How are U.S. Family Firms Controlled?

Abstract

In large U.S. corporations, founding families are the only blockholders whose control rights on average exceed their cash flow rights. We analyze how families achieve this separation between cash-flow and control rights, and at what cost. We find that indirect ownership through trusts, foundations, limited partnerships, and other corporations is prevalent but rarely creates a wedge between cash-flow and control rights. The primary sources of the wedge are dual-class stock and voting agreements. Additional control is frequently obtained through board representation in excess of voting control, and through the presence of a family member as CEO or Chairman of the Board. We also find that the impact of control-enhancing mechanisms on firm value depends on the specific mechanism used: the effect is negative for dual-class stock and disproportional board representation, but positive for pyramids and voting agreements.

Keywords: Family firms, ownership, control, dual-class stock, corporate governance

JEL Classification: G32, G3