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Journal of International Financial Management and Accounting 12:3 2001

The Effect of Founding Family Influence on

Firm Value and Corporate Governance

Chandra S. Mishra
Oregon State University, 200 Bexell Hall, College of Business, Corvallis, OR 97331, USA

Trond Randøy
Agder University College and Agder Research Foundation, Kristiansand, Norway, and Oregon State
University, Corvallis, OR 97331, USA

Jan Inge Jenssen

Agder University College and Agder Research Foundation, Kristiansand, Norway, and Oregon State
University, Corvallis, OR 97331, USA

Abstract
We examined a sample of 120 Norwegian, founding family controlled and non-founding
family controlled firms, to address two important research questions: (1) is founding family
control associated with higher firm value; and (2) are there unique corporate governance
conditions under which a founding family controlled firm can be more valuable? We find a
positive association between founding family control and firm value for four alternative
definitions of founding family control. We find that the association between founding
family CEOs and firm value is stronger among younger firms, firms with smaller boards,
and firms with a single class of shares. However, the impact of founding family directors on
firm value is not affected by corporate governance conditions such as firm age, board
independence, and number of share classes. We also find that the relation between founding
family ownership and firm value is greater among older firms, firms with larger boards, and
particularly when these firms have multiple classes of shares. Our results imply that
founding family controlled firms are more valuable and governed differently than firms
without such influence. Furthermore, our results also suggest that founding family CEOs
can enhance firm performance when family influence does not create shareholder
entrenchment or when their cash flow rights are more aligned with their control rights.

1. Introduction
Does founding family control add value to the firm? How does the found-
ing family influence interact with other corporate governance mechanisms
to affect firm value? Is there a unique corporate governance scenario
under which founding family control can be more effective? To explore
these questions, we compare a sample of Norwegian founding family
controlled firms with non-founding family controlled firms.

We would like to thank the Norwegian Shipowners Association and the Confederation of Norwegian
Business and Industry for financial support. We would also like to thank Ray Brooks, Don Herrmann,
Jim Nielsen, Art Stonehill, the journal editor, and the two anonymous reviewers of the journal, whose
comments and suggestions have greatly improved our paper.
© Blackwell Publishers Ltd. 2001, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.
236 C. S. Mishra, T. Randøy and J. I. Jenssen

An advantage of founding family control is that family ownership can

help guarantee stability of business and long-term planning. Family
owners can also make decisions more quickly and be more flexible.
Family traits, such as trust, altruism, and paternalism, can encourage
an atmosphere of commitment and love for the business (James, 1999).
Fama and Jensen (1983) suggest that the long-term nature of family
relationships is advantagous in monitoring and disciplining managers.
Many large organizations try to adopt these family traits in an effort to
compete more effectively and boost firm performance (La Porta et al.,
1996).
One potential drawback of founding family ownership is that these
firms might have difficulty accepting professional managers capable of
responding to new technology and increased competition. Family busi-
nesses can also confiscate corporate property for personal use. For example,
they may interfere in corporate decision making to benefit themselves or
their friends, or they may use transfer pricing to shift income from
publicly traded firms they control to private firms they own outright.
The role of founding family control is under-explored in the area of
finance. The few empirical studies conducted so far on the relation
between firm value and founding family control, have produced mostly
inconsistent results. For example, McConaughy et al. (1998) find a
positive effect of founding family control in the US, whereas Lauterbach
and Vaninsky (1999) find that family firms in Israel under-perform
other firms.1 In this paper, we find a positive association between founding
family control and firm value for four alternative definitions of founding
family control. The relation between founding family control and firm
value is also stronger among firms that do not have multiple share classes.
We also find that the impact of founding family control does not vary
significantly with firm age (with the exception of founding family CEOs).
Our results indicate that founding family control is positively related to
firm value and that founding family firms are governed differently than
firms without family control. This finding is consistent with Fama and
Jensen (1983), as well as De Angelo and De Angelo (1985), who suggest
that founding family involvement reduces agency costs and allows
improved monitoring of the firm’s managers. However, our results also
suggest that founding family CEOs can enhance firm performance when
family influence does not create shareholder entrenchment or when their
cash flow rights are more aligned with their control rights.
In the following section, we discuss the unique corporate governance
environment of Norway, and then review the relevant literature. Then we
© Blackwell Publishers Ltd. 2001.
 Founding Influence on Firm Value and Corporate Governance 237

review procedures for data collection and define the variables used in
the study. Next we outline the research methods and report the results
obtained. Finally, we conclude with a discussion of our findings.

2. Corporate Governance in Norway

We suggest that studying founding family control in Norway is interesting
for four reasons. First, we find a number of publicly traded Norwegian
firms with founding family influence. La Porta and Lopez-de-Silanes
(1999) report that 25 per cent of Norwegian firms are owned by founding
families who hold at least 20 per cent of the firm’s shares. However,
very few Norwegian publicly traded companies have 50 per cent or more
family ownership. Before the mid-1980s, the Norwegian stock market
was not well developed. For example, in 1981, the total market value of
all domestic shares was NOK 19.4 billion (approximately US$2.7 billion)
and the market turnover (percentage of active stocks) was only 3 per cent
per year. Similar figures in 1996 were NOK 74.9 billion and 40 per cent
per year, respectively (Oxelheim et al., 1998). Consequently, equity
investment and corporate control through founding family ownership have
historically been important in Norway.
Second, an increased need for capital by founding family firms, has
recently caused a decline in family ownership in Norway. This is part of
a long-term trend whereby individual ownership is declining, and insti-
tutional ownership is increasing (Oslo Stock Exchange, 1996). The case
of Braathens, the largest domestic airline in Norway, illustrates this point.
The founding family of Braathen made its first public stock issue in 1993,
but the Braathen founding family still controlled 75 per cent of the stock.
In 1997, KLM, the Dutch airline, bought 30 per cent of the shares from the
Braathen family, as a need for greater internationalization persuaded the
family to reduce its ownership to about 38 per cent of the company. Due to
poor performance in 1998, the family CEO and grandson of the founder,
Erik G. Braathen, was forced to step down. This case illustrates how family
firms in Norway are unable to escape the discipline of the capital market.
Third, a number of recent studies have evaluated the influence of
founding families on the performance of US companies (McConaughy
et al., 1998; Mishra and McConaughy, 1999; among others). In our
research, we extend their study to a sample of Norwegian firms, using four
alternative definitions of founding family control. In addition, we examine
the type of corporate governance under which founding family control can
enhance firm value.
© Blackwell Publishers Ltd. 2001.
238 C. S. Mishra, T. Randøy and J. I. Jenssen

