Founding family ownership and firm performance: Evidence from the evolution of family ownership and firm policies

Abstract We use a novel dataset to follow the evolution of family ownership, firm value and firm policies for up to 25 years post initial public offering (IPO). Firm value, measured by Tobin's Q, increases as family ownership decreases over time. Firms with higher family ownership invest less in research and development (R&D) and have greater R&D sensitivity to internal cash flow. A path analysis reveals the lower R&D investment as a mechanism through which firm value relates negatively to family ownership. Firms with higher family ownership rely more on debt financing, and firms with higher levels of family ownership at the IPO are less likely to conduct seasoned equity offerings. Altogether, the valuation, investment and financing patterns are consistent with the premise that firms with higher levels of family ownership are unwilling to issue equity and dilute family ownership. A reluctance to issue equity creates financing constraints that limit the firms’ abilities to fully exploit their investment opportunities and contributes to lower firm value among firms with more concentrated family ownership.