Groupthink in the Board of Family Firms: The Case of Institutional Investment

Abstract

This study explores groupthink on the boards of family firms. We conjecture that institutional investors, in the face of principal–principal agency issues, are discouraged by groupthink and consequently invest less in family firms. Appropriate corporate governance in the form of greater board diversity, lower director tenure, busier boards, more financial disclosure, and bigger shareholder voice should help in alleviating these institutional investor concerns. We examine a sample of firms from the S&P 500 and find evidence consistent with these propositions. Also, we provide evidence that board generational heterogeneity in family firms exacerbates groupthink.

Keywords

groupthink institutional investors family firm heterogeneity board directors strategic leadership

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