Do tenure‐based voting rights help mitigate the family firm control‐growth dilemma?

Claudia Imperatore and Peter F. Pope

Strategic Management Journal, 2024, vol. 45, issue 11, 2257-2274

Abstract: Research Summary Investment growth in family firms is constrained by family preferences to retain corporate control, which limits outside equity issuance and increases the expropriation risk perceived by external minority shareholders. Tenure‐based voting rights (TVRs) weaken the link between voting rights and cash flow rights, facilitating new equity capital issuance without loss of control. We find that publicly listed family firms in Italy adopt TVRs to facilitate the continuation of investment growth while retaining family control. We also find that in family firms with fragile control, investment increases after TVR adoption. Our results indicate that control‐enhancing mechanisms such as TVRs can help resolve the control–growth dilemma in family firms. Managerial Summary Family firms tend to invest less than other firms because funding new investment can lead to loss of family control. Tenure‐based voting rights (TVRs) reinforce the control of qualifying family shareholders, giving them extra shareholder voting power. Deviation from the one‐share‐one‐vote principle is generally regarded as detrimental to outside shareholders' interests. However, we find that TVR‐adopting Italian family firms invest more, pay higher dividends, are more profitable and have more outside shareholders on the board of directors. In other words, violation of the one‐share‐one‐vote rule using TVRs can benefit both family owners and outside shareholders. Policymakers could consider whether TVRs can help in promoting economic growth, especially in countries where family firms are important.

Date: 2024
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