Cofounders and the Value of Family Firms

ABSTRACT

Prior literature documents the positive effect of the founder’s role on family-firm value. In this study, we examine whether the existence of cofounders has any effect on family firm value. We find that the outperformance of founder family firms is concentrated in family firms with cofounders as measured by Tobin’s q. Our results are robust when we use return on assets (ROA) as an alternative measure. These findings suggest that the presence of cofounders would reduce the potential risk arising from the absence of the sole founder and the power concentration in the sole founder and thus lead to higher firm value.

KEY WORDS:

• family firm
• firm value
• founder

Acknowledgments

All errors are the authors’ own.

Notes

1. To the best of our knowledge, there are no studies that examine the effects of multiple founders on family-firm performance. Adams et al. (2009) use the number of founders as an instrument for the founder-CEO status along with the proportion of the firm’s founders that are dead to analyze the relationship between founder-CEOs and firm performance.

2. In our classification, we do not pay much attention to the titles of the founders as the focus of the study is to examine the relation between the number of founders who exert significant influence on a firm’s decisions and firm value. Studies measure founder control in various ways (Adams et al. 2009; Fahlenbrach 2009; Villalonga and Amit 2006). For example, Villalonga and Amit (2006) report that founders contribute to firm value when they do not hold the CEO position and serve as chairman of the board.

3. We follow Villalonga and Amit (2006) to define technology firms as companies with SIC codes 35, 36, 38, and 73.

Additional information

Funding

Baek is financially supported by the Hankuk University of Foreign Studies research fund of 2014.