Finally, a number of current studies evaluate the effect of founding

family control in developing countries, particularly after the 1997 cur-
rency crisis in East Asia. Some of these studies attribute the economic
crisis to bad corporate governance practices, especially among the family
controlled firms. For example, in a World Bank study, Claessens et al.
(1999) find that East Asian firms that use dual-class shares, stock
pyramiding, and cross-holdings, have lower market values, especially in
those firms under family control. The authors describe the East Asian
countries as having weak property and shareholders’ rights, inadequate
financial disclosure, inefficient judicial systems, weak market incentives,
and a high degree of corruption. In contrast, in Norway, companies are
relatively transparent, corruption is low, nepotism not tolerated, pyramid
business structures are rare, the use of multiple share classes is declining,
and financial markets are more developed.
Norwegian accounting standards are of high international quality (La
Porta et al., 1998), and many Norwegian companies are listed on foreign
stock exchanges, requiring supplementary IAS (International Accounting
Standards) and US GAAP disclosures. The Oslo Stock Exchange also
encourages companies without foreign listings to provide IAS or US
GAAP disclosures (Johnsen, 1993). Anecdotal evidence provides an
illustrative example; the statements of Norway’s most valuable traded
firm, Norsk Hydro, reveal no major differences between the US GAAP
and the Norwegian accounting practices. For example, Norsk Hydro’s
earnings in 1996 were 0.3 per cent lower according to the US GAAP than
according to Norwegian accounting standards.
It may be noted that Norwegian law does not allow a single person to
serve both as the CEO and the chairman of the board simultaneously,
whereas this combined leadership structure is frequently observed among
US firms. We should also note that multiple share classes are more
common in Norway (11 per cent of all firms in 1996), although their
proliferation is declining. The market for corporate control is less
developed in Norway than in the US or UK, and compared to countries
such as Canada, there are very few subsidiaries (both domestic and
foreign controlled) being publicly traded.

3. Literature Review
We have two research objectives. First, we seek to understand the rela-
tionship between founding family control and firm value. Second, we
want to understand this relationship under various corporate governance
© Blackwell Publishers Ltd. 2001.
 Founding Influence on Firm Value and Corporate Governance 239

conditions, such as board size, board independence, firm age, and the
presence of multiple share classes. In the following section, we discuss the
two primary thrusts of our research.
Jensen and Meckling (1976) argue that firm value is positively
correlated with the level of managerial ownership because of reduced
agency costs and increased alignment of interests between managers and
shareholders. Stulz (1988), however, argues that managerial ownership in
excess of 50 per cent insulates managers from the market for corporate
control. Morck et al. (1988) find a significant but non-linear relationship
between managerial ownership and firm value, suggesting that some
levels of managerial ownership are advantages. McConnell and Servaes
(1990) report a curvilinear relationship between firm value and man-
agerial ownership: firm value rises until managerial ownership reaches
50 per cent and then falls due to management’s insulation. All of the
above have bearing on the effect of founding family influence.
Mishra and McConaughy (1999) report that founding family controlled
firms are run differently than those firms with concentrated management
ownership. McConaughy et al. (1998) find that founding family con-
trolled firms in the US are more valuable than similar firms without
founding family control. They study the operating efficiency and relative
value of a sample of US founding family controlled firms whose CEOs are
either founders themselves or are related to the founders. They find that
both founders and their descendants run their firms more efficiently than
CEOs without founding family ties. Kang (1998) also finds that founding
family owners enjoy an increased firm performance relative to their
industry competitors in a study of the US textile industry, an industry that
is characterized by transparent economic conditions and strong social
relationships between owners and managers.
Chami (1997) develops a theory of family business that explains the
dynamics of market forces and the family. He shows that family busi-
nesses are fundamentally different from other businesses. Family traits
can encourage an atmosphere of love for the business and a sense of
commitment. Nepotism and favoritism are held in check by the need for
the family business to compete and succeed in the product and capital
market.
However, Johnson et al. (1985), in examining stock price reaction to the
sudden death of senior corporate executives, document a positive relation
between the deceased executive’s status as a corporate founder and excess
stock returns. On the other hand, Slovin and Sushka (1993), in their
examination of stock price reaction to the death of large-block shareholders,
© Blackwell Publishers Ltd. 2001.
240 C. S. Mishra, T. Randøy and J. I. Jenssen

find that founder status does not have any significant effect on the stock
price.
Our second thrust is to explore the relation between founding family
control and firm value under different corporate governance conditions,
such as firm age, board size, outside director representation, and the use
of multiple classes of shares. Lane and Jameson (1993), in analyzing a
sample of small US firms whose CEOs are founders, find that founding
family controlled firms are younger than firms without such control. In
contrast, Claessens et al. (1999), in surveying nine East Asian countries,
find that many family controlled firms are older and smaller. They find a
negative correlation between founding family firms and firm performance.
Morck et al. (1988) also find that the presence of a founding family
member among the top two executives increases firm value for younger
firms and reduces it for older firms. Kang (1998) documents that early
generation family owners are associated with higher performance than
their descendants. Overall, the evidence is that older family firms perform
more poorly than younger ones.
In examining the relation between board size and firm value, Yermack
(1996) finds that firms with small board sizes have higher stock market
value. Using a sample of large US corporations, he finds an inverse rela-
tionship between firm value and board size. Yermack reports a negative
26 per cent correlation between board size and founding family control.
This suggests that small boards are more common in companies con-
trolled by founding families. It is possible that founding family companies
have been more effective because they generally have smaller boards.
Board member interrelationships can be more easily managed in smaller
boards. Furthermore, smaller boards can help founding family owners
make decisions more quickly.
Several researchers concur that outside directors increase board
effectiveness and firm performance, such as Baysinger and Butler (1985),
Weisbach (1988), Rosenstein and Wyatt (1990), Byrd and Hickman (1992),
Brickley et al. (1994), and Cotter et al. (1997). However, Booth and Deli
(1996) find a negative relationship between the number of outside directors
and the firm’s growth prospects. Similarly, Agrawal and Knoeber (1996)
and Subrahmanyam et al. (1997) find that firm performance is actually
reduced when additional outsiders serve on the board. Moreover,
Hermalin and Weisbach (1991) do not find any relation between firm
performance and the fraction of outside directors. These contradictory
findings suggest that more research is needed on the issue of board
independence.
© Blackwell Publishers Ltd. 2001.
 Founding Influence on Firm Value and Corporate Governance 241

