DBJ Discussion Paper Series, No.1404

Amenity Potential, Private Benefits of Control, and the Valueof Levered Family Firms

Worawat Margsiri(Fordham University)

July 2014

Discussion Papers are a series of preliminary materials in their draft form. No quotations,reproductions or circulations should be made without the written consent of the authors in orderto protect the tentative characters of these papers. Any opinions, findings, conclusions or
recommendations expressed in these papers are those of the authors and do not reflect the viewsof the Institute.

Amenity Potential, Private Bene…ts of Control, and the Value ofLevered Family Firms
Worawat Margsiri
Fordham University
July 13, 2011

Abstract
Family …rms are usually a¤ected by the agency cost associated with the con‡ict between the family
and minority shareholders. However, another con‡ict that usually co-exists in family …rms is thatbetween debt holders and shareholders which results in the agency cost of debt. The two agency costs
may not always add up; they may reinforece or o¤set each other. In this paper, we explore how amenity
potential and private bene…ts of control a¤ect di¤erent claim holders in family …rms. We show how
minority and debt claim holders may also gain from the bene…ts of control the family shareholders
have. These gains come from the reduction in the agency cost of debt and is di¤erent from the bene…ts
derived of monitoring or from the competitive advantages of the family. The amenity potential andprivate bene…ts also have implication on the debt capacity of family …rms. Under a plausible range ofparameters, family …rms tend to have lower debt capacity.

Acknowledgement: This paper was written while I was a Shimomura Research Fellow at the Development Bank ofJapan (DBJ). I would like to thank everyone at DBJ, especially people at the Research Institute of Capital Formation,
for their inputs and supports. All errors are my own.

Corresponding address: Fordham University, 1790 Broadway, New York, 10019. Tel: (212) 636–6853, Fax: (212) 6367076, Email: margsiri@fordham.edu

11Introduction

Control of a corporation o¤ers bene…ts to the controlling party. The type of bene…ts to the controller that
does not come at the expense of other claims holders is referred to as amenity potential, and the type thatthe controller appropriates from other claim holders is referred to as private bene…ts of control (Demsetz(1983), and Burkart et al. (2003)). These bene…ts create two types of agency con‡ict which receive muchattentions among research on corporate governance: that between the shareholders and managers andthat between the large and small shareholders. The …rst type of con‡ict occurs in …rms with disperse
ownership that are controlled by a manger who has incentives to entrench the …rms and expropriate theshareholders (Berle and Means (1932) and Jensen and Meckling (1976)). Demsetz and Lehn (1985) argue
that ownership concentration can mitigate this kind of con‡ict by bringing greater alignment of incentives
between the manager and the shareholders.
However, the bene…ts from the concentration of ownership may be o¤set by a second type of agency
con‡ict which controlling shareholders take advantage of minority shareholders, especially if there is aseparation of ownership and control of a …rm (Shleifer and Vishny (1997)). For example, Johnson et al.
(2000) present the argument that the controlling shareholders may "tunnel" resources out of the …rms fortheir own wealth, and Bae et al. (2002) o¤er the empirical supports for this hypothesis for the case of
Korean business groups.
Burkart, Panunzi, and Shleifer (2003) point out that the type of agency cost …rms choose to baredepends, among other things, on the degree of legal protection of minority shareholders. However, on topof these two types of agency costs, levered …rms face another type of agency cost: that between the debt
holders and the shareholders . Throughout the world, debt usually represents a signi…cant part of the …rms’balance sheet, and the agency cost associated with it can be signi…cant; Debt can cause underinvestment,
asset substitution, and ine¢ cient liquidation problems (Jensen and Meckling (1976), Leland (1998)). In
this paper we investigate how the presence of debt a¤ects the other agency con‡icts in the …rm, focusing
on the family and non-family …rms.
Family-controlled …rms are an example of the case in which the controlling family may expropriate theminority shareholders. Villalonga and Amit (2008) report that in large U.S. corporations founding families
are the only blockholders whose control exceeds ownership, and the primary sources of control wedge are
dual-class share. The founding family members often seem themselves as stewards of the business for future
generations, and thus seem to have longer horizon. In this paper, we model a family as "deep-pocket"
controlling shareholders who enjoy amenity potential and the private bene…ts of control. We …rst consider
dual-class shares as a control mechanism and then investigate other mechanism such as voting agreements.

