Anderson y Reeb (2003) Founding Family Ownership, Corporate Diversification, and Firm Leverage

FOUNDING-FAMILY OWNERSHIP, CORPORATE
DIVERSIFICATION, AND FIRM LEVERAGE*

RONALD C. ANDERSON and DAVID M. REEB
American University Temple University
Abstract
Anecdotal accounts imply that founding families routinely engage in opportunistic
activities that exploit minority shareholders. We gauge the severity of these moral
hazard conflicts by examining whether founding families—as large, undiversified
blockholders—seek to reduce firm-specific risk by influencing the firm’s diversifi-
cation and capital structure decisions. Surprisingly, we find that family firms actually
experience less diversification than, and use similar levels of debt as, nonfamily firms.
Consistent with these findings, we also find that direct measures of equity risk are
not related to founding-family ownership, which suggests that family holdings are
not limited to low-risk businesses or industries. Although founding-family ownership
and influence are prevalent and significant in U.S. industrial firms, the results do not
support the hypothesis that continued founding-family ownership in public firms leads
to minority-shareholder wealth expropriation. Instead, our results show that minority
shareholders in large U.S. firms benefit from the presence of founding families.
I. Introduction
Journalistic accounts suggest that founding-family ownership and control

in public firms allow family members to exploit minority shareholders.1 Prior
academic research also indicates that family ownership can lead to minority-
* Ronald C. Anderson is a Kogod Endowed Faculty Fellow, Kogod School of Business,

American University. David Reeb is a Fuller Research Fellow, Department of Finance, Fox
School of Business, Temple University. The authors would like to thank Augustine Duru, Scott
Lee, Michel Robe, Leigh Riddick, Pat Rudolph, Don Fraser, an anonymous referee, and seminar
participants at American University for their assistance and insights on our research. All errors
are our own.
1
For example, Justine Schack, All in the Family, 35 Inst. Investor 95 (January 2001), suggests
that the Ford family was able to increase their voting power and control of the firm, at the
expense of minority shareholders. Similarly, Allan Sloan, The Tax-Avoidance Tango, 134
Newsweek 46 (1999), discusses the special treatment or “sweet deals” that the Chandler family
repeatedly received from Times Mirror at the expense of minority shareholders. Likewise,
David Bank, Heard on the Street: H-P Case Illustrates Clout of Shareholders, Wall St. J.,
December 24, 2001, at C1, notes how many large public companies explicitly provide pref-
erential treatment for family shareholders relative to minority shareholders.
[Journal of Law and Economics, vol. XLVI (October 2003)]

䉷 2003 by The University of Chicago. All rights reserved. 0022-2186/2003/4602-0024$01.50
653
654 the journal of law and economics
shareholder wealth expropriation.2 Specifically, Harold Demsetz3 and Dem-

setz and Kenneth Lehn4 observe that families have the incentives and power
to systematically expropriate wealth from the firm’s other claimants, which
suggests severe moral hazard conflicts between the founding family and
minority shareholders. Surprisingly, given these concerns, family ownership
and influence are quite prevalent and significant in U.S. firms, even among
the largest publicly traded companies. Founding families, for example, are
present in one-third of the Standard and Poor’s (S&P’s) 500 firms, have held
their stakes on average for over 78 years, and control over 18 percent of
their firm’s shares. In those cases in which the families do not have outright
majority ownership, they directly control 2.8 times as many board seats as
their ownership provides.
Andrei Shleifer and Robert Vishny5 observe that one of the most important
costs that large, undiversified shareholders can impose on the firm is risk
aversion or avoidance.6 Founding families can reduce firm risk in two ways.
First, families may influence the firm’s investment decisions by pursuing
projects with imperfectly correlated cash flows relative to existing projects;
this suggests that corporate diversification is an efficient strategy for founding
families. Second, families may seek capital forms that bear low probabilities
of default, which indicates greater reliance on equity financing or, conversely,
less use of leverage in the firm’s capital structure. Either risk reduction
strategy, however, can impose costs on diversified, minority shareholders.
We explore the severity of moral hazard conflicts between large, undiv-
2
See Harold Demsetz & Kenneth Lehn, The Structure of Corporate Ownership: Causes and
Consequences, 93 J. Pol. Econ. 1155 (1985); W. Bruce Johnson et al., An Analysis of the
Stock Price Reaction to Sudden Executive Deaths: Implications for the Managerial Labor
Market, 7 J. Acct. & Econ. 151 (1985); Irwin Friend & Larry H. P. Lang, An Empirical Test
of the Impact of Managerial Self-Interest on Corporate Capital Structure, 43 J. Fin. 271 (1988);
Larry D. Singell, Jr., & James Thornton, Nepotism, Discrimination, and the Persistence of
Utility-Maximizing, Owner-Operated Firms, 63 S. Econ. J. 904 (1997); Stijn Claessens, Simeon
Djankov, & Larry H. P. Lang, The Separation of Ownership and Control in East Asian Cor-
porations, 58 J. Fin. Econ. 81 (2000); Harry DeAngelo & Linda DeAngelo, Controlling Stock-
holders and the Disciplinary Role of Corporate Payout Policy: A Study of the Times Mirror
Company, 56 J. Fin. Econ. 153 (2000); and Mara Faccio, Larry H. P. Lang, & Leslie Young,
Dividends and Expropriation, 91 Am. Econ. Rev. 54 (2001). Although James Ang, Rebel Cole,
& James Lin, Agency Costs and Ownership Structure, 55 J. Fin. 81 (2000), reports lower levels
of agency conflicts with outside managers in small firms, Luis Gomez-Mejia, Manuel Nunez-
Nickel, & Isabel Gutierrez, The Role of Family Ties in Agency Contracts, 44 Acad. Mgmt.
J. 81 (2001), reports greater entrenchment with family ownership in smaller Spanish firms.
3
Harold Demsetz, The Structure of Ownership and the Theory of the Firm, 25 J. Law &
Econ. 375 (1983).
4
Demsetz, & Lehn, supra note 2.
5
Andrei Shleifer & Robert W. Vishny, Large Shareholders and Corporate Control, 94 J. Pol.
Econ. 461 (1986).
6
Using the families that appear in both Forbes’s “400 Wealthiest Americans” survey and
in the S&P 500, we find that families typically have over 69 percent of their wealth invested
in the firm. Some of the families in our sample include the Waltons (Wal-Mart), Dorrances
(Campbell Soup), Fords (Ford Motor), and Strattons (Briggs and Stratton).
founding-family ownership 655
ersified shareholders and minority-equity claimants by examining founding-

family influence on the firm’s diversification and financing decisions. If fam-
ilies seek to reduce firm risk, we expect family firms to exhibit significantly
greater levels of corporate diversification and lower levels of debt usage
relative to nonfamily firms. In addition, we focus on the divergence between
family ownership and company control. We argue that family expropriation
should be greatest when the family’s control is larger than its ownership
provides.7 As such, we examine whether corporate diversification and capital
structure are related to the ratio of family board control to ownership rights.
Finally, families can exert perhaps the greatest influence on the firm by
placing one of their members in the position of chief executive officer (CEO).8
Consequently, we expect family firms with family CEOs to experience the
greatest reductions in firm risk relative to nonfamily firms or to family firms
with outside CEOs.
Using the 1992 S&P 500 Industrial firms from 1993 to 1999, we document
that founding-family ownership is significantly related to the firm’s diver-
sification decisions. However, contrary to our moral hazard hypothesis, we
find that family firms engage in significantly less corporate diversification.
After controlling for industry- and firm-specific attributes, we show that
family firms exhibit about 15 percent less corporate diversification. With
respect to leverage, both univariate and multivariate results indicate that
family ownership has little effect on the capital structure choices of family
firms. A potential explanation for our findings is that families may maintain
holdings in low-risk businesses, which suggests that they have less need to
engage in risk-reducing activities. Further analysis reveals, however, that
direct measures of equity risk—total, systematic, and firm-specific risk—are
not significantly different between family and nonfamily firms, which sug-
gests that family firms are not limited to low-risk businesses or industries.
Finally, we find that family control of board seats does not significantly
influence the firm’s diversification or financing decisions.
To further determine whether family ownership leads to minority-share-
holder wealth expropriation, we examine the relation between shareholder
value (excess value and economic value added) and family ownership. Con-
7
Shleifer & Vishny, supra note 5; Claessens, Djankow, & Lang, supra note 2; and Faccio,
Lang, & Young, supra note 2, discuss the potential for expropriation when there is divergence
between ownership and control. George A. Akerlof & Paul M. Romer, Looting: The Economic
Underworld of Bankruptcy for Profit, 2 Brookings Papers Econ. Activity 1 (1993), suggests
that beyond the standard risk-shifting concern, a divergence between ownership and control
can lead to corporate “looting” by the family.
8
Johnson et al., supra note 2; Randall Morck, Andrei Shleifer, & Robert W. Vishny, Man-
agement Ownership and Market Valuation: An Empirical Analysis, 20 J. Fin. Econ. 293 (1988);
David J. Denis & Diane K. Denis, Majority Owner-Managers and Organizational Efficiency,
1 J. Applied Corp. Fin. 91 (1994); and Gomez-Mejia, Nunez-Nickel & Gutierrez, supra note
2, examine family CEOs and suggest that they are more entrenched relative to CEOs in
nonfamily firms.
sistent with our diversification results, we find that family firms are more
valuable than nonfamily firms. In aggregate, the results indicate that family
ownership, instead of exacerbating the agency costs with minority-equity
claimants, appears to reduce conflicts of interest. The results are both sta-
tistically and economically significant; are insensitive to alternative measures
of diversification, leverage, or family ownership; and are robust to concerns
of endogeneity, serial correlation, heteroskedasticity, and outliers.
The remainder of this paper is organized as follows. Section II briefly
reviews the related literature and presents our hypotheses. Section III de-
scribes our sample and variable measures, while Section IV presents the
empirical results. Section V examines the robustness of our analysis, and
Section VI concludes the paper.
II. Undiversified Shareholders, Moral Hazard,

