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U.S. Family‐Run Companies–They May Be Better Than You Think

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  • Henry McVey
  • Jason Draho

Abstract

Despite the common perception of public family‐run companies as poor investments, the evidence shows that they actually perform quite well. And there may be some good reasons for this: A family that both owns and controls a company avoids the classic agency problem—the natural tendency of professional managers to pursue some private interests at the expense of their shareholders—that confronts most publicly traded companies. The family's concentrated, long‐term investment in the company and knowledge of the business make them potentially effective and highly motivated monitors. Using a sample of “true” family firms from the S&P 500 (one that deliberately excludes “founder companies” like Microsoft and Dell), the authors show that these companies have in recent years produced considerably higher stock returns than their non‐family counterparts. At the same time, family companies with dual‐class share structures produced lower returns than those with a single class of shares, and the returns to dual‐class firms with insider‐dominated boards were still lower. Specific examples highlight the different ways that families maintain control, the consequences of the CEO choice (family member versus professional manager), and the potential benefits of the family's permanent presence, including a long‐term investment focus and reputation for fair dealing with corporate stakeholders.

Suggested Citation

  • Henry McVey & Jason Draho, 2005. "U.S. Family‐Run Companies–They May Be Better Than You Think," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(4), pages 134-143, September.
  • Handle: RePEc:bla:jacrfn:v:17:y:2005:i:4:p:134-143
    DOI: 10.1111/j.1745-6622.2005.00067.x
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    Cited by:

    1. Martin R.W. Hiebl & Zhen Li, 2020. "Non-family managers in family firms: review, integrative framework and future research agenda," Review of Managerial Science, Springer, vol. 14(4), pages 763-807, August.
    2. Julio Pindado & Ignacio Requejo & Chabela la Torre, 2015. "Does Family Control Shape Corporate Capital Structure? An Empirical Analysis of Eurozone Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(7-8), pages 965-1006, September.
    3. García-Ramos, Rebeca & García-Olalla, Myriam, 2011. "Board characteristics and firm performance in public founder- and nonfounder-led family businesses," Journal of Family Business Strategy, Elsevier, vol. 2(4), pages 220-231.
    4. Pindado, Julio & Requejo, Ignacio & de la Torre, Chabela, 2014. "Family control, expropriation, and investor protection: A panel data analysis of Western European corporations," Journal of Empirical Finance, Elsevier, vol. 27(C), pages 58-74.
    5. Jesus Sáenz González & Emma García-Meca, 2014. "Does Corporate Governance Influence Earnings Management in Latin American Markets?," Journal of Business Ethics, Springer, vol. 121(3), pages 419-440, May.
    6. Rebeca García-Ramos & Belén Díaz-Díaz & Myriam García-Olalla, 2017. "Independent directors, large shareholders and firm performance: the generational stage of family businesses and the socioemotional wealth approach," Review of Managerial Science, Springer, vol. 11(1), pages 119-156, January.
    7. Lozano, M. Belén & Yaman, Serhat, 2020. "The determinants of cash flow sensitivity of cash: The family ownership effect," Research in International Business and Finance, Elsevier, vol. 53(C).
    8. Pindado, Julio & Requejo, Ignacio & de la Torre, Chabela, 2011. "Family control and investment–cash flow sensitivity: Empirical evidence from the Euro zone," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1389-1409.

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