Family firm heterogeneity and corporate policy: Evidence from diversification decisions

Manuscript Type: Empirical Research Question/Issue: This paper empirically tests how founders and their families affect business segment diversification. We contribute to the literature by studying the distinct effects of family ownership, management, and supervision on diversification strategies. Research Findings/Insights: We use a large panel dataset of listed German firms. Our results indicate a sharp contrast between firms owned by families and those in which the family holds an active management position. Firms owned by families have higher levels of diversification. However, the opposite is true for firms managed by families. Furthermore, other large shareholders perform a monitoring role and induce family owners to concentrate on their core business. Theoretical/Academic Implications: This paper clearly confirms that family firms comprise a heterogeneous group of firms. Thus, empirical research in this area should carefully distinguish the impact of different channels (i.e., management vs. ownership) families may use to influence corporate decision making. For diversification decisions, we can even show that family ownership and management have an opposite impact. Founding families have to trade off the desire to preserve financial wealth (via diversification) with the risk of losing control and endangering their socioemotional wealth (SEW). Practitioner/Policy Implications: For policy makers, our results underline that family firms are not a homogeneous group of firms. Hence, it is important to consider their heterogeneity in the political discussion. For example, needs and preferences of family managed firms may differ substantially from those of family owned firms. Equity investors and debt providers should also be aware of this family firm heterogeneity.