2

We view non-family …rms as a publicly held …rm, with large shareholders who monitor the controlling
manager. The managers also enjoy both amenity potential and private bene…ts of control. The non-family…rm has only one class of shares with one share eligible for one vote. The family and non-family …rms
have debt on their balance sheets.
Theories of family …rms usually argue that family-control …rms may have competitive advantage overnon-family …rms (Bertrand and Schoar (2006)). The bene…ts from this competitive advantage may compensates for losses from the agency con‡ict for the minority investors. To focus on the role of the rolesof amenity potential, private bene…ts of control, and the controlling mechanism, we abstract from thiscompetitive advantage argument in the model and assume that the family …rms and non-family …rms have
similar growth rate and risk pro…le. However, because a limited pool of talents, the family …rms may not
be run e¢ ciently and might incur some ine¢ ciency costs, the aspect that we retain in the model.
We show that the amenity potential and private bene…ts of control in the family …rm have di¤erente¤ects on di¤erent claim holders. They increase the agency costs of debt for non-family …rms, but reduce
the agency costs for family …rms. When minority shareholders receive preferential dividends, they also
gain from these bene…ts. Debt holders also gain since the family have incentives to keep the …rm alive
longer. It is also shown that, in family …rms that do not pay preferential dividends, while these private
bene…ts of control may reduce the value of the minority’s shares, they may still increase the value of debt
claims, because it aligns the interests of the controlling family shareholders and that of the debt holders.
When the control mechanism allows for the possibility of negotiation for higher dividends for theminority shareholders, the value of the minority’s claims increases. Therefore, the value of minority sharesin a …rm that uses dual-class share structure, which makes negotiations di¢ cult, tends to be lower thanthat of a …rm that use "softer" control mechanisms such as voting agreements which make negotiations
more likely.
We begin with a basic model of a family …rm, …nanced both with debt and equity. The assumptionsof the model are outlined in Section 2. Section 3 computes the values of di¤erent claims in the family…rm that promises to pay preferential dividends. Section 4 determines the values of the claims in the nonfamily …rm. Section 5 discusses the agency costs in the family and non-family …rms. Section 6 presents
a numerical example of the model. Section 7 examines the family …rm that does not promise preferential
dividends. Section 8 discusses the di¤erence in the results if the controlling mechanism of the family …rm
is voting agreements. Section 9 highlights the main conclusion.

3

2

Assumptions

Consider a …rm controlled by family shareholders that has unlimited wealth ("deep-pocket assumption").
The founders of the family business are participating in management of an asset-in-place which generates
a stochastic instantaneous stream of cash ‡ow revenue X. The evolution of X is assumed to be governedby a geometric Brownian motion
dX = Xdt + XdZ;
whereis the drift rate, and(1)is the volatility rate, and Z is a standard Brownian motion. There is aconstant instantaneous risk-free interest rate of r. The initial value of the revenue stream is X0 > 0, andall the agents in the the economy are risk neutral.
Following Miller (1977), de…nec as the corporate tax rate,i the interest income tax rate, andd theshareholders’personal dividend tax rate. Then the e¤ective tax shield rate is
=1

(1

c )(1

1

d)

:

(2)

i

Next, de…ne V as the present value of the revenue ‡ows, or the market value of the asset-in-place, thenV =assuming that (1i )r >

(1
(1

c )(1

d)

i )r

X;

(3)

, and de…ne V0 as the initial value of the present value corresponding to X =X0 . As Goldstein et al. (2001) shows, V has the same dynamic as X, so for the rest of the paper, we use
V instead of X as a state variable.
The …rm has a perpetual debt with instantaneous coupon payment c, and the value of debt is denotedby D. The coupon is tax deductible, and the debt have a covenant prohibiting the controlling family fromissuing additional debt to pay dividends. Whenever the revenue is lower than the coupon payment, theshareholders of the …rm pay the di¤erence; otherwise the …rm defaults on its debt and is liquidated. Insuch case, the value of the asset-in-place is lost by a fraction

2 [0; 1): Thus V can be thought of as apresent value of the deadweight cost from liquidating the business. In the event of bankruptcy, the absolutepriority rule applies and the asset-in-place is turned overed to the debt holders, and the tax bene…ts arelost.
The …rm may operates with some ine¢ ciency. We assume that the cash ‡ows generated within the…rm is lost by a fraction , so a present value of the lost due to ine¢ ciency is V .

4

2.1

Amenity Potential

These are the bene…ts that accrue to the controlling family shareholders that do not come at the expensesof other claim holders. These bene…ts may include the increases in the utility the controlling shareholders
attribute to being in charge of the …rm, or valuable private information they acquires from operating thebusiness. It is assumed that the instantaneous amenity potential the controlling party receives is a fractionof the instantaneous cash ‡ows, so a present value of the amenity potential is

V , and when the …rm

defaults, it is lost.

2.2

Private Bene…ts of Control

The controlling family may divert cash ‡ows from other claims holders into its own pockets. One example
is the use of the …rm’s money to pay for the family’s perquisites. The appropriations reduce cash ‡ows
left to the other claim holders by, and a present value of the bene…ts of control is

V: However, theappropriation does not a¤ect the underlying asset-in-place, and does not change the total cash-‡ows.
Therefore, the family shareholders want to appropriate the maximum amount possible, and the value ofis determined by factors outsides the model such as corporate governance environment the …rm operates
in. When the …rm defaults, the control of the asset is turned to the debt holders, and the appropriations
stop.

