Chandra S. Mishra

Founding family controlled firms: Efficiency and value

Abstract We examine the efficiency and value of founding family controlled firms (FFCFs), firms whose CEOs are either the founder or a descendant of the founder. We find that FFCFs are more efficient and valuable than non-FFCFs that are similar with respect to industry, size, and managerial ownership. We also observe that descendant-controlled firms are more efficient than founder-controlled firms. Finally, we show that younger founder-controlled firms are more efficient than older ones. These results are robust after controlling for the age of the firm and a variety of investment opportunity measures. Our results are consistent with the notions that managerial ownership is endogenous to the firm and that family relationships improve monitoring while providing incentives that are associated with better firm performance.

Founding Family Control and Capital Structure: The Risk of Loss of Control and the Aversion to Debt

This paper tests the hypothesis that Founding Family Controlled Firms (FFCFs) are more averse to control risk than similar non-FFCFs and therefore avoid debt. Higher levels of debt increase the likelihood of bankruptcy and the level of control risk. We show that FFCFs use less debt; their choice of debt is more sensitive to conditions associated with control risk; and that leverage is not significantly related to managerial ownership in non-FFCFs, indicating that founding family control, not managerial ownership, matters in determining leverage.

The Effect of Founding Family Influence on Firm Value and Corporate Governance

We examined a sample of 120 Norwegian, founding family controlled and non-founding family controlled firms, to address two important research questions: (1) is founding family control associated with higher firm value; and (2) are there unique corporate governance conditions under which a founding family controlled firm can be more valuable? We find a positive association between founding family control and firm value for four alternative definitions of founding family control. We find that the association between founding family CEOs and firm value is stronger among younger firms, firms with smaller boards, and firms with a single class of shares. However, the impact of founding family directors on firm value is not affected by corporate governance conditions such as firm age, board independence, and number of share classes. We also find that the relation between founding family ownership and firm value is greater among older firms, firms with larger boards, and particularly when these firms have multiple classes of shares. Our results imply that founding family controlled firms are more valuable and governed differently than firms without such influence. Furthermore, our results also suggest that founding family CEOs can enhance firm performance when family influence does not create shareholder entrenchment or when their cash flow rights are more aligned with their control rights.

Effectiveness of CEO pay-for-performance

Abstract Firm performance has a generally positive, but diminishing relationship with the level of CEO pay-for-performance sensitivity to stock returns, consistent with the tradeoffs between incentives and risk sharing that underlie the use of pay-for-performance. Two moderating risk variables capture this tradeoff and significantly shape the pay-for-performance relationship: a firms business risk and the standard deviation of its stock returns. At higher levels of pay-for-performance sensitivity, the future performance of higher risk firms is more negatively related to sensitivity than for lower risk firms. Our results support the notion that CEO risk aversion limits the benefits from incentive pay, and that when too much risk is placed on the CEO, firm performance suffers. Compensation managers should take these results into account when making changes in CEO pay-for-performance plans.

The return on R&D versus capital expenditures in pharmaceutical and chemical industries

The impact of research and development (R&D) on firm performance is generally agreed to be positive, but the nature and extent of this impact share little agreement in the previous research. Using an improved, time series, cross-sectional regression model that accounts for both contemporaneous and firm-specific serial correlation, as well as the feedback between firm profitability and investments, our study compares the rate of return from a dollar investment on R&D to a dollar investment on fixed assets in pharmaceutical and chemical industries. We find positive associations of R&D intensity and all variables of firm performance (net margin, operating margin, sales growth, and market value). We find that an investment in R&D earns an operating margin return much higher than the industry cost of capital. We also find that the effect of an investment in R&D on the firms market value is about twice as much the effect of an investment in fixed assets. These findings have implications for corporate investment strategies, indicating that additional R&D investment is more likely to provide a firm with a unique and sustainable competitive advantage.

Debt, Performance-Based Incentives, and Firm Performance

We identify conditions of prior performance and pay-performance sensitivity under which an increase in incentives is associated with improved performance. We find that increasing sensitivity increases risk-adjusted performance in firms with poor prior performance, but has little impact on high-performance firms. We also observe that firms choose higher pay-performance sensitivity when the probability of wealth transfers to bondholders is high(e.g., in low-growth, high-debt firms). Pay-performance sensitivity to stock prices is important. If carefully implemented under the appropriate conditions, it can provide effective incentives for improving firm performance.

The association between bank performance, board independence, and CEO pay‐performance sensitivity

Outlines previous research on the links between board composition, firm performance and chief executive officer (CEO) compensation, and presents a study of CEO pay‐performance sensitivity, board independence and performance in the US banking industry. Explains the methodology and presents the results, suggesting that for large bank holding companies with average performance, increased board independence reduces pay‐performance sensitivity because internal monitoring is sufficient without extra alignment incentives. Adds that when performance is poor this no longer holds true and compensation contracts are then used to align the interests of managers and shareholders.

The performance of firms before and after they adopt accounting-based performance plans

Abstract This paper examines the long-run performance of firms before and after they adopt accounting-based performance plans. We test if the change in compensation policy is a response to a prior performance problem or is a signal to the market that firm performance will improve over current performance levels. Our findings are consistent with the signaling hypothesis. Stock prices increase at the announcement of the adoption of a performance plan apparently signaling previously private information regarding improved future performance. A related benefit of adoption may well be a better incentive-alignment contract for managers and shareholders but the strongest evidence points to a credible disclosure of future performance.

Creating Brand Equity Through Strategic Investments

Brand equity is central to an understanding of the worth of any business, yet it exists in the minds of consumers as a mixture of awareness and image. To measure and understand how this equity is developed, mananged, and enhanced is central to all theories of value creation. This article looks at the concepts of brand identity, brand meaning, brand response, and brand relationship with an eye toward how the measure of brand equity correlates with and is influenced by technology equity, communication equity, and foreign strategic investments. Seventy-seven multinational firms are tracked through the years 1986-1988 and results are reported on based on R&D expenses, advertising costs, and investments in foreign subsidiaries.

Strategic Value of Corporate Venture Capital Programs

Corporate venturing activities, driven largely by the need to be competitive in the Internet Age, have out-paced the accompanying theory on how such programs can create value. This article presents a framework for understanding value creation through a firms venture capital programs. The framework includes two stages of value creation: a firm creates value through building technology equity and brand equity, and then corporate venturing programs can multiply this value. A mediating variable, free cash flow level, is included to allow for effective use of venture funds.