Cronqvist, H., Nilsson, M. (2003) Flashcards
Why are family-controlled firms less likely to be taken over?
Family CMSs will only relinquish control if they are compensated for their private benefits. Unless a potential acquirer can either receive the same private benefits or is significantly more capable in running the firm, the price demanded by the family CMS will likely be too high for a takeover to be worthwhile, resulting in few takeovers of family-controlled firms.
How do controlling families with CMS structures affect firm value?
Controlling families with CMS structures have entrenched control, deriving large private benefits while owning only a fraction of the firm’s equity. The agency costs of CMSs range from 6%-25% of the firm’s value (measured by Tobin’s q) for the median firm. This control is associated with a significant decrease in firm value, with family CMSs showing the largest discount on firm value, indicating agency costs.
How do agency costs affect a firm’s operating performance, specifically in terms of ROA?
Agency costs associated with CMSs (particularly family CMSs) are reflected in lower operating performance, as evidenced by a decrease in Return on Assets (ROA). This is due to the family’s focus on private benefits rather than maximizing the firm’s overall profitability.
How do controlling minority shareholders (CMSs) achieve control in a firm?
CMSs achieve control by using control-enhancing mechanisms (CMS), such as dual-class shares, where they hold shares with disproportionate voting rights compared to their ownership stake. This allows them to maintain control of the firm, even with a minority equity position, and influence decisions that may benefit them personally, often at the expense of minority shareholders.