Fama and Jensen (1983) suggest that family relationships between

managers and owners should reduce agency costs because of the multi-
dimensional, long-term nature of those relationships, which allow
improved monitoring of the decision agents (managers). De Angelo and
De Angelo (1985) also suggest that family involvement serves to monitor
and discipline managers. Kang’s (1998) field research suggests that
founding family members are active monitors of their managers. He
suggests that the information flow between managers and family members
acts as a control mechanism, where managers make decisions with the
understanding that they have to eventually justify them to family owners
in face-to-face conversations. Because founding family control is unique,
as suggested by the above authors, the level of outside representation on
the board might not affect the relation between founding family control
and firm value.
Finally, Rydqvist (1992) reviews the literature on multiple classes of
shares, where control rights of some owners significantly exceed their
cash flow rights. Several of these studies report a large premium for the
superior voting rights at the expense of small shareholders (known as
small-shareholder expropriation). For example, Zingales (1994), who
reports a large premium for voting shares in Italy, suggests that small-
shareholder expropriation is significant in Italy. Malitz (1989) and Slovin
and Sushka (1997), however, find no evidence of such small-shareholder
expropriation in US firms. Several studies examining the wealth effects
of dual-class recapitalizations of the US firms (Partch, 1987; Jarrell and
Poulson, 1988; Cornett and Vetsuypens, 1989; among others), conclude
that these recapitalizations have a non-negative impact on the wealth of
shareholders. In addition, these authors conclude that insider control
increases after the creation of the second class of stock.
Claessens et al. (1999) also report small-shareholder expropriation in
nine East Asian countries, especially in family controlled companies.
They examine the complex web of stock holdings and the ultimate
ownership of about 2,600 firms in nine East Asian countries and find that
firms who use dual-class shares, stock pyramiding, and cross-holdings,
have lower market values. In a similar study by the Organization for
Economic Cooperation and Development (OECD), Nikomborirak and
Tangkitvanich (1999) argue that the East Asian crisis can be partly
attributed to bad corporate governance practices which include risky
investment by managers, expropriation of company’s funds by directors,
managers and large shareholders, shady business deals, and poor
audits.
© Blackwell Publishers Ltd. 2001.
242 C. S. Mishra, T. Randøy and J. I. Jenssen

In response to the Asian economic crisis, the OECD developed a set of

non-binding principles of corporate governance that would provide
guidance to investors, directors, regulators, and corporations as they
evaluate their own legal, institutional, regulatory, and company-specific
frameworks. These principles fall under five broad headings (OECD,
1999): (1) the rights of shareholders, (2) the equitable treatment of
shareholders, (3) the role of stakeholders, (4) disclosure and trans-
parency, and (5) the role of the board. In addition, the OECD and the
World Bank have agreed to cooperate and help promote improved cor-
porate governance on a worldwide basis through their Global Corporate
Governance Forum. As a result, founding family ownership will remain
an important issue in the corporate governance reform movement in these
countries.

4. Data
By the end of 1996 there was a total of 136 non-financial companies listed
on the Oslo Stock Exchange. Because Norwegian law does not allow
family control of banks and insurance companies, we chose to exclude
these firms from our sample. We also excluded seven companies with less
than two years of public listing, since we could not get reliable growth
figures for these companies. Nine companies lacked sufficient financial
information, and these were also excluded, leaving a total sample of
120 firms.
Some of the information on corporate governance and financial
variables were collected from annual reports and other secondary sources
(such as http://www.huginonline.no). Furthermore, extensive interviews
were conducted to identify name(s) of founder(s) and the possible
relationship to the present CEO, board members, and major shareholders.
Of the 120 companies, based on the definition below, 53 are founding
family controlled firms and 67 non-founding family controlled firms. All
of the measures of this study, except for the 1993 to 1996 growth rates,
were measured as of December 31, 1996.
We used multiple indicators to capture the phenomena of founding
family control. We measure founding family control by: (1) a binary
variable that equals 1 if the CEO is a founder or a relative of the founder,
(2) the percentage of ownership by the founding family, and (3) the
percentage of directors that are members of the founding family. Finally,
we used a composite variable (4) that equals 1 if the firm satisfies at
least one of the three indicators above (for ownership we have set the
© Blackwell Publishers Ltd. 2001.
 Founding Influence on Firm Value and Corporate Governance 243

percentage to at least 10 per cent of all shares). Our first criterion was
used in previous studies by McConaughy et al. (1998) and Mishra and
McConaughy (1999), and the other three criteria are new measures. The
four alternative measures provide a richer picture of the multifaceted
nature of founding family control.
Firm value is measured by q-value, which is defined as the ratio of
market value of the firm to the book value of total assets, where the market
value of the firm is measured by the sum of the market value of equity and
the book value of total liabilities. The q-values of the sample firms were
not normally distributed, as there were a number of firms (particularly in
information technology) with q-values of more than three standard
deviations larger than the mean. To reduce heteroskedasticity, we applied
the natural log of the q-value as the dependent variable. The q-value
measure is an approximation of Tobin’s Q (Chung and Pruitt, 1994;
Perfect and Wiles, 1994). This measure has been used extensively in
similar studies by, for example, Morck et al. (1988), McConnell and
Servaes (1990), Yermack (1996), McConaughy et al. (1998), and others.
In the approximation of Tobin’s Q, the replacement cost of total assets and
the market value of total debt are approximated by their book values.
Perfect and Wiles (1994) report that this simple approximation measure
of Tobin’s Q has a 93 per cent correlation with the estimate using the
Lindenberg and Ross (1981) algorithm. Khanna and Palepu (2000) use a
similar q-value measure to examine the relation between shareholder
concentration and firm value in India. Cronqvist and Nilsson (1999) also
use this approximation of q-value to examine the structure of corporate
ownership in Sweden.

