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

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