Financial Wealth, Socioemotional Wealth, and IPO Underpricing in Family Firms: A Two-stage Gamble Model

By J. Kotlar, Andrea Signori, Alfredo De Massis, Silvio Vismara. Academy of Management Journal, 2017

265 citations recorded by the source corpus.

There are competing theoretical explanations and conflicting empirical evidence for the initial public offering (IPO) underpricing phenomenon in family firms. The behavioral agency model predicts that loss-averse family firms discount their shares more than nonfamily firms to minimize losses of socioemotional wealth (SEW). Conversely, the endowment effect in prospect theory suggests that family owners maximize their financial wealth (FW) by including SEW in perceptions of firm value and demanding a higher IPO price to relinquish it. We reconcile these seemingly incompatible predictions by examining dynamic properties of the reference point in decision framing. Conceiving IPO pricing as a two-stage gamble, we theorize that initial SEW losses entailed by the listing decision increase the disposition of family owners to underprice IPO shares to possibly offset these losses, or "break even." We thereby advance the behavioral agency model with the aversion to loss realization logic to explain how family owners' decision frames and preferences change during the IPO process, depending on initial losses of current SEW and new expectations of future SEW. Our analysis of 1,807 IPOs in Europe supports our theoretical expectations, clarifying the trade-off between FW and SEW and explicating the dynamic properties of mixed gambles in family firms.

Subfields: Accounting, Management of Technology and Innovation, Organizational Behavior and Human Resource Management

View Paper: https://www.semanticscholar.org/paper/7d47d15a57125833c0b556dcd20d1f32ab57112a

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Citations in the corpus

Family firms in the global economy: Toward a deeper understanding of internationalization determinants, processes, and outcomes (2018, background): “…to remain in their domestic markets and adopt conservative behaviors, tending to protect their socioemotional wealth (GomezMejia et al., 2007; Kotlar et al., 2017), which refers to the family members’ affective endowment, including family control and influence over the firm, their emotional…”
Entrepreneurial orientation and innovation in family SMEs: Unveiling the (actual) impact of the Board of Directors (2018, background): “especially relevant in the case of family SMEs, as their inherent resource limitations and time constraints often clash with the greater difficulty to evaluate the trade-offs between economic and non-economic goals in their strategic decision-making (De Massis et al., 2018; Kotlar et al., 2017), and”
Strategic agility and international joint ventures: The willingness-ability paradox of family firms (2020, background): “, 2011) and gains in one dimension of wealth are often associated with losses in the other dimension (Kotlar et al., 2018).”
Family Business Growth Around the World (2020, background): “The current control perspective argues that family firm owners will act to preserve control in the hands of the family and resist taking risks that may jeopardize that (Gomez- Mejia et al., 2013; Gómez- Mejía et al., 2007; Kotlar et al., 2018).”
Innovation in Family Firms: A Systematic Literature Review and Guidance for Future Research (2018, background): “Mainstream innovation scholars can draw on concepts such as SEW, the multiplicity of FF goal systems (Chua et al. 2018) and the trade-offs between SEW and financial wealth (Kotlar et al. 2018), to understand their effect on innovation behaviours, priorities and strategies.”