and the Firm’s Strategic Decisions
A. Family Ownership and Firm Risk

Large public firms are often characterized as having dispersed ownership,
atomistic shareholders, and a separation between ownership and control.
Shleifer and Vishny9 note, however, that concentrated shareholders are com-
mon and document that over 77 percent of the Fortune 500 firms have at
least one shareholder owning 5 percent or more of the firm.10 Large, undiv-
ersified shareholders can impose costs on the firm that are not present in
firms with diffuse ownership. These costs can take many forms, including
expropriating wealth from small investors in the form of special dividends,
excessive compensation packages, and risk avoidance. Diversified share-
holders generally evaluate projects on the basis of maximizing residual cash
flows, while large-concentrated shareholders may derive greater benefits from
pursuing firm growth, technological innovation, or firm survival; this suggests
severe agency conflicts with the firm’s other claimants.11
Founding families represent an important class of large shareholders that
potentially have unique incentive structures and a strong voice in the firm.
We posit that founding families, because of the undiversified nature of their
9
Shleifer & Vishny, supra note 5.
10
Many large shareholders hold diversified portfolios, as in Peter Tufano, Who Manages
Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry,
51 J. Fin. 1097 (1996). Specifically, institutional investors such as mutual funds or insurance
companies typically hold large positions in several firms, which suggests that their portfolios
are well diversified relative to founding-family portfolios. Prior research suggests these large
diversified blockholders provide managerial monitoring and have investment rules similar to
those of atomistic shareholders (Shliefer & Vishny, supra note 5). In our analysis, we control
for these blockholders.
11
Eugene F. Fama & Michael C. Jensen, Separation of Ownership and Control, 26 J. Law
& Econ. 301 (1983).
holdings and their desire for firm survival, have strong incentives to minimize
firm risk. Specifically, Mark Casson12 and Ralph Chami13 argue14 that found-
ing families view their firms as an asset to pass to family members or their
descendants rather than wealth to consume during their lifetimes. Firm sur-
vival is thus an important concern for families, which suggests that families
will seek risk reduction strategies through diversification or low-default cap-
ital forms.15 Consequently, for founding families, mitigating risk levels via
corporate diversification may be an effective investment strategy even at the
cost of creating severe conflicts with the firm’s other constituents.16
If family ownership influences the diversification decisions of the firm,
then we anticipate that the same family characteristics will manifest in the
firm’s financing policies. Specifically, family firms can mitigate firm risk by
employing financing forms with low probabilities of default, which suggests
a greater reliance on equity financing in their capital structure. Prior empirical
work17 illustrates that ownership dispersion is positively related to firm lev-
erage. Moreover, Michael Jensen18 argues that concentrated ownership re-
duces the agency cost of free cash flow and can create greater cash levels
12
Mark C. Casson, The Economics of the Family Firm, 47 Scandinavian Econ. Hist. Rev.
10 (1999).
13
Ralph Chami, What’s Different about Family Business? (Working paper, Univ. Notre Dame
& Int’l Monetary Fund 1999).
14
Both of these arguments are based on Gary S. Becker, A Theory of Social Interactions,
82 J. Pol. Econ. 1063 (1974); and Gary S. Becker, A Treatise on the Family (2d ed. 1981).
15
As Carly Fiorina (CEO of Hewlett-Packard) observes, founding families can have very
different interests than minority shareholders because the family is concerned with issues such
as stability and capital preservation (Molly Williams, As Merger Teeters, H-P’s Fiorina Faces
the Sales Challenge of Her Career, Wall St. J., December 12, 2001, at B1).
16
Phillip G. Berger & Eli Ofek, Bustup Takeovers of Value-Destroying Diversified Firms,
51 J. Fin. 1175 (1996), reports that corporate diversification leads to a significant discount in
shareholder value (about 13–15 percent). David S. Scharstein & Jeremy C. Stein, The Dark
Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment, 55 J.
Fin. 2537 (2000), suggests that this is due to rent-seeking divisional managers subverting the
internal capital allocation decision. Several studies focus on other explanations for the discount,
such as selection bias, endogeneity problems, and measurement error; for example, John R.
Graham, Michael L. Lemmon, & Jack Wolf, Does Corporate Diversification Destroy Firm
Value? 57 J. Fin. 695 (2002); and Toni N. Whited, Is It Inefficient Investment That Causes
the Diversification Discount? 56 J. Fin. 1667 (2001). However, Charles J. Hadlock, Michael
Ryngaert, & Shawn Thomas, Corporate Structure and Equity Offerings: Are There Benefits to
Diversification? 74 J. Bus. 613 (2001), reports that funds raised from new equity issues by
diversified firms are viewed less negatively by market participants than new equity financing
for undiversified firms. Sattar A. Mansi & David M. Reeb, Corporate Diversification: What
Gets Discounted? 57 J. Fin. 2167 (2002), suggests that shareholder losses stem from the risk
reduction associated with corporate diversification. In general, empirical evidence suggests that
diversification is associated with lower shareholder values.
17
For example, Friend & Lang, supra note 2; and Anup Agrawal & Nandu J. Nagarajan,
Corporate Capital Structure, Agency Costs, and Ownership Control: The Case of All-Equity
Firms, 45 J. Fin. 1325 (1990).
18
Michael C. Jensen, Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,
76 Am. Econ. Rev. 323 (1986).
in family firms, thus allowing the firm to rely less on debt as a form of
financing. Consequently, we expect that family firms will employ significantly
lower levels of debt in their capital structure relative to nonfamily firms.
Finally, Mara Faccio, Larry Lang, & Leslie Young19 indicate that founding
or controlling families have strong incentives to expropriate wealth from
minority shareholders and that the incentives are strongest when the family’s
influence exceeds its ownership rights. They document that family ownership
in East Asian firms creates severe agency conflicts with the firm’s other
shareholders when family influence is greater than its cash flow rights.20
Families can exert their control or influence via two possible paths: holding
the CEO position or maintaining disproportionate representation on the board
of directors. Consequently, we expect that family expropriation (greater di-
versification and lower leverage) should be the greatest when family board
control exceeds ownership rights or when a family member holds the position
of CEO.
B. Family Ownership and Shareholder Value

Finally, we examine the relation between family ownership and shareholder
value. Phillip Berger and Eli Ofek21 suggest that corporate diversification
bears a negative relation to shareholder value. Irwin Friend and Larry Lang22
likewise note that low leverage levels increase the cost of capital and thus
potentially harm shareholder value. Beyond differences in diversification and
leverage, families can also expropriate minority-shareholder wealth by cre-
ating impediments for bidding agents (takeovers), paying special dividends,
conducting business with family-related parties, or remunerating themselves
through excessive compensation packages.23 If families seek to expropriate
minority-shareholder wealth, we expect to observe a negative relation be-
tween family ownership and shareholder value.
C. An Alternative Perspective: Families as Stewards of Firm Value

In contrast to the above arguments, founding families may have substantial
incentives to diminish agency conflicts and maximize firm value. Specifically,
19
Faccio, Lang, & Young, supra note 2.
20
Faccio, Lang, and Young, id., argue that the issue of ownership and control is more
problematic in East Asia than in the United States because of less-than-transparent capital
markets and the affiliation of the firm with a group of firms also controlled by the family,
which allows corporate wealth to be expropriated through intragroup sales.
21
Berger & Ofek, supra note 16.
22
Friend & Lang, supra note 2.
23
See, for example, Michael J. Barclay & Clifford G. Holderness, Private Benefits from
Control of Public Corporations, 25 J. Fin. Econ. 371 (1989); Gomez-Mejia, Nunez-Nickel, &
Gutierrez, supra note 2; Faccio, Lang, & Young, supra note 2; and Mike Burkart, Denis Gromb,
& Fausto Panunzi, Agency Conflicts in Public and Negotiated Transfers of Corporate Control,
55 J. Fin. 647 (2000).
because the family’s welfare is so closely linked to firm performance, families

may have strong incentives to forgo corporate diversification because of the
substantial negative effects on shareholder value.24 The family’s historical
presence and large, concentrated equity position also provide an exceptional
position to monitor managers and ensure value maximization.25 Moreover,
Michel Robe26 shows that controlling owners who suffer severe penalties for
failure—such as loss of substantial family wealth—place greater effort into
enhancing shareholder wealth.
Harvey James27 shows in a two-period model that families may have longer
investment horizons than atomistic shareholders and therefore perceive
greater incentives to use market value rules for evaluating projects than do
small, outside shareholders. Jeremy Stein28 also demonstrates how the pres-
ence of shareholders with relatively long investment horizons can mitigate
the incentives for myopic investment decisions by managers. As such, family
ownership may lead to less corporate diversification. Founding families could
also shun diversification if the firm-specific knowledge of an acquisition or
new business lies beyond the family’s competitive advantage. Diversifying
beyond the family’s knowledge set potentially increases family uncertainty,
which suggests less diversification in family firms versus nonfamily firms.
From a debt usage perspective, Jeffrey Zwiebel29 shows that family-
controlled firms may use debt as a credible signal to forgo poor investments.
The market for corporate control (takeovers) is an alternative mechanism to
mitigate poor investment choices. However, without family consent, take-
overs are difficult to achieve in family firms; hence, debt can restrict poor
investment choices and blunt family opportunism. If so, family firms may
potentially employ more debt than nonfamily firms.
D. Research Focus
Our central research question is the influence of founding-family ownership
on the firm’s diversification and debt usage decisions. Specifically, we explore
whether family influence generates moral hazard conflicts with minority-
equity claimants. We address four questions. First, does the firm’s level of
diversification exhibit a relation to family ownership? Second, are debt levels
24
Mansi & Reeb, supra note 16.
25
Shleifer & Vishny, supra note 5.
26
Michel A. Robe, Harsh Penalties and Warrants: The Impact of Limited Liability Rules
(Working paper, Am. Univ. 2002).
27
Harvey S. James, Jr., Owner as Manager, Extended Horizons, and the Family Firm, 6 Int’l
J. Econ. Bus. 41 (1999).
28
Jeremy C. Stein, Takeover Threats and Managerial Myopia, 96 J. Pol. Econ. 61 (1988);
and Jeremy C. Stein, Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate
Behavior, 104 Q. J. Econ. 655 (1989).
29
Jeffrey Zwiebel, Dynamic Capital Structure under Managerial Entrenchment, 86 Am. Econ.
Rev. 1197 (1996).
related to founding-family ownership? Third, does the level of family con-