5. Empirical Tests
Table 1 reports the mean values of variables used in the study and the
t-statistics (two-tailed) that test the mean differences of these variables
between founding family controlled firms and non-founding family
controlled firms. The table reveals how founding family controlled firms
are a distinct group from non-founding family controlled firms.
We find that firm value, as measured by the December 31, 1996 log
q-value, is significantly higher for founding family controlled firms.
When all industries are considered together, the average log q-value for
founding family controlled firms is 0.658 and the average log q-value for
non-founding family controlled firms is 0.460, or a q-value of 2.41 (found-
ing family controlled firms) and 1.83 (non-founding family controlled firms)
© Blackwell Publishers Ltd. 2001.
Table 1. Descriptive Statistics of Norwegian Founding Family Controlled Firms (FFCFs) and Non-Family Controlled Firms
(Non-FFCFs)

Full Sample FFCFs Non-FFCFs

(N = 120) (N = 53) (N = 67)

No. of t-Statistics
Variables Mean SD Observations Mean Mean of Difference

A. Founding Family Control Variables

Founding family composite (FC) 0.44 0.50 120 1 0
Founding family ownership (group) 2 2 120 4 0
Founding family directors (%) 10 14 120 23 0
Founding family CEO (%) 21 41 120 47 0
B. Firm Value (log q-value)
All industries 0.55 0.56 120 0.658 0.460 1.943*
Shipping, offshore, and transportation industry 0.16 0.24 35 0.185 0.123 0.75
Manufacturing industry 0.51 0.42 43 0.657 0.427 1.73*
Information technology and media industry 1.19 0.55 22 1.54 0.988 2.53**
Other industries 0.61 0.63 20 0.903 0.312 2.34**
C. Firm Financial and Governance Variables
Sales growth (%) 0.512 0.951 120 0.426 0.58 –0.88
Firm size (log of sales) 13.15 2.56 120 12.44 13.71 –2.77***
Financial leverage 0.59 0.18 120 0.55 0.62 –2.22**
Firm age ( log of years) 3.46 1.14 120 3.27 3.61 –1.62
Return on assets 0.035 0.11 120 0.030 0.040 –0.52
Asset tangibility 0.45 0.26 120 0.46 0.44 0.53
Board size (no.) 6.60 1.84 120 6.11 6.99 –2.64**
Board independence (%) 0.58 0.23 120 0.484 0.65 –4.18***
Table 1. Continued

Full Sample FFCFs Non-FFCFs

(N = 120) (N = 53) (N = 67)

No. of t-Statistics
Variables Mean SD Observations Mean Mean of Difference

C. Firm Financial and Governance Variables (cont)

Board stock ownership (%) 26.11 25.39 120 33.21 20.51 2.80***
CEO tenure ( years) 5.83 6.63 120 7.23 4.72 2.09**
Share class (binary) 0.133 0.341 120 0.17 0.10 1.04

***Significant at 1% level (two-tailed). **Significant at 5% level (two-tailed). *Significant at 10% level (two-tailed).
The full sample is divided into FFCFs and non-FFCFs using the variable, founding family composite (FC). Founding family composite is 1, if any one of the two
criteria is met: (1) if the CEO is a founder or a relative of the founder (founding family CEO), (2) if there is a presence of founding family members on the board;
0, otherwise, or if the founding family control at least 10% of all shares, 0 otherwise. Founding family ownership is the percentage of stock held by founding
family and their relatives and the variable is coded as: 1 (0 to 4.99%), 2 (5 to 14.99%), 3 (15 to 24.99%), 4 (25 to 49.99%), and 5 (greater than 50%), respectively.
Founding family directors is the percentage of directors that are founding family members. Firm value is the q-value, the ratio of the market value of the firm to
the book value of total assets, where the market value of the firm is measured by the sum of the market value of equity and the book value of total liabilities.
Sales growth is the average growth in sales over the last three years. Firm size is measured by the logarithm of sales. The logarithm difference between end of
year 1997 and the firm’s founding year measures firm age. Financial leverage is the ratio of total liabilities to total assets. Return on assets measures 1996 earnings
before tax over end of year total assets. Asset tangibility equals the ratio of property, plant and equipment (net) over total assets at the end of 1996. Board size is
the number of directors on the board. Board independence is the percentage of independent outside directors on the board. Board stock ownership is the
percentage of stock held by the directors. CEO tenure is the tenure of the current CEO in years as of the end of 1997. Share class is a binary variable: 1 for firms
with multiple classes of shares and 0 for firms with a single class of shares. Note that other industries include finance (excluding banks and insurance companies),
real estate companies, and any other industries in Norwegian industry code #9. All data, unless otherwise stated, are as of the end of year 1996.
246 C. S. Mishra, T. Randøy and J. I. Jenssen

respectively, without the log transformation. The 30 per cent difference

between founding family controlled firms and non-founding family
controlled firms is similar to the 42 per cent difference reported by
McConaughy et al. (1998). In their sample of US companies, the average
q-value of founding family controlled firms was between 2.06 and 2.16
and that of the non-founding family controlled firms was between 1.42
and 1.55.
The average sales growth is not significantly different between
founding family controlled firms and non-founding family controlled
firms in our sample. The average founding family controlled firm has one
third of the turnover of firms without founding family control. On
average, the founding family controlled firms were founded in 1952
versus 1938 for non-founding family controlled firms; however, this
difference was only significant at p = 0.107 (two-tailed). Founding family
controlled firms also use less debt, which is consistent with the findings
of Mishra and McConaughy (1999). Return on assets (ROA) and assets
tangibility were not significantly different for founding family controlled
firms versus non-founding family controlled firms.
All our corporate governance variables, except dual share classes,
reveal significant differences between founding family controlled firms
and non-founding family controlled firms. Board size is smaller in
founding family controlled firms, and the board has fewer outside
representatives. Board stock ownership is higher and the CEO tenure is
longer in founding family controlled firms. The use of dual-class shares is
more common in founding family controlled firms than in non-founding
family controlled firms, although the difference is not significant.
The Oslo Stock Exchange (1996) classifies Norwegian firms into nine
industry groups. Since we have very few observations in some industries,
we chose to regroup them into four major groups as shown in Table 1:
(1) shipping, offshore, and transportation, (2) manufacturing, (3) infor-
mation technology and media, and (4) other industries. The bivariate
analysis in Table 1 shows that founding family control is more valuable
than non-founding family controlled firms in all industries, except in the
shipping, offshore, and transportation industry. The difference is most
significant in the information technology and publishing industry. We use
these four industry groups as control variables in our regressions.
In examining the correlation matrix in Table 2, firm value has an 18 per
cent positive correlation with the founding family control composite
variable. Firm value has significant positive correlation to sales growth,
and significant negative correlation to the following variables: firm size,
© Blackwell Publishers Ltd. 2001.
 Founding Influence on Firm Value and Corporate Governance 247

