Private Benefits of Control in Founding-Family Owned Firms: An Analysis of the Dynamics of Disproportionate Ownership and Control in Family Firm Ipos

44 Pages Posted: 18 Jul 2003 Last revised: 8 Oct 2015

Olaf Ehrhardt

University of Applied Sciences Stralsund

Eric Nowak

University of Lugano; Swiss Finance Institute

Date Written: July 1, 2015

Abstract

Our study examines private benefits of control in founding-family owned firms, by analyzing a unique sample of 105 IPOs of family firms on German stock exchanges from 1970 to 2011. First, we show that substantial private benefits of control exist in these firms and we empirically determine the nature of these private benefits. Second, we confirm that the separation of cash flow rights and voting rights via dual-class shares is used to create controlling shareholder structures in order to preserve private benefits of the family. In doing so, we analyze the effect of different types of private benefits on dual-class adoption. Third, we show that the market cares about private benefits of control and find a significant long-run underperformance by dual-class IPO shares.

Keywords: Private benefits; Family firms; Initial public offerings; Dual-class shares; One share-one vote; Control transfers; Ownership structures; Investor protection

JEL Classification: G14, G32, G15

Suggested Citation

Ehrhardt, Olaf and Nowak, Eric, Private Benefits of Control in Founding-Family Owned Firms: An Analysis of the Dynamics of Disproportionate Ownership and Control in Family Firm Ipos (July 1, 2015). Available at SSRN: https://ssrn.com/abstract=423506 or http://dx.doi.org/10.2139/ssrn.423506

Olaf Ehrhardt

University of Applied Sciences Stralsund ( email )

Zur Schwedenschanze 15
D-18435 Stralsund
United States

Eric Nowak (Contact Author)

University of Lugano ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland
+41-91-9124-637 (secr. -712) (Phone)
+41-91-9124-647 (Fax)

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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