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The Family Firm Ownership Puzzle

Author

Listed:
  • Ronald Anderson
  • Nan Li
  • David M. Reeb
  • Masud Karim

Abstract

Conventional wisdom suggests that family shareholders should exit their large, concentrated equity stakes in publicly traded firms and seek benefits arising from diversification. However, founding families maintain a substantive and undiversified stake in many publicly traded U.S. firms. The classical models without ambiguity cannot quantitatively explain the decision of these family owners to hold a large portion of their wealth in the family firm. We propose a robust portfolio-choice model with ambiguity about the return volatility, where family owners can exploit their information advantage about their firm to reduce the ambiguity of their firm relative to other firms in a diversified portfolio. Our model rationalizes family owners’ decision to concentrate their wealth in the family firm and predicts that the less wealthy, less risk averse, and younger families are more likely to exit the firm. The empirical results based on more than 500 U.S. family firms' cross-section data support these novel predictions. Based on family ownership and exit decisions, we find that information advantage and ambiguity about return volatility are critical to understanding the family owners' decision to maintain substantive control in countries with well-developed financial markets and legal regimes.

Suggested Citation

  • Ronald Anderson & Nan Li & David M. Reeb & Masud Karim, 2022. "The Family Firm Ownership Puzzle," Review of Corporate Finance, now publishers, vol. 2(4), pages 679-720, December.
  • Handle: RePEc:now:jnlrcf:114.00000027
    DOI: 10.1561/114.00000027
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    Citations

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    Cited by:

    1. Morris, Heather & Blewitt, Claire & Savaglio, Melissa & Halfpenny, Nick & Carolan, Erin & Miller, Robyn & Skouteris, Helen, 2022. "Using a realist lens to understand the Victorian Family Preservation and Reunification Response in the first year of implementation — Towards a better understanding of practice," Children and Youth Services Review, Elsevier, vol. 143(C).
    2. Dasgupta, Kabir & Diegmann, André & Kirchmaier, Tom & Plum, Alexander, 2022. "The gender reveal: The effect of sons on young fathers’ criminal behavior and labor market activities," Labour Economics, Elsevier, vol. 78(C).
    3. Alice Rossi & Tom Vanacker & Silvio Vismara, 2023. "Unsuccessful Equity Crowdfunding Offerings and the Persistence in Equity Fundraising of Family Business Start-Ups," Entrepreneurship Theory and Practice, , vol. 47(4), pages 1327-1355, July.

    More about this item

    Keywords

    Family-owned firms; firm ownership; ambiguity; asymmetric information; robust portfolio choice;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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