Founding Family: An Asset or a Liability? Evidence from IPOs

We study family firms at the time of going public. By studying the relationship between the degree of a founding familys involvement in the management and governance of the firm, on the one hand, and the reputation of its underwriters, IPO underpricing, the extent of analyst coverage, and post-IPO institutional interest, on the other, we cast new light on the differences between family and non-family firm IPOs. We find that family firms are taken public by less reputable underwriters, have higher underpricing, attract lower institutional interest in their IPOs, and receive less extensive analyst coverage. These results are especially pronounced for family firms with a dual role of founder as the CEO and the chairperson of the board. Our findings contrast with the findings of several recent studies that, using a sample of large and well established firms, have found that family ownership has a positive influence on the firm value. We also shed a new light on the role of venture capital in IPOs. Our findings suggest that venture capital provides certification of founder quality: venture-backed family firms, especially those with a dual role of founder as the CEO and the chairperson of the board, are viewed more positively by underwriters, analysts, and institutional investors than non-venture-backed family firms. Finally, we find that the importance of an independent board in mitigating the adverse influence of a founding family on various IPO characteristics varies with the degree of the familys involvement in the management and governance of the firm.