trol—via board seats or the CEO position—further influence the diversifi-
cation or leverage decision? Finally, do minority shareholders of family firms
suffer from a family ownership discount? Or more specifically, is shareholder
value related (negatively) to the presence of continued founding-family own-
ership in the firm? After controlling for other factors affecting diversification
and debt usage decisions, we posit that founding-family incentive structures
increase moral hazard conflicts with minority shareholders. This study pro-
vides an empirical analysis on the subject, using data on corporate diver-
sification, leverage, and shareholder value for publicly traded firms in the
S&P 500.
III. Data Description
A. The Sample
Our sample begins with the S&P 500 Industrial firms as of year-end 1992.
We restrict the sample to all firms with 1993 data on the Compustat Industry
Segment file, excluding the financial services and utilities industry. This
provides a sample of 319 firms, or 2,108 firm-year observations, from 1993
to 1999. From the Compustat files, we obtain accounting information,
monthly stock data, and industry segment data.
We manually collect data on family ownership and family board repre-
sentation from proxy statements. The literature provides no commonly ac-
cepted measure or criterion for identifying a family firm. As such, we collect
data on the fractional equity ownership of the founding family. For some
firms, the process is straightforward since the proxy statement denotes the
founder, his or her immediate family members, and their holdings. However,
several generations after the founder, the family typically expands to include
distant relatives or in-laws with different last names. We resolve descendent
issues by manually examining corporate histories for each firm in the sample.
Histories are from Gale Business Resources, Hoovers, and company press
releases and literature.30
B. Primary Variable Measures

A potential concern with using family ownership data is that some families
are able to exert control with minimal fractional ownership, while others
require larger stakes for the same level of control because of differences in
firm size, industry, business practices, and product placement. Consequently,
30
Our estimates of the fractional holdings of families could be biased downward because
the Securities Exchange Act of 1934 requires only that officers, directors, and 5 percent owners
report their holdings. Thus, several family members could hold 4.9 percent of the firm but not
serve as an officer or director, and we would not capture this as family ownership. Consequently,
we use a binary variable to denote family firms in our primary tests.
we denote family ownership in three ways. First, we develop a binary variable

that equals one when the founding family has an equity stake in the firm
and zero otherwise. Second, family control is measured using the fractional
equity holdings of the founding family.31 Third, we also incorporate the dollar
value of equity held by families as an alternative measure of ownership.
Including the dollar value of equity accounts for the possibility that owning
20 percent of a $10 billion company might affect the family’s incentives to
diversify or assume debt differently than would owning 50 percent of a $50
million company.
The diversification literature uses numerous methods to determine the level
of corporate diversification. These measures include number of segments,
sales outside the firm’s primary Standard Industry Classification (SIC) code,
and dummy variables. For consistency with prior research32 we use a binary
variable that equals one when the firm has sales in more than one four-digit
SIC code as our primary measure. We also use the number of business
segments for each firm as an alternative proxy.
We measure leverage as the ratio of long-term debt to total assets. For
robustness we consider alternative measures of leverage that include short-
term debt (current long-term debt, accounts payable, and notes payable) and
use firm market value as an alternative metric for the denominator in the
debt ratio.
Founding families may be concentrated in low-risk businesses or industries,
which would indicate less need for the family to pursue risk reduction strat-
egies such as corporate diversification or lower levels of debt in the firm’s
capital structure. We calculate equity risk for our sample of firms using the
market model (single-index) and monthly returns for the previous 60 months.
From the model, we estimate three different measures of firm risk: total risk,
the standard deviation of the firm’s monthly returns; systematic risk, the
component of risk that captures the influence of underlying economic and
financial conditions of the entire market (b); and firm-specific risk, the mea-
surement of stock price volatility that is unique to an individual firm and is
related to its specific operations and capital structure. Firm-specific risk is
measured as the standard deviation of the residuals of the market model for
each firm.
To gauge the wealth effects of family ownership on minority shareholders,
we use two measures of shareholder wealth creation. First, we measure excess
value using a common measure in the literature, which is the market value
31
We follow Ronald C. Anderson & David M. Reeb, Founding-Family Ownership and Firm
Performance: Evidence from the S&P 500, 58 J. Fin. 1301 (2003), in identifying family firms.
32
For example, Berger & Ofek, supra note 16.
of assets minus the book value of assets, scaled by total assets. Specifically,
we measure excess value (EV) as
(market value of equity ⫹ book value of dept) ⫺ book value of assets
EV p . (1)
book value of assets
Second, we use an independent measure of firm value. Specifically, we obtain

Stern Stewart’s measure of economic value added (EVA) to assess share-
holder wealth effects. We measure EVA as net operating profit less the oppor-
tunity cost of capital for the funds invested in the firm;33 it is computed as
EVA p (net operating profit after taxes)

(2)
⫺ (capital # cost of capital).
We obtain our measures of EVA from the Stern Stewart 1000 database. The
database provides the EVA measure for the Fortune 1000 firms during the
1990s.
C. Control Variable Measures

We control for both industry- and firm-specific attributes in our regression
analyses. Firm size is the natural log of the firm’s total assets. Firm age is
the number of years since company inception. Research and development
(R&D) is measured as R&D scaled by total sales. Performance is earnings
before interest, tax, depreciation, and amortization divided by total assets.
We control for firm risk in our regressions on diversification and leverage
using the standard deviation of monthly stock returns for the previous 60
months. Finally, we control for the level of cash holdings since family firms
may experience lower agency costs of free cash flow than nonfamily firms
owing to their concentrated equity ownership.34 We measure cash holdings
as the sum of cash and cash equivalents divided by total assets.
Prior research indicates that failures in corporate governance could permit
managers to pursue diversification at the expense of shareholders.35 Conse-
quently, we include governance measures in our analysis. From corporate
proxy statements, we identify all blockholders with at least a 5 percent equity
stake in the firm. Blockholders are defined as affiliated or unaffiliated, where
an unaffiliated blockholder is an entity with no relation with the firm other
than its equity holdings. Finally, we classify board members in the manner
33
G. Bennett Stewart, EVA: Fact or Fantasy? 7 J. Applied Corp. Fin. 71 (1994).
34
Jensen, supra note 18.
35
However, Ronald Anderson et al., Corporate Governance and Firm Diversification, Fin.
Mgmt. 5 (Spring 2000), finds little relation between governance mechanisms and corporate
diversification.
TABLE 1
Descriptive Statistics of Sample Firms: Mean Values for Variable Measures
All Family Nonfamily

Firms Firms Firms t-Test
Number of observations 2,108 709 1,399 . . .
Family Ownership (%) 6.08 18.02 .00 . . .
Family Control to Ownership 1.49 2.81 .00 . . .
Number of Business Segments 2.77 2.32 2.99 4.27**
Fraction of Single-Segment Firms 32.69 44.71 26.59 3.82**
Leverage (Long-Term Debt/Total Assets (%)) 19.03 18.42 19.34 .62
Excess Value 1.349 1.525 1.259 3.35**
Economic Value Added ($ millions) 76.29 113.44 58.33 1.65⫹
Total Risk .079 .804 .079 .72
Systematic Risk 1.083 1.067 1.091 .68
Firm-Specific Risk .070 .071 .069 .91
Outside Blockholders (%) 10.52 8.08 11.75 3.94**
CEO Ownership (%) .87 2.16 .23 5.23**
Independent Directors on Board (%) 55.93 45.04 61.46 9.67**
Return on Assets (%) (EBITDA) 15.15 15.57 14.94 .69
Firm Size (Total Assets) 14,122 9,560 16,433 4.72**
Firm Age (years) 86.48 77.92 90.82 2.82**
Research and Development Ratio (%) 2.04 2.03 2.05 .05
Cash to Total Assets (%) 6.58 8.18 5.76 2.46**
Source.—Data on family ownership, outside blockholders, CEO ownership, and board independence
are obtained from annual corporate proxy statements. Information on total risk, systematic risk, and firm-
specific risk is calculated with data from the Center for Research in Security Prices. Remaining variables
are calculated with data drawn from Compustat. EBITDA p earnings before interest, taxes, deprecia-
tion, and amortization.
Note.—The sample consists of 2,108 firm-year observations for the period 1993–99. Family Control to
Ownership is the proportion of board seats held by family members divided by family ownership. The t-
statistics are corrected for serial correlation.
⫹
Statistically significant at the .10 level.
** Statistically significant at the .01 level.
of James Brickley, Jeffrey Coles, and Rory Terry36 as inside, affiliated, or

independent directors. Independent directors are members whose only affil-
iation with the firm is their directorship. Affiliated directors are directors
with existing or potential business ties to the firm but are not full-time
employees. Inside directors are employed by the firm, retired from the firm,
or immediate relatives of managers working for the firm. We use the pro-
portion of independent directors to total directors as our measure of board
independence.
D. Descriptive and Univariate Statistics

