The effect of signaling family governance to nonprofessional investors: An experimental approach
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We explore if equity investors use signals of founding family governance (ownership, involvement in management, board representation) when making investment choices in an experimental setting. We link the literature on investor heterogeneity to signalling theory, and apply it in the context of founding family governance by exploring the presence of investor groups with varying utility functions with respect to founding family involvement in a firm. We show that nonprofessional investors use signals of founding governance in their investment choices. However, using latent class analysis we find that there are three distinct clusters within our sample that have conflicting utility curves with respect to founding family governance. Investor heterogeneity with respect to the value and desirability of family governance may explain the range of findings in prior empirical work. Our results suggest that rather than an agency theory phenomenon we are actually dealing with heterogeneous expectations similar to that found in the experimental asset pricing literature.
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