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Risk, Return and Degree of Owner Involvement in Privately Held Firms

Author

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  • Edward Vos

    (University of Waikato)

  • Bronwyn M. Smith

Abstract

Financial theory states that the variability of an asset’s return should be explained by the relative riskiness of that asset (Sharpe, 1964). This concept has been built around, and applied to, publicly-listed companies for which market information (which forms the basis of the risk and return measures) is easily visible and obtainable. Unfortunately, the fact that such information is rarely (if ever) available for small businesses, severely limits the usefulness of such a theory for privately-held enterprises. Therefore by using data from 100 small businesses and three measures of risk, this study provides empirical evidence that for small businesses, there is no significant relationship between financial returns and risk, but there is a relationship between the level of control exerted by the owners of a firm and the financial returns of that firm. This paper also provides evidence that owners with little or no control of a firm, take action to prevent agency costs. This action is in the form of disbursements to shareholders, rather than using debt as a means of reducing agency costs.

Suggested Citation

  • Edward Vos & Bronwyn M. Smith, 2003. "Risk, Return and Degree of Owner Involvement in Privately Held Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 8(1), pages 31-55, Spring.
    • Handle: RePEc:pep:journl:v:8:y:2003:i:1:p:31-55
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    References listed on IDEAS

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    1. Edward A. Vos, 1992. "Differences in Risk Measurement for Small Unlisted Businesses," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 1(3), pages 255-267, Spring.
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    3. James S. Ang, 1992. "On the Theory of Finance for Privately Held Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 1(3), pages 185-203, Spring.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    5. Collins, Robert A. & Barry, Peter J., 1988. "Beta-adjusted hurdle rates for proprietary firms," Journal of Economics and Business, Elsevier, vol. 40(2), pages 139-145, May.
    6. Kothari, S P & Shanken, Jay & Sloan, Richard G, 1995. "Another Look at the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 185-224, March.
    7. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    8. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    9. James S. Ang & Rebel A. Cole & James Wuh Lin, 2000. "Agency Costs and Ownership Structure," Journal of Finance, American Finance Association, vol. 55(1), pages 81-106, February.
    10. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    11. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    1. Vos, Ed & Yeh, Andy Jia-Yuh & Carter, Sara & Tagg, Stephen, 2007. "The happy story of small business financing," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2648-2672, September.

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    More about this item

    Keywords

    Risk; Return; Owner Involvement; Private Firms;
    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
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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