Table 1 presents descriptive statistics for the variables in the analysis. We
show mean values for the entire sample, family firms, and nonfamily firms.
The final column of the table presents t-statistics for difference-in-mean tests
36
James A. Brickley, Jeffrey L. Coles, & Rory L. Terry, Outside Directors and the Adoption
of Poison Pills, 35 J. Fin. Econ. 371 (1994).
between family and nonfamily firms. Our sample consists of 2,108 obser-
vations, of which 33.6 percent are from family firms and the remaining 66.4
percent are from nonfamily firms.
Founding families continue to hold considerable positions in their firms,
with an average ownership stake of 18.02 percent. In addition, families tend
to be very long term investors, with the average age of family firms nearly
78 years, as compared to 86 years for nonfamily firms. Although family firms
tend to be slightly smaller than nonfamily firms, they are still quite large,
with mean total assets of $9.67 billion, relative to $14.1 billion for nonfamily
firms. We find that family members serve as CEO in 44.3 percent of family
firms—founders hold 13 percent of the CEO positions, and founder descen-
dants hold the remaining 31 percent.
Sixty-seven percent of the firms in our sample report more than one busi-
ness segment. However, family firms show significantly less diversification,
with nearly 45 percent reporting only one line of business compared to 26.6
percent of nonfamily businesses reporting a single line. On average, the firms
in our full sample report 2.8 business segments. Family firms report 2.32
business segments, and nonfamily firms report 2.99 segments—again sug-
gesting less diversification in family firms. With respect to leverage, we find
that families employ slightly less debt in their capital structure (18.42 percent)
relative to nonfamily firms (19.34 percent); however, the difference in debt
usage is not significant at conventional levels. Firm risk (total, systematic,
or firm specific) for family firms is not significantly different from that
observed in nonfamily firms, which suggests that family firms are not clus-
tered in low-risk businesses or industries. Excess firm value and EVA are
significantly higher in family firms than in nonfamily firms—this is incon-
sistent with the notion that family firms heighten moral hazard conflicts.
The univariate analysis also indicates substantial differences in corporate
governance characteristics between family and nonfamily firms. For family
firms, we find that outside blockholdings and independent director represen-
tation are significantly lower than in nonfamily firms. Specifically, block-
holders own 8.0 percent of the shares in family firms and 10.5 percent in
nonfamily firms, and independent directors dominate the board in nonfamily
firms but hold less than one-half of the seats in family firms. In terms of
monitoring, the governance analysis indicates that family firms bear less
scrutiny from outside observers, implying that family control of the firm is
more extensive than family ownership rights initially suggest.
Table 2 provides correlation coefficients among the key variables in the
analysis. The correlation data suggest that family ownership exhibits a neg-
ative relation to corporate diversification and firm leverage but a positive
association with firm risk and excess equity value. This is inconsistent with
the notion that family firms choose investments that have imperfectly cor-
related cash flow streams with existing firm projects, or are less risky, or are
valued at a discount relative to nonfamily firms. Instead, family influence
TABLE 2
Descriptive Statistics of Sample Firms: Correlation Coefficients
between Select Variables
Family Business Total Excess

Firm Segments (N) Leverage Risk Value ln(Total Assets)
Family Firm 1.000
Business Segments (N) ⫺.178 1.000
Leverage ⫺.066 .090 1.000
Total Risk .031 ⫺.262 .052 1.000
Excess Value .164 ⫺.235 ⫺.206 ⫺.070 1.000
ln(Total Assets) ⫺.237 .265 .056 ⫺.304 ⫺.223 1.000
Source.—Data on family ownership are obtained from annual corporate proxy statements. Information
on total risk, systematic risk, and firm-specific risk are calculated with data from the Center for Research
in Security Prices. Remaining variables are calculated with data drawn from Compustat.
Note.—The sample consists of 2,108 firm-year observations for the period 1993–99.
appears to focus the firm’s investment choices, thereby lessening the moral
hazard conflict with minority-equity claimants and increasing firm value.
Table 3 examines the levels of corporate diversification and debt usage as
founding-family ownership increases. The table also provides data on firm
size (total assets) relative to family holdings and the difference in diversi-
fication (leverage) levels between family and nonfamily firms in column 4
(6). We calculate the difference in diversification (leverage) between family
firms and nonfamily firms as the average number of business segments (debt
levels) at each level of family ownership less the average number of business
segments for the entire subsample of nonfamily firms.
Surprisingly, we find no obvious relation between firm size and family
ownership in the univariate analysis. However, the diversification analysis
presents two interesting observations. First, regardless of the level of family
ownership, family firms experience significantly less diversification than the
average nonfamily firm. Second, the relation between diversification and
family ownership appears to have a U shape. Diversification decreases with
increasing family holdings; after reaching a minimum around 30 percent
family ownership, however, diversification begins to increase with increasing
family holdings. We find no readily apparent relation between family own-
ership and firm debt usage.37
Table 4 provides the distribution of firms in our sample across single-digit
SIC codes. Family firms operate in all major industry groups, with further
inspection suggesting that families do not cluster in particular industries or
businesses. We find similar results when delineating firms on the basis of
two-digit SIC codes (not reported). To control for firm size and other firm-
37
We also examine the relation between firm risk (total, systematic, and firm specific) and
the level of family holdings. The analysis indicates that risk levels are not significantly different
from those of nonfamily firms; in addition, we find similar risk levels at all levels of family
holdings.
TABLE 3
Comparison of Founding-Family Firms and Nonfamily
Firms by Level of Ownership
Family Firm
Business Family Firm
Number of Segments Debt
Business Less Mean Level of Debt Less Mean
Total Assets Segments in Nonfamily in Family Nonfamily
N ($ Millions) Family Firms Segments Firms Firm Debt
Family Ownership (1) (2) (3) (4) (5) (6)
Own ≤ 10% 383 5,910 2.44 ⫺.48 17.93 ⫺1.41
10% ! Own ≤ 20% 155 10,792 2.28 ⫺.64 20.11 .77
20% ! Own ≤ 30% 88 5,058 1.74 ⫺1.18 17.97 ⫺1.37
30% ! Own ≤ 40% 38 27,175 2.27 ⫺.65 19.65 .31
Own 1 40% 92 19,692 2.52 ⫺.40 17.42 ⫺1.92
Note.—This table provides diversification and leverage levels in family firms based on the level of
family ownership. Own represents the fractional equity holdings of the founding family. Family Firm
Business Segments (leverage) Less Mean Nonfamily Firm Segments (leverage) is calculated as the average
number of business segments (debt) at each level of family ownership less the average number of business
segments (debt) for the entire subsample of nonfamily firms. The sample consists of 2,108 firm-year
observations for the period 1993–99.
and industry-specific attributes, we use a multivariate framework analysis to

examine the relation between family ownership, diversification, and leverage.
Our primary tests include both industry (based on two-digit SIC codes) and
time (yearly) dummy variables. We explore alternative industry controls in
Section V.
IV. Multivariate Testing Results
A. Corporation Diversification and Founding-Family Ownership

