The Contest to the Control in European Family Firms: How Other Shareholders Affect Firm Value

• Published date: 01 May 2008
• Author: Mauricio Jara‐Bertin,Félix J. López‐Iturriaga,Óscar López‐de‐Foronda
• Date: 01 May 2008
• DOI: http://doi.org/10.1111/j.1467-8683.2008.00677.x

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The Contest to the Control in European

Family Firms: How Other Shareholders Affect

Firm Value

Mauricio Jara-Bertin, Félix J. López-Iturriaga* and

Óscar López-de-Foronda

ABSTRACT

Manuscript type: Empirical

Research Question/Issue: This paperanalyses the influence of large shareholders on firm valueusing a sample of firms from

11 European countries, specifically considering how the existence of a controlling coalition in family-owned firms and the

contestability of control of the largest shareholder affect the value of the family-owned firms.

Research Findings/Insights: We find that increased contestability of the control of the largest shareholder increases the

value of family-owned firms. Results also show that in firms in which the largest shareholder is a family, a second family

shareholder reduces firm value. Conversely, an institutional investor as second shareholder increases firm value. Likewise,

better legal protection of shareholders not members of the controlling coalition increases the value of family firms.

Theoretical/Academic Implications: We explore an under-examined aspect of agency conflict – contestability between

large, dominant shareholders and minority shareholders. We highlight the role of the second and third largest shareholders,

in terms of share and type of shareholder. We suggest the need for new avenues of research focused on the dynamics of

power within the firm. Finally, we identify a situation in which conflict of interest becomes prominent.

Practitioner/Policy Implications: This study corroborates policymakers’ concerns regarding the protection of rights of

minority shareholders. We suggest the need for a strongermacro governance environment to facilitate minority shareholder

participation in corporate decision making. Our study also lends support to balanced ownership structures with multiple

large shareholders as a way to increase the firm’s performance. Managers would also better serve shareholders’ interests by

not limiting their attention to the current controlling coalition.

Keywords: Corporate control, corporate governance, family firms, ownership structure

INTRODUCTION

Although the dynamics of power within organizations –

and, more specifically, how the distribution of power

within firms affects decision making – has begun to draw

the attention of researchers and academia in recent years,

the topic remains relatively unexplored. The literature to

date shows that power is not static among the elites in an

organization and that contest between various actors results

in competition for control and in the development of

competing coalitions (Selznick, 1957; Ocasio, 1994; Thornton

and Ocasio, 1999). Although limited, previous literature has

also shown that insiders’ actions to enhance their power in

the firm can be related to the firm’s performance (Stevenson,

Pearce and Porter, 1985; Bourgeois and Eisenhardt, 1988;

Eisenhardt and Bourgeois, 1988).

Political dynamics within the firm can be explained by

two main models (Ocasio, 1994). The institutionalization of

power model emphasizes a static playing field in which

power is generally perpetuated, consolidated, and un-

challenged (Pfeffer, 1981). Conversely, the circulation of

power model stresses incessant political struggles created

by continually shifting coalitions within the firm (Jackall,

1988). This circulation of power is created by the interplay

of two underlying mechanisms – obsolescence and

*Address for correspondence: University of Valladolid,Department of Financial Eco-

nomics & Accounting, Facultad de Ciencias Económicas and Empresariales, Avda.

Valle del Esgueva 6, E-47011 Valladolid, Spain. Tel: +34-983-423000; Fax: +34-983-

423899; E-mail: flopez@eco.uva.es

146 CORPORATE GOVERNANCE

Volume 16 Number 3 May 2008 © 2008 TheAuthors

Journal compilation © 2008 BlackwellPublishing Ltd

doi:10.1111/j.1467-8683.2008.00677.x