The Contest to the Control in European Family Firms: How Other Shareholders Affect Firm Value

14 Pages Posted: 19 Aug 2008

See all articles by Mauricio Jara-Bertin

Mauricio Jara-Bertin

University of Chile - Business School

Félix J. López-Iturriaga

University of Valladolid - Department of Financial Economics and Accounting; National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy

Óscar López-de-Foronda

University of Burgos - Department of Economics

Abstract

This study corroborates policymakers' concerns regarding the protection of rights of minority shareholders. We suggest the need for a stronger macro governance environment to facilitate minority shareholder participation in corporate decision making. Our study also lends support to balanced ownership structures with multiple large shareholders as a way to increase the firm's performance. Managers would also better serve shareholders' interests by not limiting their attention to the current controlling coalition. We explore an under-examined aspect of agency conflict contestability between large, dominant shareholders and minority shareholders. We highlight the role of the second and third largest shareholders, in terms of share and type of shareholder. We suggest the need for new avenues of research focused on the dynamics of power within the firm. Finally, we identify a situation in which conflict of interest becomes prominent. We find that increased contestability of the control of the largest shareholder increases the value of family-owned firms. Results also show that in firms in which the largest shareholder is a family, a second family shareholder reduces firm value. Conversely, an institutional investor as second shareholder increases firm value. Likewise, better legal protection of shareholders not members of the controlling coalition increases the value of family firms. This paper analyses the influence of large shareholders on firm value using a sample of firms from 11 European countries, specifically considering how the existence of a controlling coalition in family-owned firms and the contestability of control of the largest shareholder affect the value of the family-owned firms. Empirical This paper analyses the influence of large shareholders on firm value using a sample of firms from 11 European countries, specifically considering how the existence of a controlling coalition in family-owned firms and the contestability of control of the largest shareholder affect the value of the family-owned firms. We find that increased contestability of the control of the largest shareholder increases the value of family-owned firms. Results also show that in firms in which the largest shareholder is a family, a second family shareholder reduces firm value. Conversely, an institutional investor as second shareholder increases firm value. Likewise, better legal protection of shareholders not members of the controlling coalition increases the value of family firms. We explore an under-examined aspect of agency conflict contestability between large, dominant shareholders and minority shareholders. We highlight the role of the second and third largest shareholders, in terms of share and type of shareholder. We suggest the need for new avenues of research focused on the dynamics of power within the firm. Finally, we identify a situation in which conflict of interest becomes prominent. This study corroborates policymakers' concerns regarding the protection of rights of minority shareholders. We suggest the need for a stronger macro governance environment to facilitate minority shareholder participation in corporate decision making. Our study also lends support to balanced ownership structures with multiple large shareholders as a way to increase the firm's performance. Managers would also better serve shareholders' interests by not limiting their attention to the current controlling coalition.

Suggested Citation

Jara-Bertin, Mauricio Alejandro and Lopez-Iturriaga, Felix Javier and Lopez de Foronda, Oscar, The Contest to the Control in European Family Firms: How Other Shareholders Affect Firm Value. Corporate Governance: An International Review, Vol. 16, Issue 3, pp. 146-159, May 2008. Available at SSRN: https://ssrn.com/abstract=1235539 or http://dx.doi.org/10.1111/j.1467-8683.2008.00677.x

Mauricio Alejandro Jara-Bertin (Contact Author)

University of Chile - Business School ( email )

Diagonal Paraguay 257
Santiago, Chile
Chile

Felix Javier Lopez-Iturriaga

University of Valladolid - Department of Financial Economics and Accounting ( email )

Avda. Valle Esgueva 6
47011 Valladolid
Spain
+34 983 184 395 (Phone)
+34 983 183830 (Fax)

HOME PAGE: http://www2.eco.uva.es/flopez

National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy ( email )

Lebedeva,27
Perm, Perm 614070
Russia

Oscar Lopez de Foronda

University of Burgos - Department of Economics ( email )

Plaza Infanta Elena
E09001 Burgos
Spain

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