financial leverage, firm age, asset tangibility, board size, board stock
ownership, and dual share classes. The unexpected negative effect of
board ownership has to be interpreted in the context of ownership struc-
ture in Norway. Board ownership consists of founding family ownership
and industrial ownership, as well as other investor representation on the
board. Industrial ownership has traditionally been substantial in Norway,
since active board monitoring by banks and insurance companies is
prohibited in Norway. Furthermore, the investment community is less devel-
oped than in countries such as the UK Apparently, the negative effect of
industrial ownership, which in some cases also includes cross-ownership,2
is not outweighted by the positive monitoring effect of such ownership.
The founding family control variables are highly correlated with each
other. Founding family control is also significantly negatively correlated
with board size, financial leverage, firm age, and the percentage of out-
side directors. Yermack (1996) finds a negative 26 per cent correlation
between board size and founding family control in his US sample of firms,
which is similar to a negative 24 per cent correlation in our sample. Board
size is, however, highly positively correlated with firm size (45 per cent)
and firm age (38 per cent), and negatively correlated with the percentage
of family directors on the board (–43 per cent). Furthermore, the use of
multiple share classes has a significant positive correlation (32 per cent)
with firm size, indicating larger firms are more likely to have multiple
share classes in Norway.
To further test the relation between firm value and founding family
control, we use the following regression equation 1:
Q-value = α + (β1 × Founding Family Control) + (β2 × Sales Growth) +
(β3 × Firm Size) + (β4 × Financial Leverage) +
(β5 × Firm Age) + (β6 × Return on Assets) +
(β7 × Asset Tangibility) + (β8 × Board Size) +
(β9 × Board Independence) +
(β10 × Board Stock Ownership) +
(β11 × CEO Tenure) + (Σβi × Industry Dummy) (1)
We report four alternative measures of founding family control, as defined
earlier.3 In each regression, we control for three sets of variables: (1) six
firm characteristics: firm size, sales growth, financial leverage, return on
assets, asset tangibility, and firm age; (2) four corporate governance
characteristics: size, board independence, board stock ownership, and
CEO tenure; and (3) three dummy variables representing the four industry
groups defined earlier.
© Blackwell Publishers Ltd. 2001.
Table 2. Correlation Matrix

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)

1. Founding family composite 1.0

2. Founding family ownership 0.85***
3. Founding family directors 0.78*** 0.70***
4. Founding family CEO 0.58*** 0.44*** 0.60***
5. Firm value 0.18* 0.06 0.18* 0.26***
6. Sales growth –0.08 –0.08 –0.05 –0.01 0.23**
7. Firm size –0.24*** –0.01 –0.25*** –0.34*** –0.46*** –0.32***
8. Financial leverage –0.20** –0.08 –0.25*** –0.31*** –0.32*** –0.18* 0.40***
9. Firm age –0.15 –0.04 –0.12 –0.20** –0.38*** –0.47*** 0.46*** 0.16*
10. Return on assets –0.05 0.07 –0.02 –0.08 –0.06 –0.37*** 0.31*** –0.19** 0.29***
11. Asset tangibility 0.05 0.09 0.01 –0.07 –0.50*** –0.02 0.17* 0.37*** 0.00 –0.09
12. Board size –0.24** –0.19** –0.43*** –0.28*** –0.24*** –0.31*** 0.45*** 0.10 0.38*** 0.21** –0.06
13. Board independence –0.36*** –0.30*** –0.45*** –0.33*** –0.14 0.23** 0.10 –0.01 –0.01 0.01 –0.06 0.21**
14. Board stock ownership 0.25*** 0.32*** 0.25*** 0.17* –0.16* –0.05 –0.12 0.06 0.02 –0.02 0.31*** –0.24*** –0.14
15. CEO tenure 0.19** 0.17* 0.24** 0.30*** –0.01 –0.20** 0.08 0.01 0.11 0.06 0.09 –0.07 –0.01 –0.03
16. Share class 0.10 0.17* 0.00 –0.02 –0.16* –0.12 0.32*** 0.12 0.19** 0.08 0.08 0.26*** –0.01 –0.09 0.11

***Significant at 1% level (two-tailed). **Significant at 5% level (two-tailed). *Significant at 10% level (two-tailed).
Founding family composite is 1, if any one of the three criteria is met: (1) if the CEO is a founder or a relative of the founder (founding family CEO), (2) if there
is a presence of founding family members on the board; 0, otherwise, (3) if the founding family control at least 10% of all shares, 0 otherwise. Founding family
ownership is the percentage of stock held by founding family and their relatives and the variable is coded as 1 (0 to 4.99%), 2 (5 to 14.99%), 3 (15 to 24.99%),
4 (25 to 49.99%), and 5 (greater than 50%), respectively. Founding family directors is the percentage of directors that are founding family members. Firm value
is the log q-value Dec. 31, 1996; measured as the ratio of the market value of the firm to the book value of total assets, where the market value of the firm is
measured by the sum of the market value of equity and the book value of total liabilities. Sales growth is the average growth in sales over the last three years.
Firm size is measured by the logarithm of sales. The logarithm difference between end of year 1997 and the firm’s founding year measures firm age. Financial
leverage is the ratio of total liabilities to total assets. Return on assets measures 1996 earnings before tax over end of year total assets. Asset tangibility equals the
ratio of property, plant and equipment (net) over total assets at the end of 1996. Board size is the number of directors on the board. Board independence is
the percentage of independent outside directors on the board. Board stock ownership is the percentage of stock held by the directors. CEO tenure is the tenure of the
current CEO in years as of the end of 1997. Share class is a binary variable, 1 for firms with multiple classes of shares and 0 for firms with a single class of shares.
 Founding Influence on Firm Value and Corporate Governance 249

