Time Horizon, Costs of Equity Capital, and Generic Investment Strategies of Firms

15 Pages Posted: 14 Feb 2007

See all articles by Thomas Zellweger

Thomas Zellweger

University of St. Gallen - Center for Family Business; Babson College - Arthur M. Blank Center for Entrepreneurship

Abstract

Recent literature (McNulty, Yeh, Schulze, & Lubatkin, 2002) states that the assumptions behind the capital asset pricing model, in particular the irrelevance of time horizon, do not correspond to the characteristics of firms that prefer long-term investment horizons. I show that family firms display a longer time horizon than most of their nonfamily counterparts, since (1) family firms display a longer CEO tenure, (2) this type of firm strives for long-term independence and succession within the family, and (3) due to the fact that family firms are overrepresented on western European stock markets in cyclical industries in which business cycles inhibit short-term success. As the annual default risk of an investment diminishes with increasing holding period (Hull, 2003), the risk-equivalent cost of equity capital of firms with longer planning horizons (e.g., family firms) can be lower as well. Based on the assumption that economic value to shareholders is created when firms invest in projects with returns above the associated cost of capital (Copeland, Koller, & Murrin, 2000), I argue that long-term-oriented firms can tackle unique investment projects represented by two generic investment strategies - the perseverance and the outpacing strategy. The first one, the perseverance strategy, represents investment strategies in which long-term-oriented firms invest in lower return but equal risk projects than their more short-term-oriented counterparts. The second one, the outpacing strategy, comprises investment projects with higher risk and equal return than the short-term competitors.

Suggested Citation

Zellweger, Thomas, Time Horizon, Costs of Equity Capital, and Generic Investment Strategies of Firms. Family Business Review, Vol. 20, No. 1, pp. 1-15, March 2007, Available at SSRN: https://ssrn.com/abstract=962988 or http://dx.doi.org/10.1111/j.1741-6248.2007.00080.x

Thomas Zellweger (Contact Author)

University of St. Gallen - Center for Family Business ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland
+41 71 224 71 42 (Phone)
+41 71 224 71 01 (Fax)

HOME PAGE: http://www.kmu.unisg.ch/org/kmu/web.nsf/wwwPubPersonGer/90349757A26ABCBFC125716B0046D6EE

Babson College - Arthur M. Blank Center for Entrepreneurship

231 Forest Street
Babson Park, MA 02457-0310
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
20
Abstract Views
1,379
PlumX Metrics