Family Firms, Agency Costs and Risk Aversion - Empirical Evidence from Diversification and Hedging Decisions

CEFS Working Paper No. 2008-13

34 Pages Posted: 11 Dec 2008 Last revised: 3 Jun 2009

See all articles by Thomas Schmid

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics

Markus Ampenberger

Technische Universität München - Center for Entrepreneurial and Financial Studies

Christoph Kaserer

Technische Universität München (TUM)

Ann‐Kristin Achleitner

Technische Universität München - Center for Entrepreneurial and Financial Studies

Date Written: December 11, 2008

Abstract

We analyse whether family firms differ from non-family firms in terms of business segment and geographical diversification or the application of currency hedging instruments. This analysis is based on a unique dataset of 339 publicly listed companies (1,561 firm years) in the German Prime Standard from 2002 to 2006. While there is widespread empirical evidence on differences between family and non-family firms in terms of corporate performance, comparatively little is known about the impact of family firm dimensions on firm behaviour. We try to fill this research gap with a single country study focusing on Germany, an economy where family-control traditionally plays a predominant role in corporate governance.

We find that family firms are less diversified in unrelated business segments. However, there are no differences between family firms and non-family firms in terms of overall and related business segment diversification. For geographical diversification, we do not find convincing evidence for any differences. Finally, our analysis indicates that family firms are less likely to use currency hedging instruments.

In a second step, we go beyond existing research and distinguish between two separate dimensions of family firms: family management and family ownership. Empirical results indicate that those two dimensions have conflictive effects on firm behaviour. Family management, i.e. the involvement of the founding family into firm management, reduces agency costs and thus leads to lower levels of business segment diversification and less currency hedging. In contrast family ownership leads to risk aversion and more business segment diversification. Overall, the family management aspect is more likely to dominate the family ownership aspect.

Keywords: Family firms, family ownership, family management, risk management, risk aversion, agency costs, diversification, derivatives, hedging, corporate governance

JEL Classification: G32, G34

Suggested Citation

Schmid, Thomas and Ampenberger, Markus and Kaserer, Christoph and Achleitner, Ann-Kristin, Family Firms, Agency Costs and Risk Aversion - Empirical Evidence from Diversification and Hedging Decisions (December 11, 2008). CEFS Working Paper No. 2008-13 , Available at SSRN: https://ssrn.com/abstract=1314823 or http://dx.doi.org/10.2139/ssrn.1314823

Thomas Schmid (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Markus Ampenberger

Technische Universität München - Center for Entrepreneurial and Financial Studies ( email )

Arcisstraße 21
München, 80333
Germany
++49 89 289 25483 (Phone)
++49 89 289 25488 (Fax)

HOME PAGE: http://www.cefs.de

Christoph Kaserer

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 289 25489 (Phone)
+49 89 289 25488 (Fax)

HOME PAGE: http://www.cefs.de

Ann-Kristin Achleitner

Technische Universität München - Center for Entrepreneurial and Financial Studies ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 289 25181 (Phone)

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