Our first test examines whether founding families are more (or less) likely
to pursue diversification than nonfamily firms. If families seek to protect and
preserve wealth by mitigating risk levels, we anticipate a positive relation
between founding-family ownership and corporate diversification. We use
the following specification to test our proposition.38
Diversification p A 0 ⫹ A1 (FamFirm,t ) ⫹ A 2 (BlockHolders i,t )
⫹ A 3 (Directors i,t ) ⫹ A 4 (Leveraget ) ⫹ A 5 (Sizet )
⫹ A 6 (R&Di,t ) ⫹ A 7 (Profits i,t ) ⫹ A 8 (Risk,t ) (3)
⫹ A 9 (Ageit )A10 (Cash) ⫹ A11 (TimeDum,t )
⫹ A12 (IndDum it ) ⫹ ␧,
38
We control for serial correlation and heteroskedasticity using the Huber-White sandwich
(clustered) estimator for b variance and include fixed effects for time and industry. In addition,
TABLE 4
Industry Distribution of Family and Nonfamily Firms
Number of Number of
SIC Code Industry Group Family Firms Nonfamily Firms
1 Mining 3 11
2 Construction 42 52
3 Manufacturing 30 69
4 Transportation 6 13
5 Wholesale trade 21 26
6 Retail trade 4 14
7 Agricultural services 11 12
8 Forestry 1 4
where
Diversification is a binary variable that equals one when a firm has two
or more business segments and the natural log of the number of business
segments for each firm;
FamFirm is a binary variable of one when founding families are present
in the firm and zero otherwise; and
control variables represent ownership of independent blockholders, fraction
of outside directors, leverage, firm size, research and development, prof-
itability, stock return volatility, firm age, cash holdings, and time and
industry dummies.
The primary variable of interest is FamFirm and its coefficient estimate,
A1, which indicates the difference in diversification between family and non-
family firms. A positive coefficient estimate provides support for the hy-
pothesis that family ownership increases corporate diversification, thereby
creating moral hazard conflicts with minority-equity claimants.
For our control variables, we expect both outside blockholders and outside
directors to exhibit a negative relation to corporate diversification if these
entities act as independent monitors of the family and/or management. Firm
size should bear a positive relation to diversification, as larger firms have
greater resources to acquire or build businesses beyond their core industry.
Finally, we expect firm risk to decrease as diversification levels increase.
Contrary to our moral hazard hypothesis, we find that founding-family
ownership is associated with significantly less corporate diversification. Col-
umns 1–3 of Table 5 present logit regressions of our binary dependent variable
on the founding-family variable, and columns 4–6 show regressions results
using the log of the number of business segments on family ownership. The
logit regressions estimate the probability of diversification in family firms,
we also used (not reported) (i) random-effects panel data regressions; (ii) pooled, time-series
average regressions; and (iii) Fama-MacBeth regressions and found results quantitatively and
qualitatively similar to those reported in the tables.
TABLE 5
Regression Results of Corporate Diversification and Family Ownership
Corporate Diversification:
Corporate Diversification: Binary Variable ln(Number of Business Segments)
(1) (2) (3) (4) (5) (6)
Intercept ⫺2.825 (1.61) ⫺2.050 (1.24) ⫺4.287** (2.51) ⫺.177 (.48) ⫺.014 (.04) ⫺.376 (1.04)
Family Firm ⫺.734** (2.52) . . . . . . ⫺.159** (2.77) . . . . . .
CEO Founder . . . ⫺1.569** (2.34) . . . . . . ⫺.338** (2.76) . . .
CEO Descendant . . . ⫺.985* (2.28) . . . . . . ⫺.195* (2.24) . . .
CEO Hire . . . ⫺.649⫹ (1.85) . . . . . . ⫺.138* (2.09) . . .
Family Control to Ownership . . . . . . .001 (.03) . . . . . . ⫺.006 (.83)
Blockholders ⫺1.053 (.89) ⫺1.240 (1.07) ⫺.544 (.48) ⫺.264 (1.20) ⫺.288 (1.35) ⫺.170 (.79)
Board Independence .286 (.39) .132 (.18) .840 (1.22) ⫺.062 (.43) ⫺.100 (.68) .069 (.50)
Leverage .600 (.62) .554 (.56) .649 (.68) ⫺.020 (.11) ⫺.036 (.20) ⫺.010 (.06)
ln(Total Assets) .184 (1.28) .168 (1.14) .251⫹ (1.80) .093** (3.31) .091** (3.21) .103** (3.67)
R&D/Sales ⫺5.393 (1.10) ⫺5.177 (1.02) ⫺6.737 (1.39) ⫺2.085** (2.33) ⫺2.076** (2.34) ⫺2.118* (2.31)
Profitability (ROA) ⫺.018 (1.36) ⫺.017 (1.22) ⫺.020 (1.57) ⫺.002 (.76) ⫺.002 (.68) ⫺.002 (.86)
Total Risk ⫺3.671 (1.35) ⫺3.791** (2.85) ⫺3.091** (2.41) ⫺.708** (2.51) ⫺.665** (2.36) ⫺.658** (2.36)
ln(Firm Age) 1.033** (3.95) .920** (3.69) 1.062** (3.88) .145** (2.55) .116* (2.07) .140** (2.46)
Cash Ratio ⫺2.809⫹ (1.74) ⫺2.674 (1.63) ⫺2.863⫹ (1.86) ⫺.536* (2.11) ⫺.553* (2.26) ⫺.606** (2.39)
Adjusted R2 .332 .338 .323 .500 .498 .503
Note.—The sample consists of 2,108 firm-year observations for the period 1993–99. Models 1, 2, and 3 are logit regressions, and models 4, 5, and 6 are ordinary least
squares regressions. Family Firm is a binary variable that equals one when founding families are present in the firm. CEO Founder, CEO Descendant, and CEO Hire are
binary variables to denote CEO type in family firms. Family Control to Ownership is the fraction of board seats held by the family divided by family ownership. The t-
statistics in parentheses are corrected for serial correlation and heteroskedasticity. Two-digit Standard Industrial Classification and year dummy variables are included in all
models. ROA p return on assets.
⫹
* Statistically significant at the .05 level.
and the ordinary least squares (OLS) regressions depict the difference in
diversification levels between family and nonfamily firms. The results in-
dicate that founding-family firms are, on average, 15.0 percent less diversified
(column 4) than nonfamily firms.39 With respect to diversification decisions,
family ownership appears to alleviate agency conflicts with minority
shareholders.
Columns 2 and 5 investigate the influence that family members serving
as CEO have on the diversification decision. We include variables that denote
CEOs as founders, founder descendants, and outsiders—the intercept in the
regression equation denotes CEOs in nonfamily firms. Contrary to our agency
hypothesis, the presence of family member CEOs—founders and founders’
descendants—bears a negative relation to corporate diversification. The co-
efficient estimates from column 5 suggest 28.6 percent (17.7 percent) less
diversification when founders (founder descendants) act as CEO. The F-tests
indicate that the coefficient estimates on founder CEO, descendant CEO, and
outside CEO (while all statistically significant) are not significantly different
from one another (F p .99, p p .32), which suggests that family ownership,
rather than CEO type, is the important issue in the diversification decision.
The results are both statistically and economically significant.
Finally, we consider the divergence between family board control and
ownership rights. Families often control more board seats than their own-
ership rights indicate. In our sample, families without majority control have
2.8 times as many board seats as voting shares. We include the ratio of family
board control to family ownership rights as an independent variable and
report the regression results in columns 3 and 6. Consistent with our prior
results, we find little evidence that greater family control leads to greater
levels of diversification; again, this indicates that family ownership lessens
the moral hazard conflict with minority shareholders.40
In summary, irrespective of the specification, we find unambiguous evi-
dence that family firms are less diversified than nonfamily firms, consistent
with the notion that families seek to maintain or maximize the value of their
stake and thereby minimize diversification discounts.
39
The use of a binary variable as a dependent variable requires the use of logit regres-
sion techniques that yield the probability of an event occurring. With the continuous variable,
we use panel data techniques that allow us to determine the difference in diversification be-
tween family and nonfamily firms. We obtain the difference in diversification levels as
DDiversification p (ebx ⫺ 1) # 100 percent.
40
We examine changes in diversification and leverage for the eight firms in our sample in
which the family exits the firm. We find no evidence of changes in either diversification or
leverage after the family exits the firm. However, the small sample size and limited time frame
after the family’s exit (2.8 years) constrain this analysis.
B. Founding-Family Ownership and Leverage

The previous section indicates that founding families do not pursue risk
reduction strategies through corporate diversification; however, families may
seek to reduce risk through their financing choices. Ceteris paribus, higher
debt levels are more likely to lead to default, so family firms may choose
to use greater portions of equity in their capital structures. We use a similar
specification to our prior regression model and use two measures of debt
levels (in Section V, we examine various alternative specifications). Our first
measure is long-term debt divided by total assets. The second measure is a
binary variable that equals one when firms employ more than 5 percent long-
term debt in their capital structure (levered firms) and zero otherwise (all or
near-all equity firms). The intent of the binary variable is to capture whether
family firms are less (or more) likely to use debt in their capital structure
relative to nonfamily firms.41 Columns 1, 2, and 3 of Table 6 provide
OLS regression results with the continuous variable (debt levels), and col-
umns 4, 5, and 6 provide logit regression results with the binary variable.
We use the same independent variables as in the prior section to capture
family ownership.
The results of the OLS specifications suggest that family ownership, with
or without the inclusion of family CEOs, bears no significant relation to debt
usage. The coefficient estimates on Family Firm, CEO Founder, CEO De-
scendant, CEO Hire, and Family Control to Ownership are not significantly
different from zero. On average, family firms appear to use the same levels
of debt as nonfamily firms.
The regression results in columns 4, 5, and 6 of Table 6 examine the
probability of family firms’ using debt. In general, the results bear out our
prior conclusions that family firms are no less (or more) likely to use debt
than nonfamily firms. In total, our analysis of the relation between founding-
family holdings and firm leverage indicates that family firms (irrespective of
CEO status), on average, use no less or more debt than nonfamily firms.
C. On the Linearity of Founding-Family Ownership

The univariate results from Table 3 suggest that the relation between
founding-family ownership and firm diversification is potentially nonmon-
otonic. In this section, we examine the possibiliy of a nonlinear association
41
Agrawal & Nagarajan, supra note 17, examines a sample of all equity companies (less
than 5 percent long-term debt) and find family ownership in about one-third of the firms. Our
analysis indicates, however, on the basis of the S&P 500 Industrials, that founding families
are present in about one-third of all firms, which suggests that Agrawal and Nagarajan’s finding
on family ownership in all equity firms may be proportional to the overall population of family
firms.
TABLE 6
Regression Results of Leverage and Family Ownership
Firm Leverage: Long-Term

