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Family firms and crash risk: Alignment and entrenchment effects

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  • Srinidhi, Bin
  • Liao, Qunfeng

Abstract

Stock price crash risk could be lower in family firms because the controlling family investors have a longer-term interest, hold greater decision rights and are better informed than investors in diffusely owned firms (alignment effect). However, the agency costs between family and nonfamily investors (entrenchment effect) could affect crash risk in two opposing ways. Non-controlling investor skepticism about insider entrenchment limits overvaluation and reduces the crash risk. In contrast, entrenched insiders could hide bad news to exploit private benefits, which could increase the crash risk. We show that family firms exhibit a lower crash risk than similar nonfamily firms after controlling for lower overvaluation, which is consistent with the better alignment effect. Moreover, we show that better governance further reduces the crash risk, which indicates that the substitutive relationship between strong governance and family ownership shown in countries with low investor protection rights does not carry over to the U.S. where investor protection rights are strong.

Suggested Citation

  • Srinidhi, Bin & Liao, Qunfeng, 2020. "Family firms and crash risk: Alignment and entrenchment effects," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(2).
    • Handle: RePEc:eee:jocaae:v:16:y:2020:i:2:s1815566920300217
    DOI: 10.1016/j.jcae.2020.100204
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    More about this item

    Keywords

    Family firms; Crash risk; Agency cost; Governance mechanism;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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