Firm Value and Pyramidal Structures: New Evidence for Family Firms

Abstract

In this paper, we analyze what effects separating ownership and control have on the performance of a sample of 99 Chilean family-controlled firms for the period 2001–2014. Our results show an inverse U-shaped relationship between voting rights and cash flow rights divergence and firm value. This result suggests that excessive divergence of rights makes the firm’s value decline and can aggravate potential conflicts of interest inside family firms. We also find a positive moderating effect of business group affiliation, which highlights the ability of business groups to attenuate the negative impact of separating rights, particularly at high levels. We also find that family CEOs exert a beneficial effect on family firm performance at lower levels of divergence of rights, but that said effect disappears as the divergence of rights increases, suggesting that, when in control, family shareholders can ensure entrenchment by installing family member CEOs.

Keywords: firm performance; family corporate control; pyramidal ownership; business groups

JEL Classification: G32