It's All in the Name: Evidence of Founder-Firm Endowment Effects

49 Pages Posted: 20 Mar 2017 Last revised: 12 Aug 2019

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business

Hye Seung (Grace) Lee

Fordham University - Accounting Area

Jesus M. Salas

Lehigh University

Date Written: February 3, 2018

Abstract

We use a subset of family firms (i.e., founder-named firms) to test for large-scale endowment effects in US capital markets. In contrast to previous studies that focus on laboratory experiments and surveys, we employ investor-based market valuations to examine the extent to which endowment effects influence real-world decision making. We find that founder-named firms are 7-8% less valuable than non-founder-named firms, and that founder-named-and-managed firms are 17-21% less valuable than their non-endowment susceptible counterparts. We posit that these valuation discounts are the result of founders operating their eponymous firms more from a “current personal use” perspective than from a “potential market exchange” perspective (Kahneman, 2011). Consistent with the presence of endowment effects, we find that founder-named-and-managed firms are less likely to engage in significant corporate restructuring, mergers and acquisitions, strategic asset sales, spinoffs, and major reorganizations. We examine alternative explanations for our findings (e.g., the presence of dual class structures, differential voting/cash flow rights, corporate opacity, CEO overconfidence, weak governance, compensation incentives) and show that none of these alternatives can account for our empirical findings.

Keywords: Founder firms, Family firms, Endowment effect

JEL Classification: G3

Suggested Citation

Brockman, Paul and Lee, Hye Seung (Grace) and Salas, Jesus M., It's All in the Name: Evidence of Founder-Firm Endowment Effects (February 3, 2018). Available at SSRN: https://ssrn.com/abstract=2933833 or http://dx.doi.org/10.2139/ssrn.2933833

Paul Brockman (Contact Author)

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

Hye Seung (Grace) Lee

Fordham University - Accounting Area ( email )

Graduate School of Business
113 W. 60th Street
New York, NY 10023
United States

Jesus M. Salas

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3238 (Phone)

HOME PAGE: http://www3.lehigh.edu/business/faculty/salas.asp

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