Debt/Total Assets Levered Firms: Binary Variable
(1) (2) (3) (4) (5) (6)
Intercept .023 (.34) .035 (.50) .018 (.27) 14.311** (3.78) 15.000** (2.79) 15.033** (2.88)
Family Firms ⫺.002 (.19) . . . . . . ⫺.169 (.44) . . . . . .
CEO Founder . . . ⫺.016 (.52) . . . . . . ⫺.871 (1.02) . . .
CEO Descendant . . . ⫺.007 (.35) . . . . . . ⫺.798 (1.38) . . .
CEO Hire . . . ⫺.001 (.03) . . . . . . .265 (.67) . . .
Family Control to Ownership . . . . . . .001 (.20) . . . . . . .006 (.17)
Blockholders .062 (1.56) .060 (1.49) .064 (1.60) 1.425 (1.34) 1.165 (1.09) 1.554 (1.45)
Board Independence .015 (.48) .012 (.38) .018 (.58) .465 (.49) .210 (.21) .662 (.75)
Diversification Dummy .013 (1.18) .012 (1.07) .013 (1.23) .476 (1.47) .417 (1.24) .513 (1.58)
ln(Total Assets) .009⫹ (1.70) .008 (1.63) .009⫹ (1.71) .434** (2.35) .398⫹ (1.92) .443** (2.39)
R&D/Sales ⫺.611** (3.54) ⫺.611** (3.52) ⫺.613** (3.55) ⫺7.617 (1.48) ⫺7.807 (1.51) ⫺7.782 (1.51)
Profitability (ROA) .001⫹ (1.67) .001⫹ (1.73) .001⫹ (1.68) .012 (.55) .015 (.74) .011 (.53)
Total Risk .327** (4.25) .330** (4.30) .329** (4.24) 4.213⫹ (1.78) 4.731* (1.96) 4.360** (1.83)
ln(Firm Age) ⫺.002 (.16) ⫺.004 (.27) ⫺.002 (.17) .020 (.04) ⫺.065 (.12) .013 (.03)
Cash Ratio ⫺.289** (4.37) ⫺.289** (4.32) ⫺.290** (4.38) ⫺6.603** (3.38) ⫺6.837** (3.30) ⫺6.641** (3.40)
Adjusted R2 .341 .340 .341 .376 .386 .375
Note.—The sample consists of 2,108 firm-year observations for the period 1993–99. Models 1, 2, and 3 are ordinary least squares regressions, and models 4, 5, and 6
are logit regressions. Family Firm is a binary variable that equals one when founding families are present in the firm. CEO Founder, CEO Descendant, and CEO Hire are
binary variables to denote CEO type in family firms. Family Control to Ownership is the fraction of board seats held by the family divided by family ownership. The t-
statistics in parentheses are corrected for serial correlation and heteroskedasticity. Two-digit Standard Industrial Classification and year dummy variables are included in all
models. ROA p return on assets.
⫹
TABLE 7
Nonlinearities in Family Ownership, Diversification, and Debt Levels
Corporate Diversification: Firm Leverage: Long-Term

ln(Number of Business Segments) Debt/Total Assets
(1) (2) (3) (4)
Intercept ⫺.201 (.56) ⫺.018 (.05) .034 (.52) .035 (.51)
Family Ownership ⫺1.829** (3.58) ⫺1.394⫹ (1.95) ⫺.120 (1.05) ⫺.170 (1.15)
2
(Family Ownership) 2.639** (4.04) 2.117** (2.52) .151 (.93) .209 (1.13)
CEO Founder . . . ⫺.250⫹ (1.79) . . . ⫺.004 (.12)
CEO Descendant . . . ⫺.090 (.85) . . . .008 (.33)
CEO Hire . . . ⫺.046 (.53) . . . .013 (.74)
Blockholders ⫺.282 (1.31) ⫺.307 (1.46) .054 (1.38) .053 (1.34)
Board Independence ⫺.033 (.22) ⫺.090 (.60) .007 (.24) .009 (.31)
Debt Ratio ⫺.056 (.32) ⫺.061 (.34) . . . . . .
Diversification Dummy . . . . . . .011 (.99) .010 (.95)
ln(Total Assets) .097** (3.62) .094** (3.38) .008 (1.62) .009⫹ (1.65)
R&D/Sales ⫺2.205** (2.51) ⫺2.142** (2.46) ⫺.618** (3.61) ⫺.625** (3.65)
Profitability (ROA) ⫺.002 (.83) ⫺.002 (.68) .001⫹ (1.68) .001⫹ (1.73)
Total Risk ⫺.726** (2.58) ⫺.684** (2.43) .321** (4.21) .328** (4.29)
ln(Firm Age) .143** (2.47) .114* (2.01) ⫺.001 (.11) ⫺.003 (.23)
Cash Ratio ⫺.553* (2.16) ⫺.551* (2.24) ⫺.286** (4.36) ⫺.288** (4.37)
2
Adjusted R .496 .495 .342 .342
Note.—The sample consists of 2,108 firm-year observations for the period 1993–99. Family
Ownership is the fractional equity holdings of the founding family. CEO Founder, CEO
Descendant, and CEO Hire are binary variables to denote CEO type in family firms. The t-
statistics in parentheses are corrected for serial correlation and heteroskedasticity. Two-digit
Standard Industrial Classification and year dummy variables are included in all models. ROA
p return on assets.
⫹
between diversification (leverage) and family holdings. We introduce family

ownership and the square of family ownership as continuous variables.42
Table 7 presents the regression results with columns 1 and 2 using corporate
diversification as the dependent variable and columns 3 and 4 using firm
debt levels as the dependent variable. Consistent with our univariate analysis,
the introduction of the square of family ownership suggests that the relation
between family holdings and diversification is curvilinear. Diversification
first decreases as family ownership increases but then begins to increase with
increasing family ownership. Firm diversification reaches a minimum when
founding families hold about 35 percent of the firm’s shares. The inclusion
of CEO type—founders, descendants, and outsiders—does not change the
nature of the result. The F-tests reveal that, irrespective of the level of
42
For example, John J. McConnell & Henri Servaes, Additional Evidence on Equity Own-
ership Structure and Firm Performance, 27 J. Fin. Econ. 595 (1990). We also use a specification
that follows the spirit of Morck, Shleifer, & Vishny, supra note 8, using piecewise linear
regression techniques. However, instead of pre-establishing the breakpoints, we use switching-
point regressions that estimate breakpoints based on minimizing the variance of the regression
model. The switching-point regressions yield results quantitatively similar to our tests using
family holdings and the square of family holdings.
founding-family ownership, family firms pursue significantly less diversifi-

cation than do nonfamily firms.43 Overall, our results suggest that instead of
pursuing risk reduction through corporate diversification, founding-family
firms appear to maintain a strong focus on the firm’s core business.
Turning to debt levels, we find that family holdings and the square of
family holdings are not significantly different from zero. The inclusion of
CEO type, again, does not change our basic conclusion: family firms’ debt
levels do not significantly differ from debt levels in nonfamily firms.
In summary, our analysis of nonlinearities between family ownership and
diversification and debt levels confirms our earlier results: families engage
in significantly less corporate diversification and employ debt levels similar
to nonfamily firms.
D. Shareholder Value and Family Ownership

In this section, we relate family ownership, corporate diversification, and
debt levels to shareholder value. Berger and Ofek44and Sattar Mansi and
David Reeb45 indicate that diversification leads to significant discounts in
shareholder value; thus, family firms may be valued at a premium relative
to nonfamily firms. Focusing on minority-shareholder wealth expropriation,
we use the following specification with measures of shareholder value as the
dependent variable:
Value p C 0 ⫹ C1 (Nondiversified Family Firmi,t )
⫹ C 2 (Diversified Family Firm)
(4)
⫹ C3 (Diversified Nonfamily Firmi,t ) ⫹ C 4 (Leverageit )
⫹ C 5 (FamFirm # Leveragei,t ) ⫹ C 6 (Control Variables) ⫹ ␧ .
To capture the influence of diversification on shareholder value in family

and nonfamily firms, we develop three indicator variables. Specifically, we
define
Nondiversified Family Firm as equal to one when the family is present in

the firm and the firm operates in a single industry and zero otherwise;
Diversified Family Firm as equal to one when the family is present in the
firm and the firm operates in two or more industries and zero otherwise;
and
43
This F-test examines the joint probability that family ownership and square of family
ownership are significantly different from zero. The results of the analysis are for Diversifi-
cation, F p 11.87, p p .001, and for Leverage, F p .01, p p .97.
44
Berger & Ofek, supra note 16.
45
Mansi & Reeb, supra note 16.
TABLE 8
Regression Results of Firm Value and Family Ownership
Excess Value Economic Value Added

(1) (2) (3) (4)
Intercept 2.771** (8.05) 2.862** (7.56) ⫺1125.11** (3.04) ⫺1121.84** (3.13)
Family Firm .074* (2.01) . . . 118.55** (2.67) . . .
Nondiversified Family Firm . . . .093** (3.50) . . . 98.38* (1.98)
Diversified Family Firm . . . ⫺.147 (1.92)
⫹
. . . 26.86 (.48)
Diversified Nonfamily Firm . . . ⫺.134** (2.72) . . . 21.43 (.47)
Diversification ⫺.179** (4.37) . . . ⫺7.482 (.24) . . .
Leverage ⫺.950** (5.82) ⫺.958** (6.63) ⫺391.51** (3.78) ⫺503.38** (4.12)
FamFirm # Leverage . . . ⫺.056 (.20) . . . 367.33⫹ (1.75)
Blockholders ⫺1.368** (5.64) ⫺1.203** (5.94) ⫺38.87** (3.45) ⫺36.15** (3.16)
Board Independence ⫺.093 (1.60) ⫺.080 (1.48) 81.64 (1.20) 74.11 (1.09)
ln(Total Assets) ⫺.089** (2.41) ⫺.085* (2.23) 128.66** (4.14) 127.55** (4.11)
R&D/Sales 4.225** (3.26) 4.391** (3.21) 1100.93** (2.33) 1064.70* (2.23)
Profitability (ROA) .028** (5.44) .027** (5.59) 12.15** (4.61) 12.472** (4.67)
Total Risk ⫺3.777** (5.87) ⫺3.209** (6.12) ⫺238.23 (1.09) ⫺230.73 (1.06)
ln(Firm Age) ⫺.137** (2.37) ⫺.152** (2.63) ⫺15.88 (.68) ⫺14.04 (.62)
2
Adjusted R .442 .450 .115 .114
Source.—Economic-value-added data are taken from the Stern Stewart 1,000 database.
Note.—For models 1 and 2, the sample consists of 2,108 firm-year observations for the period
1993–99. For models 3 and 4, we use Stern Stewart economic-value-added data that cover 1,633 firm-
year observations. Family Firm is a binary variable that equals one when founding families are present
in the firm. CEO Founder, CEO Descendant, and CEO Hire are binary variables to denote CEO type
in family firms. The t-statistics in parentheses are corrected for serial correlation and heteroskedasticity.
Two-digit Standard Industrial Classification and year dummy variables are included in all models. ROA
p return on assets.
⫹
Diversified Nonfamily Firm as equal to one when the firm has no family
presence and the firm operates in two or more industries and zero
otherwise.
The omitted variable in the regression equation—the benchmark for assessing
the above indicator variables—is Nondiversified Nonfamily Firm. In addition,
to measure the influence of debt levels on shareholder value in family firms,
we introduce an interaction term between FamFirm and Leverage. Table 8
presents regression results using two measures of shareholder value. In col-
umns 1 and 2, we use excess value (EV); in columns 3 and 4, we use economic
value added (EVA).46
Beginning with columns 1 and 3, where family ownership is a simple
binary variable (as in the regressions in the prior analysis), we find that
family firms are on average more valuable than nonfamily firms. In particular,
excess value (economic value added) is about 5.5 percent ($118.6 million)
greater when founding families maintain an ownership stake in the firm,
46
We obtain our firm-year measures of EVA from the Stern Stewart 1000 database. Matching
with our sample provides a subset of 1,633 firm-year observations (1993–99).
which suggests that family presence is beneficial rather than harmful to

