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This piece reflects on the impact of Demsetz and Villalonga (2001) on the occasion of the paper receiving the Journal of Corporate Finance 25-Year Award.

Research Summary This paper explores the stock market performance of acquisitions and divestitures where both, one, or neither of the companies in the transaction are family firms. We find that acquirer shareholder returns are highest when family firms buy businesses from non‐family firm divesters, especially when family chief executive officer (CEO) acquirers buy businesses from non‐family CEO divesters. Additionally, divester shareholder returns are highest when family firms sell businesses to non‐family firm acquirers, especially when family CEO divesters sell businesses to non‐family CEO acquirers. These findings reveal that it is important to consider the characteristics of both the acquiring and divesting firms when analyzing acquisition and divestiture performance, and that the expected gains to family firm acquisitions and divestitures are driven by transactions in which the counterparties are non‐family firms. Managerial Summary This paper explores how investors react to acquisitions and divestitures where both, one, or neither of the companies in the deal are family firms. The stock market performance of acquiring firms is highest when family firms buy businesses from non‐family firms, relative to the other three possible combinations of family and non‐family firm acquirers and divesters. Likewise, the stock market performance of divesting firms is highest when family firms sell businesses to non‐family firms, again relative to the other three possible combinations of family and non‐family acquirers and divesters. These findings suggest that investors take into consideration the identities of both the acquiring and divesting firms when evaluating acquisitions and divestitures, and that this has significant implications for the expected performance gains of these transactions.

Using a large survey database on the corporate governance practices of privately held Colombian firms, we investigate why firms have boards, and how that choice and the balance of power among the board, controlling shareholders, and minority shareholders affect the trade‐offs between control, liquidity, and growth and, ultimately, firm performance. We find that the probability of having a board increases with the number of shareholders and in family firms. When the preferences of controlling and minority shareholders diverge, as with respect to capital structure and dividend policy, boards support controlling shareholders’ decisions, thereby exacerbating the agency conflict between the two groups of shareholders.

We show that the value of corporate diversification increased during the 2007–2009 financial crisis. Diversification gave firms both financing and investment advantages. First, conglomerates became significantly more leveraged relative to comparable focused firms. Second, conglomerates’ access to internal capital markets became more valuable, not just because external capital markets became more costly but also because the efficiency of internal capital allocation increased significantly during the crisis. Our analysis provides new evidence on how and why the value of diversification varies with financial constraints and economic conditions, and it suggests that corporate diversification can serve an important insurance function for investors. This paper was accepted by Amit Seru, finance.

We review what the financial economics literature has to say about the unique ways in which the following three classic agency problems manifest themselves in family firms: (a) shareholders versus managers, (b) controlling (family) shareholders versus noncontrolling shareholders, and (c) shareholders versus creditors. We also call attention to a fourth agency problem that is unique to family firms: the conflict of interest between family shareholders and the family at large, which can be thought of as the “superprincipal” in a multi-tier agency structure akin to those found in other concentrated ownership structures in which the controlling owner is the state, a bank, a corporation, or other institutions. We then discuss the solutions or corporate governance mechanisms that have been devised to address these problems and what research has taught us about these mechanisms' effectiveness at solving these four conflicts in family firms.

This paper explores the stock market performance of acquisitions and divestitures where both, one, or neither of the companies in the transaction are family firms. We find that acquirer shareholder returns are highest when family firms buy businesses from non-family firm divesters, especially when family CEO acquirers buy businesses from non-family CEO divesters. Additionally, divester shareholder returns are highest when family firms sell businesses to non-family firm acquirers, especially when family CEO divesters sell businesses to non-family CEO acquirers. These findings reveal that it is important to consider the characteristics of both the acquiring and divesting firms when analyzing acquisition and divestiture performance, and that the expected gains to family firm acquisitions and divestitures are driven by transactions in which the counterparties are non-family firms.

