Asset Market Equilibrium and Family Firm Cost of Capital: Implications for Corporate Finance

Carlton Osakwe, Jess Chua and James J. Chrisman

Review of Corporate Finance, 2022, vol. 2, issue 4, 791-817

Abstract: Family firms are different from nonfamily firms because the combination of family ownership, family control, and family management leads to certain distinctive structural effects. These effects, along with the demonstrated importance of family firms in the global economy, have the potential to affect asset market equilibrium and the cost of capital for both family and nonfamily firms. We propose an equilibrium model that incorporates the key features characterizing family firms – receipt of nonpecuniary socioemotional benefits, holding a nontraded and non-diversified control block, and information asymmetry between the family and other investors. The resulting information and competitive equilibrium model shows that the costs of capital for family and nonfamily firms operating inside the same economy are different. These differences yield important implications for corporate finance in terms of investment and financing at the macro level.

Keywords: Cost of capital; corporate finance; family business; nonpecuniary socioemotional benefits (search for similar items in EconPapers)
JEL-codes: D53 G12 G3 L21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlrcf:114.00000030

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