• Home
• Terms and Conditions
• Resources
  • Resource Overview
  • Articles
  • Books
  • Universities
  • Online Resources
  • Family Business Videos
• Calendar
• Research Scholars Program
  • Program Overview
  • Selection Criteria
  • FAQ
• Family Business Profiles
  • Hall of Fame
  • Family Businesses
• About Us
  • Center Synergy
  • History & Activities
  • Staff
• Contact Us

Family Owned Business Institute

• Print
• Site Index
• Contact Us

Research Scholar's Abstracts 2002 - Yatin Bhagwat

Investigation of Differences in the Management of Founding Family Controlled Firms between Founders and Their Descendants Based Upon Performance, Risk, and Value
Yatin Bhagwat
2002

As the reins of a firm are passed from the founding generation to the successive generation and the successors sit firmly in the saddle, several contemporaneous changes may take place.Agency theory has brought to the forefront the issues of misalignment between the interests of managers and those of owners. An agency relationship has been defined as a "contract under which one or more persons (the principal(s)) engage another person (the agent) to perform service on their behalf which involves delegation of some decision making authority to the agent". Agency cost is the sum of (1) the monitoring expenditures incurred by the principal; (2) the bonding expenditures incurred by the agent; (3) residual loss.Agency costs can be reduced by increasing the level of managerial ownership in order to reduce monitoring costs. Lower agency costs are associated with higher firm values.

Another aspect of succession is the resulting changes in strategy that might require changes in capital structure.This adds another dimension to the agency relationship viz. agency cost of debt.The successor generation may show a willingness to undertake higher risk ventures as the family owned firm issues debt.This aspect has been well documented by the contingent claims pricing theory.

The proposed research is an investigation of differences in the management of founding family controlled firms between founders and descendants. Specifically, the study aims to identify the differences on the basis of performance, risk, and value. Performance is measured on the basis of effectiveness and efficiency. Effectiveness is measured by growth in earnings and revenues. Efficiency is measured in terms of liquidity and asset utilization ratios.Risk is defined in the finance literature as the probability that the actual return on investment will deviate from the expected return. In general, a firm will be more or less risky depending upon its capital structure.Capital structure can affect the risk of the firm. Capital structure is viewed broadly as the proportion of debt to equity. Value is measured in terms of economic value added (EVA) and the ratio of market value to book value of the stock.The success of the project relies heavily on the quality of data, which is primarily financial in nature. Hence, the sample for the study will include publicly traded firms that have undergone inter-generational transfer from the founding generation to the successor generation. Presently, firms that have undergone inter-generational transfer of leadership are being identified. The sample is highly restrictive.Several sources of data are being looked into to acquire appropriate data.