We investigate the role played by institutional development in the prevalence and performance of firms that are owned and/or managed by entrepreneurs or their families, while controlling for the potential effect of cultural norms. China provides a good research lab since it combines great heterogeneity in institutional development across its provinces with homogeneity in cultural norms, law, and regulation. Using hand-collected data from publicly listed Chinese firms, we find that, when institutional efficiency is high, entrepreneur- and family-controlled firms are more prevalent and exhibit superior performance than non-family firms. We find that the positive effects of family ownership and the negative effects of family control in excess of ownership that have been documented in earlier studies around the world are only significant in high-efficiency regions, and only for family-controlled firms proper, but not for entrepreneur-controlled firms. Institutional development also helps reconcile the divergence of results across prior studies regarding the performance impact of founders and their families as managers and not just owners. When institutional efficiency is high, the sign of the management effect is entirely contingent of whether the Chairman or CEO is the entrepreneur himself/herself (positive) or a family member (negative); when institutional efficiency is low, the effect is positive in both cases, and more strongly so in the case of a family member serving as CEO.

Using a large survey database on the corporate governance practices of privately held firms, we investigate why firms have boards, and how that choice, and the balance of power among the board, controlling shareholders, and minority shareholders impact the tradeoffs between control, liquidity, and growth, and ultimately, firm performance. We find that the probability of having a board increases with the number of shareholders and in family firms. When the preferences of controlling and minority shareholders diverge, as with respect to capital structure and dividend policy, boards support controlling shareholders’ decisions, thereby exacerbating the agency conflict between the two groups of shareholders.

This paper investigates the relationship between divestitures and firm value in family firms. Using hand-collected data on a sample of over 30,000 firm-year observations, we find that family firms are less likely than non-family firms to undertake divestitures, especially when these companies are managed by family rather than non-family-CEOs. However, we then establish that the divestitures undertaken by family firms, predominantly those run by family-CEOs, are associated with higher post-divestiture performance than their non-family counterparts. These findings indicate that family firms may fail to fully exploit available economic opportunities, potentially because they pursue multiple objectives beyond the maximization of shareholder value. These results also elucidate how the characteristics of corporate owners and managers can influence the value that firms derive from their corporate strategies

This article investigates how securities analysts help investors understand the value of diversification. By studying the research that analysts produce about companies that have announced corporate spin-offs, we gain unique insights into how analysts portray diversified firms to the investment community. We find that while analysts' research about these companies is associated with improved forecast accuracy, the value of their research about the spun-off subsidiaries is more limited. For both diversified firms and their spun-off subsidiaries, analysts' research is more valuable when information asymmetry between the management of these entities and investors is higher. These findings contribute to the corporate strategy literature by shedding light on the roots of the diversification discount and by showing how analysts' research enables investors to overcome asymmetric information.

We test what explains family control of firms and industries and find that the explanation is largely contingent on the identity of families and individual blockholders. Founders and their families are more likely to retain control when doing so gives the firm a competitive advantage, thereby benefiting all shareholders. In contrast, nonfounding families and individual blockholders are more likely to retain control when they can appropriate private benefits of control. Families are more likely to maintain control when the efficient scale is small, the need to monitor employees is high, investment horizons are long, and the firm has dual-class stock.

Inlarge U.S. corporations, foundingfamilies are theonlyblockholders whose controlrights on average exceed their cash-flow rights. We analyze how they achieve this wedge, and at what cost. Indirect ownership through trusts, foundations, limited partnerships, and other corporations is prevalent but rarely creates a wedge (a pyramid). The primary sources of the wedge are dual-class stock, disproportionate board representation, and voting agreements. Each control-enhancing mechanism has a different impact on value. Our findings suggest that the potential agency conflict between large shareholders and public shareholders in the United States is as relevant as elsewhere in the world. (JEL G3, G32) Corporate governance scholars and regulators in the United States have traditionally been concerned about protecting investors from managerial entrenchment and expropriation—the classic agency problem described by Berle and Means (1932) and Jensen and Meckling (1976). Yet, a growing body of literature has shifted attention toward a different agency problem that seems to be of greater concern in most of the world: the expropriation of small investors by large controlling shareholders (Shleifer and Vishny 1997). We suggest that this second type of agency problem is also significant in the United States. Several important findings have emerged from the international corporate ownership literature. First, most firms around the world are controlled by a large shareholder, typically founders or their families (La Porta, L´ opez de

Using proxy data on all Fortune-500 firms during 1994–2000, we find that family ownership creates value only when the founder serves as CEO of the family firm or as Chairman with a hired CEO. Dual share classes, pyramids, and voting agreements reduce the founder's premium. When descendants serve as CEOs, firm value is destroyed. Our findings suggest that the classic owner-manager conflict in nonfamily firms is more costly than the conflict between family and nonfamily shareholders in founder-CEO firms. However, the conflict between family and nonfamily shareholders in descendant-CEO firms is more costly than the owner-manager conflict in nonfamily firms.

