New York University Benefits and Challenges of Family Owned Businesses Paper

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Business Finance

New York University

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Read the given PowerPoint and elaborate the benefits and governance challenges of family-own entities in 1 page (250- 300 words) encourage to use bullet points. If use outside sources make sure to paraphrase and cite them correctly, plz do not rely on too much outside reference but base on the PowerPoint!!

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The advantages of family firms ▪ Private enforcement of property rights ▪ Preserving non-transferable property (e.g. family reputation, political and social connection) ▪ Tax factors: • Selling off business may be subject to higher government tax rate than giving the business to descendants • How would inheritance taxes affect the degree of ownership concentration in a country? The advantages of family firms What are family specific capital? ▪ Properties or assets jointly owned by family members These assets are non-divisible and non-sellable due to high transaction costs ▪ Intangible assets such as reputation in economic and political markets Family may stand for quality (e.g. Guccio Gucci) or political connections (e.g. Giovanni Agnelli of Fiat in Italy) These intangible assets are difficult to sell because their values are highly specific to owner and their families ▪ Ideology or amenity utilities (Demsetz and Lehn, 1985) Family ownership allows the owner/family to take certain political/social stand. Family ownership of media is an example Family ownership allows internalization of the satisfaction or enjoyment in the work/production process. Examples are carton making in Walt Disney and News Corp. of Murdoch and even TVB. The advantages of family firms ▪ Weak public enforcement of property rights is a fact of life in many developing countries and emerging markets • Weak laws and enforcement • Corruptions • Heavy government regulations, intervention and taxations ▪ Business contracts with stakeholders are subject to high enforcement costs ▪ Assets tend to be undervalued because of the high enforcement costs and uncertainty. The advantages of family firms ▪ Family ownership provide private enforcement of property rights that substitute for the weak public enforcement • Concentrated ownership allows control • Strong family reputation and internal control provide credibility to stakeholders ▪ By keeping it within the family, ownership preserve the value of the specific assets (e.g. political connection to the ruling parties) The Governance problems of family firms ▪ Lower professionalism and more insider-based ▪ Entrenched families may influence or engage in politics that is sometimes at the expense of economic growth, particularly in emerging economies ▪ Contract enforcement uncertainty in the succession process ▪ Internal governance depends on family codes while lack of outside disciplines ▪ Limited transferability of equity ownership - Low stock liquidity - Limited equity capital raising ability - Agency conflicts with minority investors ▪ Limited growth opportunities
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BENEFITS AND CHALLENGES OF FAMILY-OWNED BUSINESSES

Benefits and Challenges of Family-Owned Businesses
Student’s Name
Institution

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BENEFITS AND CHALLENGES OF FAMILY-OWNED BUSINESSES

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Benefits and Challenges of Family-Owned Businesses
Benefits


Family businesses offer private enforcement of property rights, which can substitute for
weak public enforcement due to weak laws and enforcement, corruption, and government
interventions. In par...


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