Investment policy in family controlled firms

• Published in: Journal of banking & finance Vol. 36; no. 6; pp. 1744 - 1758
• Main Authors: Anderson, Ronald C., Duru, Augustine, Reeb, David M.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01-06-2012; Elsevier Sequoia S.A
• Subjects: Capital expenditure; Capital expenditures; Correlation analysis; Dual class shares; Enterprises; Family business; Family firms; Family owned businesses; Founders; Heirs; Investment policy; Long-term investments; R&D spending; Research & development expenditures; Research and development; Risk aversion; Studies; Dual class shares; Capital expenditures; R&D spending; L2; K2; M4; Heirs; G3; Long-term investments; Founders; Family business
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2012.01.018

► We explore the impact of family control on corporate investment policy. ► We find that family firms devote less capital to long-term investments. ► Family firms also prefer investing in physical assets rather than risky R&D. ► Patent citations per dollar of R&D investment is decreasing in family control. ► Shareholders discount family firms that invest less in R&D than their peers.
We explore the relation between family ownership and corporate investment policy. Our analysis centers on two incentives, risk aversion and extended investment horizons, which potentially influence the level and type of investments that family firms undertake. We find that family firms devote less capital to long-term investments than firms with diffuse ownership structures. When dividing long-term investment into its two components of R&D and capital expenditures, we note that family firms, relative to nonfamily firms, prefer investing in physical assets relative to riskier R&D projects. Additional tests indicate that family firms receive fewer patent citations per dollar of R&D investment relative to nonfamily firms. Overall, all empirical results indicate that family preferences for lower firm risk, across all family sub-types, affects corporate R&D spending and capital expenditures.