minority shareholders.47
With respect to the three indicator variables that measure the effects of
diversification on shareholder value in family and nonfamily firms, we note
two interesting points. First, the shareholder value gains in family firms
appear to be isolated to nondiversified family firms that exhibit a 6.9 percent
excess-value premium (or $98.4 million EVA premium) relative to nondiv-
ersified, nonfamily firms. Second, F-tests indicate that the valuation discounts
due to diversification are not significantly different between family and non-
family firms (F p .02, p p .88), which suggests that family firms are no
better (or worse) with diversification strategies than other firms.48 Finally,
the interaction term between FamFirm and leverage is not significantly dif-
ferent from zero, which indicates that investors view the value effects of
leverage as the same in family and nonfamily firms. Overall, our evidence
indicates that family firms pursue less diversification, use similar amounts
of debt, and on average exhibit greater shareholder value, which suggests
that minority shareholders appear to benefit from founding-family presence.
V. Measures of Equity Risk, Endogeniety, and

Alternative Specifications
Conventional wisdom generally suggests that founding families syste-
matically engage in risk-reducing activities and expropriate firm resources
to their private benefit. In this section, we examine equity risk and several
alternative specifications and models to assess the robustness of our results.
Specifically, we examine whether equity risk differs between family and
nonfamily firms, discuss the nature of causality, and consider several alter-
native measures of our key variables.
A. Equity Risk in Family and Nonfamily Firms

Founding families may not have incentives to pursue risk-reduction strat-
egies (diversification or limited use of leverage) if their firms are inherently
less risky than other firms. Although we control for risk in our primary
regressions, we further examine whether equity risk differs significantly be-
tween family and nonfamily firms. Specifically, we use three measures of
47
We calculate the difference in excess value as the coefficient estimate on family firm
divided by average excess value for the entire sample (that is, .074/1.349 p 5.49 percent). For
EVA, the coefficient estimate directly provides the difference between family and nonfamily
firms.
48
In tests not reported, we assess the effect of diversification (leverage) on shareholder value
when a family member serves as the firm’s CEO. The results indicate that founder CEOs who
pursue diversification exhibit a significant and negative effect on shareholder value. Descendant
CEOs and outside CEOs appear not to be related to diversification discounts. We find no
differences in shareholder value with respect to leverage based on family-CEO status.
risk based on stock returns: total risk, systematic risk, and firm-specific risk.49
Our measures are derived from a single-index (market returns) market model
using the previous 60 months of stock return data from the Center for Re-
search in Security Prices (CRSP) files. Market returns are proxied by the
CRSP equal-weighted returns for the New York Stock Exchange/NASDAQ/
American Stock Exchange.50
Table 9 presents the results of the analysis. Columns 1, 3, and 5 show the
three risk measures when using the family-firm binary variable. The results,
consistent across the three measures of risk, indicate that family firms do not
exhibit a significant relation to equity risk, which suggests that the risk
characteristics of family firms are similar to those of nonfamily firms. Col-
umns 2, 4, and 6 of Table 9 examine firm risk on the basis of family par-
ticipation in the firm—family CEOs relative to outside CEOs. Consistent
with the prior regressions, we find that family members acting as CEOs are
not associated with lower levels of risk relative to CEOs in nonfamily firms.
Overall, the analysis generally suggests that the average risk profiles of family
firms do not significantly differ from those of nonfamily firms.
B. Endogeneity
Our analysis potentially suffers from an endogeneity problem. Specifically,
the issue is whether family ownership leads to less diversification and better
firm performance or whether less diversification and better performance
prompt families to maintain their holdings. The idea of families maintaining
their ownership because of less diversification, however, implies that families
actually seek firms with greater risk. However, to the extent that family
ownership is potentially a function of greater firm focus and leverage, we
use two-stage least-squares instrumental variable regressions to estimate
equations (3) and (4). Demsetz and Lehn51 suggest that ownership is a func-
tion of firm size and risk. Therefore, we model family ownership using the
natural log of total assets, the square of the natural log of total assets, and
monthly stock return volatility as our instruments. We present the results of
our analysis in Table 10. The estimates from the two-stage least-squares
instrumental variable regressions are consistent with our prior OLS results,
which suggests that family firms seek less diversification, employ similar
debt levels, and are more valuable relative to nonfamily firms.
49
Anthony Saunders, Elizabeth Strock, & Nickolaos C. Travlos, Ownership Structure, De-
regulation, and Bank Risk Taking, 45 J. Fin. 643 (1990).
50
Total risk is the standard deviation of the firm’s monthly returns. Systematic risk is the
coefficient estimate on the market return variable from the single index model (b). Firm-specific
risk is measured as the standard deviation of the residuals of the market model for each firm.
51
Demsetz & Lehn, supra note 2.
TABLE 9
Regression Results of Equity Risk Measures and Family Ownership
Total Risk Systematic Risk Firm-Specific Risk

(1) (2) (3) (4) (5) (6)
Intercept .131** (10.90) .124** (9.69) 1.132** (6.56) 1.098** (6.04) .124** (10.15) .116** (8.94)
Family Firm ⫺.003 (1.54) . . . ⫺.038 (1.25) . . . ⫺.003 (1.51) . . .
CEO Founder . . . .008 (1.59) . . . .008 (.10) . . . .009⫹ (1.75)
CEO Descendant . . . ⫺.004 (1.63) . . . ⫺.027 (.66) . . . ⫺.005⫹ (1.78)
CEO Hire . . . ⫺.004* (2.22) . . . ⫺.050 (1.40) . . . ⫺.004* (2.24)
Blockholders .010 (1.15) .011 (1.27) ⫺.071 (.52) ⫺.065 (.49) .013 (1.48) .013 (1.61)
Board Independence ⫺.012* (2.06) ⫺.011⫹ (1.95) .083 (1.08) .090 (1.18) ⫺.014** (2.49) ⫺.013** (2.38)
Debt Ratio .038** (5.04) .038** (5.09) .347** (2.94) .347** (2.96) .036** (4.68) .036** (4.70)
Diversification Dummy ⫺.004* (2.13) ⫺.003⫹ (1.88) ⫺.026 (.79) ⫺.024 (.72) ⫺.004* (2.12) ⫺.003⫹ (1.86)
ln(Total Assets) ⫺.004** (4.86) ⫺.005** (4.89) ⫺.017 (1.13) ⫺.016 (1.08) ⫺.005** (5.06) ⫺.005** (5.09)
R&D/Sales .178** (4.41) .175** (4.93) 1.899** (3.91) 1.896** (3.89) .169** (4.04) .166** (4.53)
Profitability (ROA) ⫺.001** (4.24) ⫺.001** (4.33) ⫺.001 (.76) ⫺.001 (.79) ⫺.001** (4.37) ⫺.001** (4.44)
ln(Firm Age) ⫺.003 (1.20) ⫺.001 (.39) .013 (.46) .019 (.62) ⫺.003 (1.36) ⫺.001 (.51)
Cash Ratio .056** (5.62) .056** (5.95) .424* (2.23) .419* (2.21) .055** (5.56) .055** (5.92)
Adjusted R2 .509 .517 .343 .343 .512 .522
Source.—Risk measures are calculated with data drawn from the Center for Research in Security Prices files.
Note.—The sample consists of 2,108 firm-year observations for the period 1993–99. Family Firm is a binary variable that equals one when founding families are
present in the firm. CEO Founder, CEO Descendant, and CEO Hire are binary variables to denote CEO type in family firms. The t-statistics in parentheses are corrected
for serial correlation and heteroskedasticity. Two-digit Standard Industrial Classification and year dummy variables are included in all models. ROA p return on assets.
⫹
TABLE 10
Two-Stage Least-Squares Regression Results of Diversification,
Leverage, and Excess Value on Family Ownership
Corporate
Diversification Firm Leverage Excess Value
(1) (2) (3)
Intercept .152 (.77) ⫺.071⫹ (1.67) 2.739** (12.74)
Instrument for Family Firms ⫺.299** (4.39) ⫺.021 (1.37) .171* (1.99)
Blockholders ⫺.238⫹ (1.92) .063** (2.43) ⫺1.183** (9.27)
Board Independence ⫺.097 (.99) ⫺.002 (.11) .041 (.35)
ln(Total Assets) .101** (8.55) .018** (7.46) ⫺.104** (7.78)
R&D ⫺1.997** (5.14) ⫺.943** (10.70) 5.697** (9.11)
Profitability ⫺.004** (2.50) .001* (2.00) .027** (11.94)
Total Risk ⫺1.117** (6.58) .224** (5.12) ⫺.973** (4.86)
ln(Firm Age) .122** (4.40) .012⫹ (1.86) ⫺.181** (5.73)
Adjusted R2 .296 .194 .416
Note.—The sample for each model consists of 2,108 firm-year observations for the period 1993–99.
Instrument for Family Firms is the predicted value from the first-stage regression. The t-statistics in pa-
rentheses are corrected for serial correlation and heteroskedasticity. Two-digit SIC and year dummy variables
included in all models.
⫹
C. Alternative Measures of the Key Variables