We report three models for each measure of founding family control. In

model 1, we include the six firm financial variables and the four industry
dummy variables. In model 2, we include all 13 control variables. Finally,
in model 3, we exclude the firm size and firm age variables, since these
two variables are highly correlated with board size.
We report the regression coefficients in Table 3.4 Each measure of
founding family control (using model 1) is positive and significant,
suggesting a positive association between founding family control and
firm value. However, when controlling for a set of corporate governance
variables (models 2 and 3) we fail to get a significant effect from founding
family directorship. This suggests that founding family directors represent
a weaker form of monitoring than founding family CEOs and founding
family ownership.
Our results indicate that the valuation impact of founding family con-
trol is fairly significant. The family control coefficients shown in Table 3
suggest that founding family controlled firms were valued between
19 and 40 per cent higher than non-founding family controlled firms. For
example, the regression coefficient of 0.151 from the founding family
composite variable in model 2 implies that one standard deviation change
in the founding family composite variable is associated with a 0.151
standard deviation change in the dependent variable (q-value). Given that
one standard deviation of the log q-value is 0.56 and that the standard
deviation of the founding family composite variable is 0.50 (see Table 1),
the log q-value for the founding family controlled firms is higher by 0.169
(0.56 × 0.151/0.50), or approximately 30 per cent higher than the sample
mean. In Table 1, we also observe that the q-value difference between
founding family controlled firms and non-founding family controlled firms
is 0.198 (0.658 – 0.46), or a 36 per cent premium to non-founding family
firms.
In all regression models, firm size has a significantly negative impact
on firm value, consistent with the argument that smaller firms have higher
q-values. The effect of asset tangibility on firm value is significantly
negative, implying that firms with a substantial proportion of their assets
in property, plant and equipment display lower q-values. In addition, the
board independence variable is significantly negative in most regressions,
suggesting that firms with higher board independence have lower
q-values, as previously reported by Agrawal and Knoeber (1996) and
Subrahmanyam et al. (1997). The board size variable is significantly
negative in the model 3 regressions, suggesting that firms with smaller
boards have higher q-values, which is consistent with Yermack (1996).
© Blackwell Publishers Ltd. 2001.
Table 3. The Effect of Founding Family Control on Firm Value

Founding Family Composite Founding Family Ownership Founding Family Directors Founding Family CEO

Independent Variables Model 1 Model 2 Model 3 Model 1 Model 2 Model 3 Model 1 Model 2 Model 3 Model 1 Model 2 Model 3

Founding family control 0.177 0.151 0.195 0.170 0.171 0.137 0.147 0.101 0.107 0.153 0.107 0.180
(2.63)*** (2.07)** (2.52)** (2.64)*** (2.39)** (1.79)* (2.17)** (1.20) (1.17) (2.20)** (1.36) (2.19)**
Sales growth 0.053 0.085 0.120 0.029 0.068 0.100 0.031 0.072 0.109 0.037 0.071 0.103
(0.66) (1.02) 1.38) (0.37) (0.82) (1.13) (0.39) (0.85) (1.40) (0.47) (0.84) (1.18)
Firm size –0.296 –0.300 –0.336 –0.346 –0.295 –0.309 –0.290 –0.293
(–3.60)*** (–3.48)*** (–4.12)*** (–3.97)*** (3.55)*** (–3.54)*** (–3.46)*** (–3.34)***
Financial leverage 0.030 0.029 –0.090 0.016 0.021 –0.128 0.027 0.023 –0.112 0.035 0.025 0.080
(0.39) (0.37) (–1.17) (0.21) (0.28) (–1.67)* (0.34) (0.29) (1.40) (0.44) (0.32) (–0.99)
Firm age –0.136 –0.123 –0.140 –0.121 –0.152 –0.144 –0.140 –0.131
(–1.74)* (–1.53) (–1.80)* (–1.54) (–1.95)* (–1.83)* (1.78)* (–1.63)
Return on assets 0.069 0.080 –0.027 0.051 0.066 –0.058 0.061 0.074 –0.044 0.068 0.078 –0.024
(0.93) (1.09) (–0.37) (0.69) (0.90) (–0.77) (0.81) (0.99) (–0.59) (0.91) (1.04) (–0.32)
Asset tangibility –0.198 –0.171 –0.177 –0.187 –0.151 –0.170 –0.191 –0.169 –0.176 –0.191 –0.170 –0.169
(–2.36)** (1.96)* (–0.1.93)* (–2.24)** (–1.74)* (–1.81)* (2.26)** (–1.91)* (–1.85)* (–2.26)** (–1.92)* (–1.81)*
Board size –0.024 –0.142 –0.016 –0.153 0.002 –0.126 –0.025 –0.139
(–0.32) (–1.86)* (–0.21) (–1.98)* (0.03) (–1.53) (–0.33) (–1.80)*
Board independence –0.125 –0.124 –0.125 –0.147 –0.135 –0.144 –0.136 –0.126
(–1.76)* (–1.62) (–1.79)* (–1.93)* (–1.82)* (–1.80)* (–1.88)* (–1.62)
Board stock ownership –0.115 –0.109 –0.139 –0.112 –0.099 –0.088 –0.100 0.099
(–1.66) (–1.50) (–1.95)* (–1.47) (–1.43) (–1.18) (–1.36) (–1.35)
Table 3. Continued

Founding Family Composite Founding Family Ownership Founding Family Directors Founding Family CEO
Independent
Variables Model 1 Model 2 Model 3 Model 1 Model 2 Model 3 Model 1 Model 2 Model 3 Model 1 Model 2 Model 3

CEO tenure 0.039 0.004 0.039 0.014 0.047 0.016 0.034 –0.017
(0.60) (0.06) (0.60) (0.21) (0.71) (0.23) (0.49) (–0.23)
Sample size 120 120 120 120 120 120 120 120 120 120 120 120
Adjusted R-square 0.553 0.565 0.496 0.554 0.570 0.481 0.545 0.553 0.473 0.545 0.555 0.489

