Informal Authority and Economic Outcomes of Family Firms: An Issue of National Power Distance

50 Pages Posted: 31 Dec 2019 Last revised: 15 May 2023

See all articles by Wolfgang Breuer

Wolfgang Breuer

RWTH Aachen University

Andreas Knetsch

Leibniz Institute for Financial Research SAFE; RWTH Aachen University

Date Written: December 15, 2021

Abstract

This paper delivers empirical evidence of how the informal authority of owner families determines the extent to which these can extract private benefits and secure preferential resource access. We argue that owner families in high power distance cultures enjoy increased informal authority. Consistent with our predictions, family firms in higher power distance countries display lower operating performance and are less likely to underinvest. Both effects are moderated by family ownership, family management involvement, and formal country-level governance mechanisms. Moreover, family firms in higher power distance countries are more commonly led by family members and pay lower costs of debt. Overall, our results emphasize the relevance of informal institutions for the economic outcomes and governance situation of family firms.

Keywords: Family Firms, Owner Family Authority, Power Distance, Operating Performance, Underinvestment

JEL Classification: G3, L2, M4

Suggested Citation

Breuer, Wolfgang and Knetsch, Andreas, Informal Authority and Economic Outcomes of Family Firms: An Issue of National Power Distance (December 15, 2021). International Review of Financial Analysis, Vol. 81, No. 102032, 2022, Available at SSRN: https://ssrn.com/abstract=3500808 or http://dx.doi.org/10.2139/ssrn.3500808

Wolfgang Breuer

RWTH Aachen University ( email )

Templergraben 55
D-52056 Aachen, 52056
Germany

Andreas Knetsch (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

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