Implicit in our analysis is the assumption that we have correctly measured
the key variables of interest. To explore the robustness of our results, we
explore alternative measures of several variables. First, we consider an al-
ternative measure for family ownership. Specifically, we repeat the analysis
in Tables 5 and 6 using the natural log of the dollar value of family holdings
since the value of holdings may be a more appropriate measure of the in-
centives to diversify or assume more debt than the percentage of fractional
equity holdings. In Appendix Table A1, columns 1 and 2 show the results
of replacing fractional family ownership with the natural log of the value of
family ownership (using equations (3) and (4)). Consistent with the earlier
analysis, we find that firm diversification exhibits a significant and negative
association with the value of family holdings, while leverage fails to show
any significant relation to the value of family holdings.
Second, we consider several alternative measures of leverage. In the pri-
mary analysis, we use the ratio of long-term debt to total assets as a leverage
measure. Columns 3, 4, and 5 in Table A1 show the results of three alternative
leverage measures (long-term debt scaled by market value, total debt scaled
by total assets, and total debt scaled by market value). Irrespective of the
leverage measure, we fail to find any significant relation between family
ownership and the firm’s use of debt.
Third, we control for potential survivorship bias by using the subset of
firms that are available for the entire sample period. Consistent with the prior
results, we find that family firms are associated with lower corporate diver-
sification. To determine whether the reported results are due to a few key
observations, we eliminate observations denoted as outliers or influential
observations using the R-Student’s statistic and the DFFITS statistic.52 We
find that the results are similar to those reported. Finally, we use an alternative
approach to control for industry differences. Specifically, we repeat the testing
excluding those industries with either 100 percent family or nonfamily firms.
The results are consistent with our earlier analysis and indicate that family
firms are less diversified, employ similar debt levels, and exhibit greater
excess value relative to nonfamily firms.
VI. Conclusion
Equity holdings of company founders and their families represent an im-
portant and significant form of ownership in publicly traded U.S. firms.
Among S&P 500 firms, family-owned firms represent one-third of the firms,
account for over 18 percent of firm equity, and have held their stakes on
average for over 78 years. Family ownership as such represents the holdings
of a committed, long-term, and concentrated investor who potentially has
different incentives and remedies relative to atomistic, diversified share-
holders. The concentrated nature of family holdings and the family’s his-
torical presence in the firm suggest that these investors have both the impetus
and power to force the firm to pursue risk reduction strategies through cor-
porate diversification and lower debt levels.
Contrary to the moral hazard hypothesis, we find strong evidence that
founding-family ownership is associated with less corporate diversification.
The analysis also suggests that leverage differs little between family and
nonfamily firms. Additional testing indicates that family firms have risk
profiles similar to nonfamily firms and are present in a wide variety of
businesses and industries. Consistent with their diversification strategies, we
also find that family firms are more valuable than the nonfamily firms. In
aggregate, our analysis suggests that family ownership, instead of increasing
agency costs, appears to lessen the moral hazard conflict for minority
shareholders.
Our analysis has several important implications and findings. First, we
document that concentrated shareholders have an impact on the diversification
process but in a fashion contrary to popular belief. Second, our analysis
suggests that the shareholder-value losses from diversification must be sub-
stantial to dissuade undiversified investors from seeking its risk reduction
benefits. Further, as the literature continues to examine the reasons for di-
versification, our analysis suggests that agency conflicts (risk reduction) be-
52
Observations with R-Student’s statistic greater than 3 are denoted as outliers, and obser-
vations with DFFITS value greater than 1 are denoted as influential observations.
tween shareholders appear to be an unlikely explanation. Finally, we add to

the small and growing literature on family ownership. While Faccio, Lang,
and Young53 indicate that family ownership leads to severe agency conflicts
in East Asian firms, we document that family firms in the United States are
less likely to seek value-reducing corporate diversification or employ less
leverage to minimize firm risk. In summary, our results imply that in well-
regulated and transparent financial markets, family ownership appears to
mitigate moral hazard conflicts and is an effective organizational structure.
53
Faccio, Lang, & Young, supra note 2.
Appendix
TABLE A1
Alternative Measures of Key Variable in the Analysis
Corporate
Diversification (Short-Term⫹Long- (ShortTerm⫹Long-
(ln(Number of Long-Term Debt/Total Long-Term Debt/Firm Term Debt)/Total Term Debt)/Firm
Business Segments)) Assets Market Value Assets Market Value
(1) (2) (3) (4) (5)
Intercept ⫺.238 (.66) .032 (.48) ⫺.482** (2.59) ⫺.019 (.21) ⫺.224⫹ (1.76)
Family Firm . . . ⫺.014 (.47) ⫺.010 (.62) ⫺.026 (1.11)
ln($Value of Family Holdings) ⫺.030** (2.99) ⫺.002 (1.11)
Blockholders ⫺.282 (1.31) .055 (1.37) .206* (2.03) .074 (1.34) .374** (2.53)
Board Independence ⫺.094 (.63) .003 (.10) ⫺.040 (.58) ⫺.030 (.82) ⫺.034 (.68)
Debt Ratio .049 (.28) . . . . . . . . . . . .
Diversification Dummy . . . .011 (1.02) .031 (1.21) ⫺.008 (.57) .033 (1.51)
ln(Total Assets) .105** (3.83) .009⫹ (1.74) .053** (3.72) .025** (3.52) .054** (5.02)
R&D/Sales ⫺2.106** (2.38) ⫺.608** (3.51) ⫺1.376** (4.11) ⫺1.194** (5.33) ⫺1.463** (4.42)
Profitability (ROA) ⫺.002 (.71) .001⫹ (1.72) ⫺.002⫹ (1.69) ⫺.001 (1.49) ⫺.004** (4.27)
Total Risk ⫺.727** (2.59) .320 (4.19) 1.147** (5.16) .449** (5.04) .703** (5.74)
ln(Firm Age) .144** (2.54) ⫺.002 (.13) .023 (.80) .020 (1.23) .012 (.49)
Cash Ratio ⫺.530* (2.08) ⫺.285** (4.28) ⫺.511** (4.18) ⫺.176 (1.58) ⫺.434** (4.22)
Adjusted R2 .426 .341 .375 .319 .400
Note.—The sample for each model consists of 2,108 firm-year observations for the period 1993–99. Family Firm is a binary variable that equals one when founding
families are present in the firm. The t-statistics in parentheses are corrected for serial correlation and heteroskedasticity. Two-digit Standard Industrial Classification and
year dummy variables are included in all models. ROA p return on assets.
⫹
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FOUNDING-FAMILY OWNERSHIP, CORPORATE

DIVERSIFICATION, AND FIRM LEVERAGE*

Journalistic accounts suggest that founding-family ownership and control

* Ronald C. Anderson is a Kogod Endowed Faculty Fellow, Kogod School of Business,

[Journal of Law and Economics, vol. XLVI (October 2003)]

shareholder wealth expropriation.2 Specifically, Harold Demsetz3 and Dem-

ersified shareholders and minority-equity claimants by examining founding-

II. Undiversified Shareholders, Moral Hazard,

A. Family Ownership and Firm Risk

B. Family Ownership and Shareholder Value

C. An Alternative Perspective: Families as Stewards of Firm Value

because the family’s welfare is so closely linked to firm performance, families

related to founding-family ownership? Third, does the level of family con-

III. Data Description

B. Primary Variable Measures

we denote family ownership in three ways. First, we develop a binary variable

Second, we use an independent measure of firm value. Specifically, we obtain

EVA p (net operating profit after taxes)

C. Control Variable Measures

All Family Nonfamily

of James Brickley, Jeffrey Coles, and Rory Terry36 as inside, affiliated, or

D. Descriptive and Univariate Statistics

Family Business Total Excess

and industry-specific attributes, we use a multivariate framework analysis to

IV. Multivariate Testing Results

A. Corporation Diversification and Founding-Family Ownership

B. Founding-Family Ownership and Leverage

C. On the Linearity of Founding-Family Ownership

Firm Leverage: Long-Term

Corporate Diversification: Firm Leverage: Long-Term

between diversification (leverage) and family holdings. We introduce family

founding-family ownership, family firms pursue significantly less diversifi-

D. Shareholder Value and Family Ownership

To capture the influence of diversification on shareholder value in family

Nondiversified Family Firm as equal to one when the family is present in

Excess Value Economic Value Added

which suggests that family presence is beneficial rather than harmful to

V. Measures of Equity Risk, Endogeniety, and

A. Equity Risk in Family and Nonfamily Firms

Total Risk Systematic Risk Firm-Specific Risk

C. Alternative Measures of the Key Variables

tween shareholders appear to be an unlikely explanation. Finally, we add to

DeAngelo, Harry, and DeAngelo, Linda. “Controlling Stockholders and the

ership and Market Valuation: An Empirical Analysis.” Journal of Financial

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