Burkart, Panunzi, and Shleifer, Family Firms

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Burkart, Panunzi, and Shleifer, Family Firms

• Journal of Finance, 2003
• (theory paper)

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Motivation and Contributions

• Family control is pervasive around the world
• Need to combine in one unified framework the twin
  conflicts
• manager outside owners
• large shareholder minority shareholders
• Examine the decision to separate ownership from
  control (management) vs. succession (a choice
  variable in this model)
• Consider collusion and non-collusion between the
  founder and professional manager

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Existing Theories on the benefits of preserving
family control

• Imperfect Capital Markets
• Bhattacharya Ravikumar (2001, 2002)
• Amenity potential
• introduced by Demsetz Lehn (1985)
• nonpecuniary private benefits of control
• does NOT come at expense of profits
• Family name adds value
• Reputation
• Political Connections - Faccio (2002)
• Expropriation
• classical Jensen Meckling (1976)
• private benefits of control are at expense of
  profits (minority shareholders)

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Model Outline

• Founder looking for a manager to succeed him
• retiring, etc.
• recognizes own inferior abilities to run the firm
  (consistent with empirical evidence Morck et
  al./ (2000), Perez-Gonzales (2001))
• equivalent to There exists a better qualified
  manager
• NO superior manager with sufficient resources to
  buy the firm outright
• Founder has 3 options
• sell out completely
• hire a pro manager AND retain control to monitor
• keep the firm in the family
• Founder max-s own welfare
• retained block
• revenues from sold shares
• amenity potential

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Model anchors and key assumptions

• trade-off b/w superior pro manager and discretion
  to expropriate
• level of legal protection of outside owners
  determines the maximum possible degree of
  expropriation
• legal protection (measured by ) vs. efficiency
  of monitoring (k)
• substitutes
• complements k
• firm size is exogeneous, no investment decision
  considered
• direct collorary If the founder is the best
  manager, then no shares are sold and there are no
  agency problems.
• firm cannot opt into more protective legal regime
  via a contract, such as cross-listing or a better
  corporate charter.

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Time line
The models is solved by backwards induction.
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Notation 1
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Notation 2
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Solution under non-separation

• ownership structure is indeterminate
• founders welfare is independent of legal
  environment
• the sum of security and private benefits is
  constant

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Solution under non-collusion
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Detailed Solution under non-collusion (Lamma 2) 1
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Detailed Solution under non-collusion (Lamma 2) 2
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Overall equilibrium (compare VNS and VS) for B at
extremes (Prop 1)

• Within a country (legal protection is const.)
• founder may find it optimal to keep control even
  with very strong protection (US media, sports
  companies)
• founder hires a pro manager if sufficiently
  incompetent (W. Europe utilities and telecoms)

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Overall equilibrium (compare VNS and VS) for
moderate B (Prop 2)
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Figure 2
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Definition of C0, C1 and C2
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Additional results

• main problem with models predictions
• under separation founders block trades at a
  discount
• stems from monitoring being a public good (free
  rider problem)

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Figure 3