Daniel L. McConaughy

Founding Family Controlled Firms: Performance, Risk, and Value

An agency theory framework is used to test the effects of founding family control on firm performance, capital structure, and value. Both the finance and management literatures regarding the relationship between firm control and firm value are explored. Controlling for size, industry, and managerial ownership, the results suggest that firms controlled by the founding family have greater value, are operated more efficiently, and carry less debt than other firms.

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.

Founders versus Descendants: The Profitability, Efficiency, Growth Characteristics and Financing in Large, Public, Founding-Family-Controlled Firms

This study examines the differences between founder-controlled firms and firms controlled by descendants or relatives of the founder. In general, we observe that founder-controlled firms grow faster and invest more in capital assets and research and development. However, descendant-controlled firms are more profitable. The results are consistent with a life-cycle view of the family firm in which the early years are characterized by rapid growth. The experience of the early years provides a basis for later, when the firm is more professionally run and can exploit its established position in the market.

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.

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.

Agency costs, market discipline and market timing: evidence from post-IPO operating performance

We compare ninety-nine 1985 IPO firms with a matched sample of “seasoned” firms. The IPO firms were more efficient and profitable, yet exhibited declining market-to-book-equity ratios over the 1985-1992 period. However, we observe no significant trend toward lower efficiency or profitability among the IPO firms. In fact, we observe a significant improvement in operating efficiency five to six years after the IPO. Post-IPO evidence suggests that (1) agency costs do not Increase; (2) the markets discipline entrepreneurs with incentives to maintain pre-IPO performance; and (3) poor stock performance is due to investors who overpay, extrapolating current performance into the future.