This paper investigates how firms choose among acquisitions, alliances, and divestitures when they decide to expand or contract their boundaries. The dataset covers 9276 deals announced and completed by 86 members of the Fortune 100 between 1990 and 2000. Our findings support explanations based on resources, transaction costs, internalization, organizational learning, social embeddedness, asymmetric information, and real options, and suggest that these theories are highly related and complementary. We find less consistent support for theories based on agency costs and asset indivisibilities. The strong role of firm attributes explains in part why firms may pre-specify whether they will pursue acquisitions, alliances, or divestitures as part of their corporate strategies. Copyright © 2005 John Wiley & Sons, Ltd.

This paper tests empirically the hypothesis that the greater the intangibility of a firm’s resources, the greater the sustainability of its competitive advantage. Resource intangibility is measured by: (1) Tobin’s q and (2) the predicted value from a hedonic regression of q on several accounting measures of intangibles. Sustainability is measured by the persistence of firm-specific profits. Using a dynamic panel data regression model, I find that intangibles play an effective role in sustaining a firm’s competitive advantage, as predicted by the resource-based view of the firm. However, the results suggest that intangibles can also lock firms into persistent disadvantages.

I use the Business Information Tracking Series (BITS), a new census database that covers the whole U.S. economy at the establishment level, to examine whether the finding of a diversification discount is an artifact of segment data. BITS data allow me to construct business units that are more consistently and objectively defined than segments, and thus more comparable across firms. Using these data on a sample that yields a discount according to segment data, I find a diversification premium. The premium is robust to variations in the sample, business unit definition, and measures of excess value and diversification.

The boundaries between CEO and CFO are blurred in the fields of strategy and finance. This volume fills this gap by discussing the main subdivisions of strategy research - corporate strategy and business strategy - and the main subdivisions of finance research - corporate finance and capital markets.

Using a large sample of diversified firms from 38 countries we investigate the influence of several national-level institutional factors or “institutional voids” on the value of corporate diversification. Specifically, we explore whether the presence of frictions in a country’s capital markets, labor markets, and product markets, affects the excess value of diversified firms. We find that the value of diversified firms relative to their single-segment peers is higher in countries with less-efficient capital and labor markets, but find no evidence that product market efficiency affects the relative value of diversification. These results provide support for the theory of internal capital markets that argues that internal capital allocation would be relatively more beneficial in the presence of frictions in the external capital markets. In addition, the results show that diversification can be beneficial in the presence of frictions in the labor market.

This paper investigates the relation between the ownership structure and the performance of corporations if ownership is made multi-dimensional and also is treated as an endogenous variable. To our knowledge, no prior study has treated the corporate control problem this way. We find no statistically significant relation between ownership structure and firm performance. This finding is consistent with the view that diffuse ownership, while it may exacerbate some agency problems, also yields compensating advantages that generally offset such problems. Consequently, for data that reflect market-mediated ownership structures, no systematic relation between ownership structure and firm performance is to be expected. The accepted paper version of this abstract can be accessed using the following URL: http://ssrn.com/abstract_id=304181

Agency and public choice theories of privatization indicate that a privatized firm's performance will improve on average, but they do not include an explanation of the observed variance in this result. We argue that organizational and contextual variables need to be considered in order to explain that variance. We develop a model and propositions about the changes that privatization triggers in the firm's management, governance structure, goals, incentives, control, strategy, and organization.

