The company you keep: The effect of other large shareholders in family firms

Abstract

Manuscript Type Empirical Research Question/Issue Using a panel of non-financial listed firms over a seven-year period, the authors analyse how the value of family firms is potentially affected by the existence of multiple shareholders, by other large shareholders’ voting rights in relation to the family's, by the final power distribution (that is, whether the family's voting rights exceed those of other shareholders), by the identity of the blockholders, and the existence of shareholder agreements. Research Findings/Insights After controlling for possible self-selection bias and for endogeneity issues, the results of a Heckman two-stage method suggest that other large shareholders’ voting rights in relation to the family's do not affect family firm value. The results indicate that what seems to matter is who controls the company in terms of voting power, i.e., whether there is just one large shareholder or other major blockholders as well, and whether they have more or fewer voting rights than the largest owner. The market favors a firm that has multiple large shareholders provided that the family retains control by holding most of the voting rights. However, when there is just one family owner or when other blockholders have more voting power than the family, industry-adjusted family firm value is negatively affected. The existence of shareholder agreements and families and non-financial firms as other blockholders has no impact on company performance, while foreign shareholders tend to increase family firm value. Theoretical/Academic Implications Academics should take the presence of multiple large shareholders into account as this can affect family power. It is not a question of collusion or contestability per se. The market seems to value other large investors’ ability to balance family power only if families retain control by holding the majority of the votes. The preferred model therefore resembles that of a king amid nobility, a “primus inter pares”, with other large blockholders (nobility) providing a credible and strong but not overwhelming opposition that benefits minority owners. Practitioner/Policy Implications When multiple large owners exist, firm value is increased if the family retains power. Ownership structure matters and the effect of other large shareholders’ voting rights on minority investors’ wealth has to be considered. New variables to describe particular situations in family firms are needed.