ICEF/LFE Research Seminar
Speaker: Thomas Noe (Saïd Business School - Oxford University)
May 23 at 4.40 pm, room 3211 International College of Economics and Finance and Laboratory for Experimental and Behavioural Economics held the Research Seminar in Finance.
Speaker: Thomas Noe (Saïd Business School - Oxford University)
Theme: «Blood and Money: Kin altruism, governance, and inheritance in the family firm»
Venue: Shabolovka str. 26, building 3, room 3211
Abstract: This paper develops a theory of governance and inheritance within family firms based on kin altruism (Hamilton, 1964). Family members weigh the payoffs to relatives in proportion to their relatives’ degree of relatedness. The theory shows that family management entails both costs and benefits. For any fixed contractual division of value between family owners and managers, the attenuated monitoring incentives associated with kin altruism produce a “policing problem” within family firms. This policing problem results in both increased managerial diversion and increased monitoring costs. Relatedness has conflicting effects on manager–owner compensation negotiations. On the one hand, owners are more willing to concede rents to managers to increase total value. On the other hand, because family managers internalize the costs to the family from their rejection of owner demands, relatedness also lowers managers’ reservation compensation level. If it is optimal for owners to exploit these reduced reservation level, lower formal compensation leads to more diversion and costly monitoring. Founders of firms, when deciding on their final bequests, anticipate these costs and benefits of family control. Unless the family’s pedigree is very unusual, founders’ preferences are more closely aligned with total value maximization than their descendants’. Founder bequests, though biased towards closer relatives, frequently involve divided bequests designed to curtail close relatives’ gains when such gains come at the expense of total family value.