This paper argues that the private-public ownership factor should be differentiated from other factors that also influence the effect of privatization on efficiency. This is empirically confirmed in a longitudinal study of 24 Spanish firms, for which several political and organizational factors are found to influence the estimated effects of privatization on efficiency. The analysis of the timing of the effects reveals a strong significance for post-privatization years 5‐6 (negative), and 7‐8 (positive). This suggests that the negative effect of these factors is transitional, being eventually offset by the positive effects of the change to private ownership. ©2000 Elsevier Science B.V. All rights reserved. JEL classification: L33

Using a large sample of diversified firms from 38 countries we investigate the influence of several national-level institutional factors or ‘institutional voids’ on the value of corporate diversification. Specifically, we explore whether the presence of frictions in a country’s capital markets, labor markets, and product markets, affect the excess value of diversified firms. We find that the value of diversified firms relative to their single-segment peers is higher in countries with less efficient capital and labor markets, but find no evidence that product market efficiency affects the relative value of diversification. These results provide support for the theory of internal capital markets that argues that internal capital allocation would be relatively more beneficial in the presence of frictions in the external capital markets. In addition, the results show that diversification can be beneficial in the presence of frictions in the labor market.

We examine whether and why the value of diversification changed during the 2008–2009 financial crisis. We find that diversified firms increased in value relative to single-segment firms during the crisis, a result that is not driven by the endogeneity of either financing constraints or firms’ diversification choices. We also find that the increase did not simply reflect changes in investor perceptions but real differences in corporate finance and investment, through two different channels: a “more money” effect arising from the debt coinsurance feature of conglomerates, and a “smarter money” effect arising from more efficient internal capital allocation.

We exploit an exogenous shock to corporate ownership structures created by a recent tax reform in Germany to explore the causal link between corporate governance and internal capital markets. We find that firms with more concentrated ownership are less diversified and have a less active but more efficient internal capital market. Our findings provide direct evidence in support of Scharfstein and Stein's (2000) model, which suggests that internal capital misallocations are partly a result of poor corporate governance. We also provide evidence of a channel through which the benefits of ownership concentration outweigh its costs.

We investigate the role played by institutional development in the prevalence and value of family firms, while controlling for the potential effect of cultural norms. China provides a good research lab since it combines great heterogeneity in institutional development across the Chinese provinces with homogeneity in cultural norms, law, and regulation. By decomposing family firms into their ownership, control, and management elements, we are able to test the specific predictions of the investor protection and internal markets explanations. Using hand-collected data from publicly listed Chinese firms, we find that, when institutional efficiency is low, family ownership and management increase value, while family control in excess of ownership reduces value. When institutional efficiency is high, none of these effects are significant. We conclude that institutional development plays an important role in the prevalence and value of family firms.

We test what explains family control of firms and industries and find that the explanation is largely contingent on the identity of families and individual blockholders. Founders and their families are more likely to retain control when doing so gives the firm a competitive advantage, thereby benefiting all shareholders. In contrast, non-founding families and individual blockholders are more likely to retain control when they can appropriate private benefits of control. Families are more likely to maintain control when the efficient scale is small, the need to monitor employees is high, investment horizons are long, and the firm has dual-class stock.

In large U.S. corporations, founding families are the only blockholders whose control rights on average exceed their cash flow rights. We analyze how families achieve this separation between cash-flow and control rights, and at what cost. We find that indirect ownership through trusts, foundations, limited partnerships, and other corporations is prevalent but rarely creates a wedge between cash-flow and control rights. The primary sources of the wedge are dual-class stock and voting agreements. Additional control is frequently obtained through board representation in excess of voting control, and through the presence of a family member as CEO or Chairman of the Board. We also find that the impact of control-enhancing mechanisms on firm value depends on the specific mechanism used: the effect is negative for dual-class stock and disproportional board representation, but positive for pyramids and voting agreements.

Using proxy data on all Fortune 500 firms during 1994-2000, we establish that, in order to understand whether and when family firms are more or less valuable than nonfamily firms, one must distinguish among three fundamental elements in the definition of family firms: ownership, control, and management. Specifically, we find that family ownership creates value only when the founder serves as the CEO of the family firm or as its Chairman with a hired CEO. Control mechanisms including dual share classes, pyramids, and voting agreements reduce the founder's premium. When descendants serve as CEOs, firm value is destroyed. Our findings further suggest that the classic owner-manager conflict in nonfamily firms is more costly than the conflict between family and nonfamily shareholders in founder-CEO firms. However, the conflict between family and nonfamily shareholders in descendant-CEO firms is more costly than the owner-manager conflict in nonfamily firms.