***Significant at 1% level (two-tailed). **Significant at 5% level (two-tailed). *Significant at 10% level (two-tailed).
The dependent variable is log q-value measured Dec. 31, 1996. Standardized regression coefficients are reported. The coefficients for the intercept and the
industry dummy variables are not reported. Founding family composite is 1, if any one of the three criteria is met: (1) if the CEO is a founder or a relative of the
founder (founding family CEO), (2) if there is a presence of founding family members on the board; 0, otherwise, (3) if the founding family control at least 10%
of all shares, 0 otherwise. Founding family ownership is the percentage of stock held by founding family and their relatives and their relatives and the variable is
coded as 1 (0 to 4.99%), 2 (5 to 14.99%), 3 (15 to 24.99%), 4 (25 to 49.99%), and 5 (greater than 50%), respectively. Founding family directors is the percentage
of directors that are founding family members. Sales growth is the average growth in sales over the last three years. Firm size is measured by the logarithm of
sales. The logarithm difference between end of year 1997 and the firm’s founding year measures firm age. Financial leverage is the ratio of total liabilities to total
assets. Return on assets measures 1996 earnings before tax over end of year total assets. Asset tangibility equals the ratio of property, plant and equipment (net)
over total assets at the end of 1996. Board size is the number of directors on the board. Board independence is the percentage of independent outside directors
on the board. Board stock ownership is the percentage of stock held by the directors. CEO tenure is the tenure of the current CEO in years as of the end of 1997.
252 C. S. Mishra, T. Randøy and J. I. Jenssen

To test further the relation between firm value and founding family
control, we use equation 2, which is the same model as in equation 1 plus
two interaction terms:
Q-value = α + (β1 × Sales Growth) + (β2 × Firm Size) +
(β3 × Financial Leverage) + (β4 × Firm Age) +
(β5 × Board Size) + (β6 × Board Independence) +
(β7 × Board Stock Ownership) + (β8 × CEO Tenure) +
(β9 × Founding Family Control × Smaller Boards Dummy) +
(β10 × Founding Family Control × Larger Boards Dummy) +
(Σβi × Industry Dummy) (2)
The regression coefficients from equation 2 are reported in Table 4. The
relation between the founding family control and firm value is positive in
all regressions. The impact of the various corporate governance conditions
(board size, firm age, board independence, and number of share classes)
is discussed below.
We test the relation between firm value and founding family control
under various corporate governance conditions. As shown in equation 2,
we ran a new set of regressions with two interaction products (see Table 4).
Using the interaction products, we are then able to differentiate between
the effect of founding family influence in firms with smaller boards and
firms with larger boards. We use the median board size to divide the firms
with founding family influence into two interaction terms: one below
median board size and the other with above median board size. Similar
pooled regressions were run for other corporate governance variables,
such as firm age, the percentage of outside directors on the board, and the
presence of multiple share classes. We also ran the pooled regressions for
two additional corporate governance variables, namely CEO tenure and
directors’ stock ownership (not reported). We did not find a significant
difference in the founding family effect between firms with short versus
long CEO tenure. However, the founding family composite effect is sig-
nificantly greater among firms when directors’ stock ownership was less
than 25 per cent, a result consistent with Morck et al. (1988). This makes
intuitive sense, as founding family monitoring is especially important
in companies without strong incentive linkage between directors and
owners.
Not all aspects of founding family control are significant, suggesting
that there is a moderating corporate governance effect. Consistent with
our findings in Table 3, models 2 and 3, we find that founding family
control through directorship has little impact on firm value.
© Blackwell Publishers Ltd. 2001.
Table 4. The Effect of Founding Family Control on Firm Value under Various Corporate Governance Conditions

Board Size Firm Age Board Independence Share Class

Founding Multiple Single

Family Control Smaller Larger Younger Older Less Outside More Outside Classes of Class of
Measures Boards Boards Firms Firms Directors Directors Shares Shares
Founding family 0.080 0.157 0.128 0.124 0.143 0.101 0.077 0.148
composite (0.92) (2.21)** (1.55)* (1.64)* (1.78)** (1.38)* (1.14) (1.96)**
(N = 120)
Founding family CEO 0.126 0.026 0.123 0.044 0.101 0.055 0.137 –0.02
(N = 120) (1.48)* (0.40) (1.44)* 0.62) (1.25) (0.75) (1.67)** (-0.27)
Founding family directors 0.074 0.116 0.066 0.100 0.094 0.056 0.48 0.97
(N = 120) (0.84) (1.66)* (0.82) (1.20) (1.09) (0.76) 0.68) (1.16)
Founding family 0.117 0.157 0.122 0.157 0.122 0.157 0.093 0.163
ownership (1.47)* (2.17)** (1.66)* (2.09)** (1.58)* (2.20)** (1.38)* (2.26)**
(N = 120)

***Significant at 1% level (one-tailed). **Significant at 5% level (one-tailed). *Significant at 10% level (one-tailed).
The dependent variable is the natural log q-value measured Dec. 31, 1996. Standardized regression coefficients are reported. P-value is the
significance level of the F-statistic that tests the two regression coefficients (associated with the two subgroups) are equal. The coefficients for the
control variables and industry dummy variables are not reported. Each regression model includes twelve control variables (sales growth, firm size,
financial leverage, firm age, return on assets, asset tangibility, board size, board stock ownership, board independence, CEO tenure, and the four
industry dummy variables) and the two interaction products of the firm governance variable and the founding family control variable, one for the
low level and the other for the high level of the governance variable. The sample median values were used to make the two interaction terms.
Founding family composite is 1, if any one of the three criteria is met: (1) if the CEO is a founder or a relative of the founder (founding family
CEO), (2) if there is a presence of founding family members on the board; 0, otherwise, (3) if the founding family control at least 10% of all shares,
0 otherwise. Founding family ownership is the percentage of stock held by founding family and their relatives and their relatives and the variable
is coded as 1 (0 to 4.99%), 2 (5 to 14.99%), 3 (15 to 24.99%), 4 (25 to 49.99%), and 5 (greater than 50%), respectively. Founding family directors
is the percentage of directors that are founding family members. Board size is the number of directors on the board. Board independence is the
percentage of independent outside directors on the board. The logarithm difference between end of year 1997 and the firm’s founding year
measures firm age. Share class is a binary variable, 1 for firms with multiple classes of shares and 0 for firms with a single class of shares.
254 C. S. Mishra, T. Randøy and J. I. Jenssen

A firm’s age has apparently little impact on the effect of founding

family control (except family CEOs), as both younger firms and older
firms display similar regression coefficients. The relation between found-
ing family control and firm value does not significantly change with a
greater percentage of outside directors.
We observe that founding family influence is stronger among firms
with a single share class, again, with the exception of founding family
CEOs (not significant for family directors). This suggests that having
multiple share classes, which reduces the relative power of the market for
corporate control, significantly reduces a firm’s benefits from founding
family control. Again, we see the need for founding family influence to be
offset by healthy corporate governance mechanisms.
The influence from a founding family CEO is apparently different from
other aspects of founding family control. Founding family influence from
a family CEO is very direct, and we suggest that it alleviates the need for
outside corporate governance monitoring. We find it especially interesting
that the effect of founding family CEOs is stronger among firms with
smaller boards. The value enhancing impact of a founding family CEO is
only significant among younger firms. We indicate that a founding family
CEO is particularly advantageous at the early stages of a firm’s life.

