Families and Firms: The impact of family risk and organisation on the governance of closely held corporations

`Families and Firms´ investigates how risk, related to family structures and family development, affects companies The overall idea is to evaluate the economic implications of the organisation of families and the realisation of uncertain events inside the families for the leadership and performance of closely held corporations. We use realisation of risky events inside families to gain new insight into the economic value of four important governance institutions: the value of corporate leaders (i.e. chief executive officers, board chairmen, directors and managers); the value of family finance; the value of political networks; and, the value of professional boards.

A part of this research project holds a sub-project: The value of Political Connections. This subproject will be carried out as an integerated PhD project. The project is directed by Professor Morten Bennedsen.

Objective:

To measure the economic value for small and medium-sized companies of having a political connection. This PhD project exploits variation in family members' political activity (do they run for office?; are they elected?; which party are they associated with?) on local and national level to estimate the effects of these connections on corporate organisation and performance. This project is an integrated PhD project that will be executed in collaboration between a PhD student and the other researchers in the group.

Motivation:

The institutional approach to family companies focuses on, to which extent families provide institutional input to the companies. One important input is political connections. In a democracy all corporations should receive equal treatment by regulative and governmental institutions. Nevertheless, having access to politicians through family connections may provide companies with a comparative information advantages in addition to an informal preferential treatment.

Theoretical and Empirical Background:

An important theme in public choice and political economics is that the politicians' actions are affected by their own interest [for an introduction, see Persson and Tabellini, 2000]. There are a number of theoretical models that focus on the link between well-connected companies and political favours. Shleifer and Vishny [2002] show how politicians cater to well-connected companies, and Bennedsen [2000] analyses how ownership structures affect the ability of well-connected companies to extract political favours. More recently, there are a number of empirical papers that estimate the rent that well-connected companies receive from the government in Asian countries [see Fisman, 2000; Johnson and Mitten, 2003; Faccio, Mausulis and McConnell, 2004; Bunkanwanicha and Wiwattanakantang, 2006; and Faccio, 2006]. In addition Bertrand et al. [2005] shows how companies back up their preferred politicians around elections through strategic corporate decisions with respect to layoffs and capital structures.

Methodology:

The first step is to collect the following data:

Using the social security number (or name and birthday), we match this data with the database constructed in the other sub-projects, which covers accounting data for all companies in Denmark; information about managers, CEOs and directors; and family information for all individuals.

The second step is to derive measures of political connections through family ties. Examples can be: if family members have run for offices; if family members sit in the local or national legislature; or, if family members are mayors or hold other significant political positions. The third step is to estimate the effect of political connections through family ties on company performance, company growth and company risk (e.g. frequency of being bailed out of bankruptcy). First, we focus on cross-sectional variance in political family connections. For instance, does a small and medium-sized company benefit from political family connections? Does it matter, if the connections are to the ruling parties or not? What are the effect of politically active family members loosing or gaining power at local elections for the performance and organisation of the companies? Second, a novelty of the proposed approach is to identify external shocks to these connections. Sources of external shocks may include changes of local or national governments; and, death and diseases among politically connected family members. Identification of such external shocks may allow us to establish a causal link between political family connections and company performance.

Outcome:

If political connections are important, we expect to see that companies with better political connections derive a positive rent. In addition we expect to provide the first studies that can establish a causal link between political rent and company performance. The most important outcome of the project is a completed PhD thesis. The PhD student will be in charge of developing a political extension to the data. The PhD student will then be responsible for analysing the data and writing a number of working papers. Some of these may be single-authored, others co-authored with the rest of the research group. Thus, we expect the output of this subproject to be a PhD thesis; a number of working papers; one top economics publication and at least one field economics or finance publication.