Family firms and crash risk: Alignment and entrenchment effects

Journal of Contemporary Accounting and Economics, 2020, 16 (2), 100204

Posted: 9 May 2014 Last revised: 30 Nov 2020

See all articles by Bin Srinidhi

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Qunfeng Liao

Oakland University-Department of Accounting and Finance

Date Written: May 7, 2014

Abstract

Stock price crash risk could be lower in family firms because the controlling family investors
have a longer-term interest, hold greater decision rights and are better informed than
investors in diffusely owned firms (alignment effect). However, the agency costs between
family and nonfamily investors (entrenchment effect) could affect crash risk in two opposing
ways. Non-controlling investor skepticism about insider entrenchment limits overvaluation
and reduces the crash risk. In contrast, entrenched insiders could hide bad news to
exploit private benefits, which could increase the crash risk. We show that family firms
exhibit a lower crash risk than similar nonfamily firms after controlling for lower overvaluation,
which is consistent with the better alignment effect. Moreover, we show that better
governance further reduces the crash risk, which indicates that the substitutive relationship
between strong governance and family ownership shown in countries with low investor
protection rights does not carry over to the U.S. where investor protection rights are
strong.

Keywords: Family firms; Crash risk; Agency cost; Governance mechanism

JEL Classification: G32; M41

Suggested Citation

Srinidhi, Bin and Liao, Qunfeng, Family firms and crash risk: Alignment and entrenchment effects (May 7, 2014). Journal of Contemporary Accounting and Economics, 2020, 16 (2), 100204, Available at SSRN: https://ssrn.com/abstract=2434254

Bin Srinidhi (Contact Author)

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Qunfeng Liao

Oakland University-Department of Accounting and Finance ( email )

275 Varner Drive
Rochester, MI 48309-4485
United States
248-370-4289 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,473
PlumX Metrics