The Family Behind the Family Firm Premium: Agency Conflicts and Personal Financial Constraints

Abstract

We relate the personal characteristics of the controlling family to the difference between the return on assets of all Norwegian family firms and nonfamily firms over twenty years. This family firm premium increases when the family owns a higher equity stake, has fewer owning members, and participates more actively in governance. The premium also increases when the family has less personal wealth, less diversified wealth, and less liquid shares. This evidence suggests that family firms have governance advantages and financial disadvantages, that both properties increase the family firm premium, and that both depend on personal characteristics of the controlling family.

Keywords: family firms, majority control, corporate governance, agency costs, return on assets, financial constraints, wealth, diversification, liquidity

JEL Classification: G32, G34