, and how its characteristic

attributes are likely to inf‌luence the behaviors and perfor-

mance of family f‌irms” (p. 10).

In this paper, we follow this direction with an in-depth

analysis of the diversif‌ication decision for German family

f‌irms. In general, diversif‌ication in new business f‌ields

requires external capital and/or managerial talent. At the

same time, diversif‌ication reduces business risk because

cash-f‌low streams from different business segments are not

perfectly correlated. Thus, overall f‌irm risk is reduced if a

company does not focus on only one single business. From

this perspective, founding families have to trade off incen-

tives for risk reduction with their strong motivation to

remain in control over the business. Thistrade-off is particu-

larly prevalent due to mostly undiversif‌ied equity owner-

ship of family owners (Shleifer & Vishny, 1986) and

their intention to preserve the socioemotional wealth

(Berrone, Cruz, & Gomez-Mejia, 2012; Gomez-Mejia,

Haynes, Nunez-Nickel, Jacobson, & Moyano-Fuentes, 2007;

Zellweger, Nason, Nordqvist, & Brush, 2013) and bequeath

the business to future generations (Lumpkin & Brigham,

2011). To our knowledge, f‌irms’ diversif‌ication decisions

have so far been studied for family f‌irms only in the

US market-based economy (Anderson & Reeb, 2003b;

Gomez-Mejia, Makri, & Larraza-Kintana, 2010), but have

received limited attention in other institutional settings.2

Thereby, the focus of both studies was on the differences

between family f‌irms and non-family f‌irms, with the main

result that family f‌irms are less diversif‌ied than non-family

f‌irms. The results may, however, be different for other insti-

tutional environments like Germany.

Our objective is to explore the differences between family

f‌irms and non-family f‌irms in greater detail. We argue that

focusing on the theoretical construct “family f‌irm” may be

problematic, especially in the context of the diversif‌ication

decision. As family f‌irms constitute a very heterogeneous

group of f‌irms, we rather focus on the different channels the

founding family may use to inf‌luence corporate decision

making. These are family ownership, management, and

supervision. Furthermore, we analyze the power of the

founding family within the entire corporate governance

structure and the interplay with other large shareholders.

This seems to be important as other, often well-diversif‌ied

blockholders receive less utility from f‌irm-level diversif‌ica-

tion than undiversif‌ied family owners. For such an analysis,

Germany provides an ideal research setting: in comparison

to the US, Germany is characterized by a two-tier board

structure with the management and the supervisory board.

This allows us to disentangle the effects of the families’

participation in day-to-day management from monitoring

via the supervisory board. While the management board has

a direct inf‌luence on all important day-to-day business deci-

sions including diversif‌ication, the supervisory board con-

gregates in regular intervals to appoint, monitor, and

dismiss members of the management board.3Although

Germany has adopted many characteristics of a market-

based economy in recent years (e.g., Enriques & Volpin,

2007; Goergen, Manjon, & Renneboog, 2008; Martynova &

Renneboog, 2011), ownership structures are still much more

concentrated than in Anglo-Saxon markets. Furthermore,

family ownership is more persistent over time than in

market-based economies (Franks, Mayer, Volpin, & Wagner,

2012). In addition, the concentrated ownership structure of

listed f‌irms in Germany allows us to explore the relevanceof

family ownership and the presence of other large (control-

ling) shareholders for the diversif‌ication decision.

The contribution of our paperto the literature is threefold:

First, we acknowledge that family businesses constitute a

heterogeneous group of f‌irms. In the sense of Sharma et al.

(2012), we can show how family f‌irms affect diversif‌ication

decisions. In particular, we argue that the different channels

founding families may use, such as family ownership or

active participation in the f‌irm’s supervisory or management

board, can even have adverse effects. We develop testable

hypotheses for different family f‌irm characteristics,

motivated by agency theory (Eisenhardt, 1989; Jensen &

Meckling, 1976), and the model of socioemotional wealth

(Berrone et al., 2012; Gomez-Mejia et al., 2007). Second, we

provide evidence that the inf‌luence of the founding family

on strategic choices depends not only on the channel the

family uses but also on their power within the entire gover-

nance structure of the f‌irm. In particular, we distinguish

between familyf‌irms with and without a second large share-

holder that potentially monitors the decision-making

process. Thereby, we complement existing empirical f‌ind-

ings that the board composition matters for the diversif‌ica-

tion decision in family f‌irms (Jones, Makri, & Gomez-Mejia,

2008) with evidence for the ownership structure. Finally, our

paper complements already existing research on the diver-

sif‌ication decision in family f‌irms (Anderson & Reeb, 2003b;

Gomez-Mejia et al., 2010). Thereby, we not only provide a

more f‌ine-grained analysis of family f‌irm effects but, to the

best of our knowledge, also the f‌irst empirical evidence on

diversif‌ication decisions of family f‌irms outside the US. This

is important because the institutional environment signif‌i-

cantly affects the prevalence of family f‌irms, their economic

performance, and strategic decision making (e.g., Burkart,

CORPORATE GOVERNANCE

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