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

44 Pages Posted: 20 Mar 2017  

Paul Brockman

Lehigh University

Hye Seung Lee

Fordham University - Accounting Area

William L. Megginson

University of Oklahoma; College of Industrial Management

Jesus M. Salas

Lehigh University

Date Written: February 15, 2017

Abstract

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

Brockman, Paul and Lee, Hye Seung and Megginson, William L. and Salas, Jesus M., It's All in the Name: Evidence of Founder-Firm Endowment Effects (February 15, 2017). Available at SSRN: https://ssrn.com/abstract=2933833 or http://dx.doi.org/10.2139/ssrn.2933833

Paul Brockman

Lehigh University ( email )

Bethlehem, PA 18015
United States

Hye Seung Lee

Fordham University - Accounting Area ( email )

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

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

College of Industrial Management ( email )

Dhahran, 31261
Saudi Arabia

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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