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Asset Market Equilibrium and Family Firm Cost of Capital: Implications for Corporate Finance

Author

Listed:
  • Carlton Osakwe
  • Jess Chua
  • James J. Chrisman

Abstract

Family firms are different from nonfamily firms because the combination of family ownership, family control, and family management leads to certain distinctive structural effects. These effects, along with the demonstrated importance of family firms in the global economy, have the potential to affect asset market equilibrium and the cost of capital for both family and nonfamily firms. We propose an equilibrium model that incorporates the key features characterizing family firms – receipt of nonpecuniary socioemotional benefits, holding a nontraded and non-diversified control block, and information asymmetry between the family and other investors. The resulting information and competitive equilibrium model shows that the costs of capital for family and nonfamily firms operating inside the same economy are different. These differences yield important implications for corporate finance in terms of investment and financing at the macro level.

Suggested Citation

  • Carlton Osakwe & Jess Chua & James J. Chrisman, 2022. "Asset Market Equilibrium and Family Firm Cost of Capital: Implications for Corporate Finance," Review of Corporate Finance, now publishers, vol. 2(4), pages 791-817, December.
  • Handle: RePEc:now:jnlrcf:114.00000030
    DOI: 10.1561/114.00000030
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    More about this item

    Keywords

    Cost of capital; corporate finance; family business; nonpecuniary socioemotional benefits;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G3 - Financial Economics - - Corporate Finance and Governance
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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