Toward a Property Rights Theory of the Family Firm

Abstract

Using property rights theory to examine the characteristics that enable family firms to exclude rivals from their competitive space, we explain why the family form of governance is often selected instead of the nonfamily form of governance and what determines the scale and scope of family firms. Family-centered nonpecuniary goals allow family firms to capture rights to common property opportunities that nonfamily firms find unattractive. Furthermore, the development and deployment of non-tradeable, immobile, inimitable, and indivisible human and nonhuman resources enable family firms to protect their property rights from competitors. Finally, because family members act as owners and managers, family firm governance can reduce the cost of monitoring as well as the possibility of opportunistic behavior and underinvestment of family resources.