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

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