Undiversified shareholders, socioemotional wealth, and corporate hedging: Evidence from family firms

Family firms have undiversified founding family owners who care deeply about their legacy and reputation due to their financial and socioemotional investment in the firm, suggesting that family firms should hedge more than non-family firms. However, empirical evidence on this prediction is inconclusive at best; indeed, the extant literature suggests that, on balance, family firms are more risk-seeking than non-family firms. We examine this question by comparing the hedging behavior of family and non-family firms using hand-collected data from the oil and gas industry. On average, family firms are 22 % more likely to hedge than non-family firms, and an additional family member on the board of directors is associated with a 10 % higher likelihood that the firm is a hedger. Founder CEOs, who likely have the highest wealth in the firm among all investors, are especially more likely to engage in hedging. Our findings are robust to controlling for the unusually high oil price volatility in 2008, differences in CEO compensation incentives, and differences in institutional ownership. To our knowledge, these findings provide the first empirical evidence that family firms are significantly more likely to hedge their commodity price risk exposure than non-family firms.