It's All in the Name: Evidence of Founder-Firm Endowment Effects
44 Pages Posted: 20 Mar 2017
Date Written: February 15, 2017
We show that founder-named firms are 8% less valuable than non-founder-named firms, and that founder-named-and-managed firms are 21% less valuable than their non-founder-named-and-managed counterparts. These results, based on a large sample of 8,062 family-firm-year observations, are robust to the inclusion of multiple control variables and alternative model specifications. What can explain a 21% discount among family firms that are founder-named and founder-managed? We posit that naming the firm after the founder encourages value-destroying endowment effects. The endowment-susceptible founder begins to view the eponymous firm more from a "current personal use" perspective than from a "potential market exchange" perspective (Kahneman, 2011). We explore several implications of this endowment effects hypothesis and find consistently-supportive evidence. We also test several alternative explanations, including the use of dual class structures, differential voting/cash flow rights, corporate opacity, CEO overconfidence, and weak internal governance. None of these alternative explanations can account for our endowment-related results.
Keywords: Founder firms, Family firms, Endowment effect
JEL Classification: G3
Suggested Citation: Suggested Citation