Using globalization and contingency theory, this paper develops a supplier-based model of global account management (GAM). The model comprises the multinational supplier's industry globalization drivers, the multinational customers' extent of globally coordinated buying, such customers' demand for GAM services, the supplier's response in terms of using various aspects of GAM, and resulting possible improvement in the supplier's performance. The paper develops six hypotheses linking these variables. Data on various aspects of these variables were collected in a survey of 191 executives in multinational companies. Two related models are estimated from these data using a structural equations method. The results support the argument that the supplier's industry globalization drivers play a key role in affecting customers' demand for GAM services, and that supplier's implementation of GAM leads to significant performance improvements.

This paper examines whether the finding of a diversification discount in U.S. stock markets is only a data artifact. Segment data may give rise to biased estimates of the value effect of diversification because segments are defined inconsistently across firms, and that inconsistency does not occur at random. I use a new establishment-level database that covers the whole U.S. economy (BITS) to construct business units that are more consistently and objectively defined across firms, and thus more comparable. Using a common methodological approach on a sample of firms which exhibit a diversification discount according to segment data, I find that, when BITS data are used, diversified firms actually trade at a significant average premium. The premium is robust to variations in the method, sample, business unit definition, and measures of excess value and diversification used.

This paper examines whether the discount of diversified firms can actually be attributed to diversification itself, using recent econometric developments about causal inference with non-experimental data. The effect of diversification on firm value is unbiasedly estimated by matching diversified and single-segment firms on the propensity score??the predicted values from a probit model of a firm?s propensity to diversify. I apply this method on a sample of diversified firms that trade at a significant mean and median discount relative to single-segment firms of similar size and industry. I find that, when a more comparable benchmark based on the propensity score is used, the diversification discount as such disappears. Therefore, I find no reason to interpret the finding that diversified firms trade at a discount as evidence that diversification destroys value. In fact, my analysis of the propensity to diversify yields support to both value-creating and value-destroying arguments for diversification. I find that diversified firms trade at a significant industry-adjusted discount prior to diversification, which however does not seem to result from their future diversification. In addition, diversifying firms are present in industries with a lower q than those of their non-diversifying counterparts. I also find that, as predicted by agency theory, diversified firms prior to diversifying have a smaller percentage of their stock owned by institutions, insiders, and blockholders, a higher risk, and are likely to diversify into industries with a lower average leverage than their own. I find support for the resource-based theory of diversification as well in that firms are more likely to diversify when faced with opportunities for exploiting potential synergies and when they have enough financial resources to do so. As required for market power-based theories of diversification to hold, firms that diversify are present in industries with higher levels of concentration. More generally, certain industries appear to lend themselves more than others to either inward or outward diversification.

This paper investigates the propensity of family firms to undertake corporate divestitures, as well as the performance consequences of these transactions. Using a proprietary dataset consisting of detailed information on the family control and divestiture activity of family firms between 1994 and 2010, we find that family firms are less likely than their non-family counterparts to under-take divestitures, especially when they are managed by family- rather than non-family CEOs. We also establish that the divestitures undertaken by family firms are associated with higher firm value, though this does not appear to be contingent on the familial relationships of the CEO of the company.

This paper investigates how securities analysts help investors understand the value of diversication. By studying the research that analysts produce about companies that have announced corporate spinos, we gain unique insights into how analysts portray diversied rms to the investment community. We nd that while analysts’ research about these companies is associated with improved forecast accuracy, the value of their research about the spun-o subsidiaries is more limited. For both diversied rms and their spun-o subsidiaries, analysts’ research is more valuable when information asymmetry between the management of these entities and investors is higher. These ndings contribute to the corporate strategy literature by shedding light on the roots of the diversication discount and by showing how analysts’ research enables investors to overcome asymmetric information.