Skip to main content

Advertisement

SpringerLink
Log in

Governance structure and performance of private family firms

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

A debate exists on the issue of whether a governance system is value additive or even necessary for a privately-held firm. One side of the debate suggests that, since agency problems do not exist in a small private firm, it does not need a costly governance system. The other side argues that a private firm indeed faces agency costs in the form of altruism and, therefore, could extract net gains from a governance system. In this paper, we empirically investigate whether a good governance system crates or destroys value of private family firms. We first demonstrate that a multifamily firm encounters larger agency costs stemming from inter-family conflicts, and therefore, has larger incentive than a single-family firm to institute a superior governance system. We then show that a multifamily firm, owing to its better governance system, outperforms its single-family counterpart.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Other reasons that might impact the performance of private small firms is their inability to provide competitive compensation and promotional opportunities, resulting perhaps in hiring employees that are likely inferior to those hired by a publicly held firm.

  2. We define “family firm” as a private business that is solely owned and controlled by the founder (i.e. single-family) or by descendants of the founder (i.e., multifamily).

  3. Although Daily and Dalton’s statement is in the context of publicly-held firms, it might equally apply to the founder-manager of a privately-held firm. Who, for personal reasons as well as being exempt from the market disciplining mechanisms, avoids a governance system that interferes with his control or questions his decisions.

  4. Private family-owned firms in India has so far been outside the scope of academic investigation as prior studies such as Khanna and Palepu (2000) and Gopalan et al. (2007) examine publicly-listed Indian firms that are usually larger and with scattered ownership structure.

  5. Daily and Dalton (1992), however, do not find a significant difference in the governance structure between publicly-held founder-CEOs and non-founder–CEOs.

  6. We use the two terms “independent” and “outsider” interchangeably.

  7. Selection of the member(s) of the same family to perform both CEO and board chair functions might reflect the trust other families have for the superior management skills of the entrusted family.

References

  • Anderson CA, Anthony RN (1986) The new directors. John Wiley and Sons, New York

    Google Scholar 

  • Anderson RC, Reeb DM (2003) Founding-family ownership and firm performance: evidence from the S&P 500. J Financ 58:1301–1328

    Article  Google Scholar 

  • Anderson RC, Mansi S, Reeb DM (2004) Board characteristics, accounting report integrity and the cost of debt. J Account Econ 37:315–342

    Article  Google Scholar 

  • Baron RM, Kenny DA (1986) The moderator-mediator variable distinction in social psychological research: conceptual, strategic and statistical considerations. J Pers Soc Psychol 51:1173–1182

    Article  Google Scholar 

  • Berg SV, Smith SK (1978) CEO and board chairman: a quantitative study of dual v. unitary board leadership. Directors and Boards 3:34–49

    Google Scholar 

  • Bhagat S, Bolton B, Romano R (2008) The promise and peril of governance indices. Colum L Rev 108:1803–1882

    Google Scholar 

  • Brickley JA, Coles JL, Jarrell G (1997) Leadership structure: separating the CEO and chairman of the board. J Financ 3:189–220

    Google Scholar 

  • Castaldi R, Wortman MS (1984) Board of directors in small corporations: an untapped resource. Am J Bus 9(2):1–11

    Google Scholar 

  • Chaganti RS, Mahajan V, Sharma S (1985) Board size, composition, and failures in the retailing industry. J Manag Stud 22:400–417

    Article  Google Scholar 

  • Coles JL, Daniel ND, Naveen L (2008) Boards: does one size fit all? J Financ Econ 87:329–356

    Article  Google Scholar 

  • Daily CM, Dalton DR (1992) The relationship between governance structure and performance in entrepreneurial firms. J Bus Ventur 7(5):375–386

    Article  Google Scholar 

  • Dalton DR, Daily CM, Johnson JL, Ellstrand AE (1999) Number of directors and financial performance: a meta-analysis. Acad Manag J 42(6):674–686

    Google Scholar 

  • Dimopoulos T, Wagner HF (2010) Cause and effect in CEO changes, working paper, http://www.csef.it/6th_c6/wagner.pdf

  • Dyer WG Jr (2006) Examining the “family effect” on firm performance. Fam Bus Rev 19(4):253–273

    Article  Google Scholar 

  • Eisenberg T, Sundgren S, Wells MT (1998) Larger board size and decreasing firm value in small firm. J Financ Econ 48:35–54

    Article  Google Scholar 

  • Faleye O (2003) Does One Hat Fit All? The Case of Corporate Leadership Structure. EFMA 2003 Helsinki Meetings. Available at SSRN: https://ssrn.com/abstract=394980 or https://doi.org/10.2139/ssrn.394980

  • Fama EF, Jensen MC (1983) Separation of ownership and control. J Law Econ 26:301–326

    Article  Google Scholar 

  • Ferris SP, Jagannathan M, Pritchard AC (2003) Too busy to mind the business: monitoring by directors with multiple board appointments. J Financ 58(3):1087–1112

    Article  Google Scholar 

  • Gersick C, Hackman R (1990) Habitual routines in task-performing groups. Organizational Behavior and Human Decision Processes 47:65–97

    Article  Google Scholar 

  • Gopalan R, Nanda V, Seru A (2007) Affiliated firms and financial support: evidence from Indian business groups. J Financ Econ 86:759–795

    Article  Google Scholar 

  • Jaffe DT, Lane SH (2004) Sustaining a family dynasty: key issues facing complex multigenerational business- and investment-owning families. Fam Bus Rev 16:5–16

