How Do Family Ownership, Control, and Management Affect Firm Value Belen Villalonga and Raphael Amit

1
How Do Family Ownership, Control, and Management
Affect Firm Value?Belen VillalongaandRaphael
AmitDiscussion byMichael R. RobertsThe
Wharton SchoolUniversity of Pennsylvania
2
Summary

• The goal
• Empirically examine whether family ownership,
  control, and management impact firm value.
• The motivation
• How do various corporate governance mechanisms,
  as implemented in family-firms, address agency
  problems? Do they mitigate or amplify them?
• Findings
• Family owned firms have higher q than non-family
  owned firms, if founder is still active in the
  firm as chairman or CEO,
• Q is highest for founders when there are no
  control-enhancing mechanisms (e.g., differential
  voting rights),
• Kids lower q but grandkids increase q,
• where q is interpreted as firm value.

3
Overview

• Interesting questions
• The questions, while not new, are interesting and
  the evidence thus far has been ambiguous. (i.e.,
  this research is needed)
• Ambitious data effort
• Authors went well beyond most previous efforts in
  acquiring information needed to answer the
  questions. (i.e., the sample design is unique)
• Well-written paper
• Discussion and analysis are easy to follow
• Comments
• Alternative interpretations
• Empirical approach
• Suggestions (for the next paper)

4
Alternative Interpretation of the Results I

• Think of q as the shadow value of capital
• Family firms have persistently higher qs than
  non-family firms
• the marginal value of capital is persistently
  greater for family firms
• family-firms are underinvesting relative
  non-family firms and inefficiently so since q gt
  1.
• Coupled with the fact that family-firms pay out
  less in terms
• of dividends, this interpretation leads to a
  conclusion that is
• opposite that of the papers.
• Why not look at the investment behavior of the
  two types of firms?
• If aspects of family firms mitigate agency
  problems, we might be able to see this in
  differential investment between the two types of
  firms?

5
Alternative Interpretation of the Results II

• Think of q as the inverse of the book-to-market
  ratio
• Family firms have higher qs than non-family
  firms
• Family firms have lower book-to-market ratios
• Family firms have lower returns
• Family firms have high future investment
  opportunities
• leading to a high current valuation. They do not
  capitalize on
• these opportunities and consequently earn low
  returns.
• Why not look at abnormal returns to portfolios of
  family vs. non-family firms or other subsamples
  as dictated by your hypotheses?
• If aspects of family run firms create wealth, do
  we see this in equity returns?

6
Not Your Ordinary Empirical Corporate Finance
Endogeneity

• The investment literature runs this regression
• The capital structure literature runs this
  regression
• This paper runs this regression
• Investment and capital structure are exogenous?
• The q-theory of investment is based on
  investment as the control and q as the costate
  (i.e., shadow value of the state variable,
  capital stock). How can we justify the reverse?

7
Suggestions (for the next paper)

• Start with a model
• Even a highly stylized, simple model to clarify
  the empirical predictions and identify the
  channels through which shocks affect the
  variables of interest
• E.g., a simple model of investment that
  incorporates agency costs into the capital
  adjustment cost function
• Empirical section may want to focus on investment
  and equity returns as variables of interest, as
  opposed to q.

8
In Sum

• Well-written paper that exploits a unique
  dataset.
• Separated the effects of ownership, control, and
  management, which is both novel and empirically
  important.
• The authors have presented evidence that family
  firms and non-family firms are different along
  many dimensions, which (may) translate into
  economically important wealth effects.
• They are poised for future research that brings
  even more evidence to bear on these questions.