6. Summary and Conclusions

In this paper, we examine the influence of founding family control on firm
value and corporate governance using a sample of 120 non-financial
Norwegian firms, of which 53 are founding family controlled and the
other 67 are non-founding family controlled. We attempt to answer two
questions: (1) does family control of a public firm make financial sense,
and (2) do family businesses have a governance advantage over those
owned by a diverse set of shareholders?
We use four alternative variables to measure founding family control:
(1) by a binary variable that equals 1 if the CEO is a founder or a relative
of the founder; (2) by the percentage of ownership by founding family;
(3) by the percentage number of directors that are founding family mem-
bers; and (4) by a composite variable that equals 1 if at least one of the above
family control measures is in place. The four alternative measures provide
a rich picture of the multifaceted nature of founding family control.
Our first finding is a positive relationship between founding family
control and firm value. This result is consistent with McConaughy et al.
(1998), who used a sample of US firms and founding family CEO as a
© Blackwell Publishers Ltd. 2001.
 Founding Influence on Firm Value and Corporate Governance 255

measure of founding family control. Based on previous case-based

research (such as Kang, 1998; James, 1999) our findings suggest that
founding family managers, having a longer time horizon than non-family
managers, have the potential to reduce the moral hazards of combining
ownership and control.
Our second result, that founding family control is more valuable among
younger firms, is consistent with McConaughy et al. (1998) and Morck
et al. (1988). However, in our sample this was only true for companies
where the founding family influence was derived from a founding family
CEO, rather than founding family ownership or directorship. This
suggests that founders and early generation owners are likely to have more
effective management practices than their descendants. Over time, the
formal authority of family influence may decrease due to fragmentation of
ownership. Also, older founder family businesses might find it harder to
maintain cohesiveness among family members.
Our third result, that there is a stronger relation between founding
family control and firm value among firms with smaller boards, was only
true for founding family CEOs. Our findings suggest that small board size
might be a superior corporate governance mechanism for firms managed
by a founding family CEO. This finding is consistent with the finding of
Yermack (1996). Smaller boards can help founding family CEOs to make
decisions more quickly and to be more flexible. Smaller boards might also
help to manage the interrelationships between board members more
effectively.
Our fourth result suggests that outside director representation (board
independence) does not improve corporate governance in founding family
controlled firms. Past research provides support that family values, such
as trust, altruism, and paternalism, can create a commitment to long-term
value creation. The logic is that potential for expropriation of wealth and
nepotism are held at bay by the need for success in a competitive
marketplace. Once the commitment is in place, the need for outside board
monitoring is diminished and the inside directors who know the company
and the marketplace may be more valuable to these firms. We perceive
that in founding family controlled firms, boards are viewed less as a
governing mechanism, and more as a top-level strategy group. Founding
family members serve as active monitors of their managers and the in-
formation flow between managers and family members serves as a control
mechanism, where managers make decisions with the understanding that
they eventually have to justify them face-to-face with owners (Kang,
1998).
© Blackwell Publishers Ltd. 2001.
256 C. S. Mishra, T. Randøy and J. I. Jenssen

Our final result, that the relation between firm value and founding
family ownership is weaker when multiple share classes are present, is
consistent with Bergstrøm and Rydqvist (1990), Zingales (1994), and
Claessens et al. (1999). Our results imply that founding family owned
firms without multiple classes of shares or whose cash flow rights are
more aligned with their control rights, can have higher market values.
Again, we find the reverse to be true for founding family CEOs. A
possible explanation might be that even when founding family CEOs issue
multiple share classes, they are acting in the best interest of all share-
holders. This suggests that altruistic and paternalistic family behavior, in
regard to the market for corporate control, only come across when the
founding family has strong influence, such as that revealed in founding
family CEOs.
Overall, our results imply that founding family controlled firms are
more valuable than firms without such influence, and founding family
controlled firms are governed differently than non-founding family
controlled firms. However, more research is needed in order to understand
the role of founding family control in a firm and its effect on firm value.
Possible areas for future research include: (1) what happens when a
founding family CEO turns control over to an outside CEO, (2) what
happens when a powerful founding family reduces its ownership stake
below certain thresholds (10, 20, 33, and 50 per cent), and (3) how
founding families manage their internal governance structures and how
internal governance structure influences firm managers and firm value.

Notes
1. However, anecdotal evidence abounds with stories from both well-managed and
poorly managed founding family controlled public firms. For example, see The Economist,
June 3, 1995; September 14, 1996; May 3, 1997; December 6, 1997; December 11, 1999;
The Wall Street Journal, August 26, 1999; October 20, 1999; and the examples cited in
Morck et al. (1999).
2. Bøhren and Michalsen (1994) conclude that in 1991 as much as 14 per cent of the
market value of all traded firms in Norway were owned by another Norwegian traded
company. We expect this proportion to be somewhat smaller in 1996.
3. We also used a fifth measure, namely if the founding family is one of the five largest
shareholders of the company. This is not reported due to similarity of results and space
limitation.
4. A standardized regression coefficient is computed by dividing the parameter
estimate by the ratio of the sample standard deviation of the dependent variable to the
sample standard deviation of the regressor. It is easier to compare standardized coefficients
across regressions. The magnitude of each regression coefficient would indicate the
standard-deviation change in the dependent variable (q-value) for a one unit standard-
deviation change in the corresponding explanatory variable.
© Blackwell Publishers Ltd. 2001.
 Founding Influence on Firm Value and Corporate Governance 257

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