    Google Scholar 

  • Jensen M (1993) The modern industrial revolution, exit, and the failure of internal control systems. J Financ 48:831–880

    Article  Google Scholar 

  • Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs, and ownership structure. J Financ Econ 3:305–360

    Article  Google Scholar 

  • Khanna T, Palepu K (2000) Is group affiliation profitable in emerging markets? An analysis of diversified Indian business groups. J Financ 55:867–891

    Article  Google Scholar 

  • Lipton M, Lorsch J (1992) A modest proposal for improved governance. Bus Law 48(1):59–77

    Google Scholar 

  • Loderer CF, Waelchli U (2010). Firm age and performance, Available at SSRN: http://ssrn.com/abstract=1342248. Accessed 26 Aug 2012

  • Majumdar SK (1997) The impact of size and age on firm-level performance: some evidence from India. Rev Ind Organ 12:231–241

    Article  Google Scholar 

  • Mak Y, Kusnadi Y (2005) Size really matters further evidence on the negative relationship between board size and firm value. Pac Basin Financ J 13:301–318

    Article  Google Scholar 

  • Maury B (2006) Family ownership and firm performance: empirical evidence from western European corporations. J Financ 12:321–341

    Google Scholar 

  • Nguyen BD, Nielsen KM (2010) The value of independent directors: evidence from sudden deaths. J Financ Econ 98:550–567

    Article  Google Scholar 

  • Roberts MR, Whited MT (2013) Endogeneity in Empirical Corporate Finance, Handbook of the Economics of Finance, vol 2, Part A, 493-572

  • Rosenstein S, Wyatt JG (1990) Outside directors, board independence, and shareholder wealth. J Financ Econ 26:175–191

    Article  Google Scholar 

  • Sanda AU, Mikailu AS, Garba T (2005) Governance mechanisms and firm financial performance in Nigeria. Afro-Asian Journal of Finance and Accounting 2(1):22–39

    Article  Google Scholar 

  • Schulze WS, Lubatkin MH, Dino RN, Buchholtz AK (2001) Agency relationships in family firms: theory and evidence. Organ Sci 12:99–116

    Article  Google Scholar 

  • Steiner G, (1971) Business and society. New York: Random House

  • Tagiuri R, Davis J (1996) Bivalent attributes of the family firm. Fam Bus Rev 9(2):199–208

    Article  Google Scholar 

  • Tajfel H (1982a) Social psychology of intergroup relations. Annu Rev Psychol 33:1–39

    Article  Google Scholar 

  • Tajfel H (1982b) Human groups and social categories. Cambridge University Press, Cambridge

    Google Scholar 

  • Tajfel H, Turner J (1979). An integrative theory of intergroup conflict. In W.G. Austin& S. Worchel (Eds.), (pp. 33–47): Brooks/Cole

  • Uhlaner L, Wright M, Huse M (2007) Private firms and governance: an integrated economic and management perspective. Small Bus Econ 29:225–241

    Article  Google Scholar 

  • Vance SC (1968) The Directors: Structure and Performance. University of Oregon Press, Eugene

    Google Scholar 

  • Vance SC (1983) Leadership: boards, directors, and strategy. McGraw-Hill, New York

    Google Scholar 

  • Yermack D (1996) Higher market valuation of companies with a small board of directors. J Financ Econ 40:185–211

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of New Orleans, New Orleans, LA, 70148, USA

    Tarun Mukherjee

  2. IBS Business School, Hyderabad, India

    Vighneshwara Swami

  3. Department of Finance, Cleveland State University, Cleveland, OH, USA

    Wei Wang

Authors
  1. Tarun Mukherjee
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Vighneshwara Swami
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Wei Wang
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Tarun Mukherjee.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendices

Appendix 1. Stages of Family Business Evolution

Generation

G1: Entrepreneur

G2: Family Partnership

G3: Business Dynasty

Business form

Entrepreneurship

Maturing business

Holding company or family office with diversified assets

Mode of control

Founder/owner/manager

Sibling team

Family branches

Strategy

Personal vision

Renew business

Sustain profitability; generate new wealth

Governance structure

ad hoc, implicit

Informal board, implicit

Board with outsiders, formal policies

  1. Source: Jaffe and Lane, Family Business Review, Vol. XVII, No. 1, March 2004.

Appendix 2. Regional Distribution of the Sample

This table provides geographical distribution of the 83 UFOSFs. The sample consists of UFOSFs from 18 provinces in all the five regions of India. The number of firms in each province is shown in parentheses.

Central Region

Eastern Region

Western Region

Northern Region

Southern Region

Chhattisgarh (2)

Assam (3)

Gujarat (7)

Haryana (4)

Andhra Pradesh (5)

Jharkhand (2)

Bihar (2)

Maharashtra (9)

Himachal Pradesh (2)

Karnataka (4)

Madhya Pradesh (4)

Orissa (3)

Rajasthan (4)

Punjab (8)

Kerala (4)

 

West Bengal 10)

 

Uttar Pradesh (6)

Tamil Nadu (4)

Total (8)

Total (18)

Total (20)

Total (20)

Total (17)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Mukherjee, T., Swami, V. & Wang, W. Governance structure and performance of private family firms. J Econ Finan 43, 713–734 (2019). https://doi.org/10.1007/s12197-018-9466-6

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s12197-018-9466-6

Keywords

JEL Classification

Search

Navigation