2.3

Control Mechanism

The family may sell part of the …rm’s equity to outside investors. We …rst consider the case in which
the family retains the control of the …rm by using duel-class shares and explicit preferential dividends
are promised. The family holds all Class-B shares, each with the right to multiple votes, and the outside
investors hold Class-A shares, each with the right to only one vote. The portion of Class-B shares in the…rm is denoted by b, and that of Class-A by 1

b: Class-A shares are compensated with higher cash-‡ow

right than Class-B shares, i.e., holders of Class-A shares have a claim over 1
those Class-B shares have a claim of bn, where n

b + n of the payouts, while

0. The parameter n can be thought of as a transfer

between the two classes of shares. The …rm announces b and n at the time when it sells shares to theoutside investors.
The following promise by Presidio Oil is an example of shares with promised preferential dividends.
“If cash dividends are paid on Class B Common Stock, a cash dividend must also be paid on Class A
Common Stock in an amount equal to 110% of the per share amount of the cash dividend paid on Class B
Common Stock.”5For the rest of the paper, we refer to Class-B shares as family’s shares and Class-A shares as minority’s
shares. The value of the shares of minority investors are denoted by M , and those of the family by F .

3

The Value Functions of the Family Firm

De…ne G as a value function of a claim paying instantaneously zV + y; G satis…es the following ordinarydi¤erential equation:r(1i )G =

1
2

2

V 2 GV V + V GV + zG + y:

(4)

The general solution of the above ODE is
G = G1 V 1 + G2 V 2 +where

1 > 0 and

zV
r(1

+

i)

y
r(1

i)

;

(5)

2 < 0 are the roots of the quadratic equation

1
2

2 2

+(

1
2

2

)

r(1

i ) = 0:(6)

Denote VB as the level of V that the …rm defaults on its debt. For an arbitrary chosen default threshold
VB , the coe¢ cients for each claim are solved using the claim’s boundary conditions.

3.1

The Value of Debt Claims

We use a superscript F to denote the value functions of the claims in the family …rm. DF is de…ned as avalue function of debt; it satis…es the above ODE, and the relevant boundary conditions are:Condition 1: DF jV =VB = (1)VB :Condition 2: DF jV !1 = rc :Using the above conditions DF can be solved analytically and is given by
DF =Notice that

and

c
+ (1
r

)VB

c
r

V
VB

2

:

(7)

do not appear explicitly in the above equation. However, they are embedded in

the default threshold VB .

3.2

The Value of Family’s Claims

De…ne F F as a value function for the family’s claims. F F also satis…es the ODE, and the boundary
conditions of F F are
6

Condition 3: F F jV =VB = 0:
Condition 4: F F jV !1 = ( +

+ (b

n)(1

b(1

)) V

)c
r

:

Using the above conditions, F F can be solved analytically and is given by
FF

=

( +

+ (b

( +

3.3

n)(1

+ (b

b(1

)) V

n)(1

)c
r
b(1

)) VB

V
VB

)c
r

2

:

(8)

The Value of Minority’s Claims

De…ne M F as the value function of the minority’s claims. The boundary conditions are
Condition 5: M F jV =VB = 0:
Condition 6: M F jV !1 = (1b + n)(1)(1

b + n)(1)V(1 b)(1
r

)V

)c

:

Solving for M F yields
MF

=

(1

(1

(1

b + n)(1b)(1)cr(1 b)(1
r

)VB

)c

V
VB

2

:

(9)

The total value of the …rm is the sum of all claims: T F = DF + F F + M F , and the equity of the …rm
is E F = T F

3.4

DF :

Preferential Dividends and Endogenous Default

Because of the di¤erence in the bene…ts they receive, the family and minority shareholders have di¤erent
default thresholds. De…ne VBf as the the default threshold preferred by the family shareholders. To …nd
VBf , di¤erentiate F F with respect to VB , and solve the …rst-order condition. Then
VBf =

bc(1

2
2

1r( +

+ b(1

)
)

n(1

))

:

(10)

Next, de…ne VBm as the default threshold preferred by the minority shareholders. Di¤erentiating M F
with respect to VB and then solving the …rst-order condition yield
VBm =

2
2

(1 b)c(11 r (1 b + n)(1

)
))

:

(11)

To resolve this con‡ict, n has to be chosen such that VBf = VBm . Denote nF as the value of n that
resolves the con‡ict between the two types of shareholders, thennF = (1

b)
7

+
1

:

(12)

Preferential dividends, denoted by P D, and de…ned as the ratio between the dividends that the family
receives over the dividends that the minority shareholders receive is
PD =

(1

b + n) =(1(b n)=b

b)

:

(13)

. Next, let VBF denote the default threshold corresponding to nF . This default threshold is given by
VBF =Notice that

2
2

c(1
1 r(1 +

)
)

:

(14)

does not enter into the above equation because when n is chosen optimally throughbargaining between the family and the minority shareholders,does not a¤ect the total value of the …rm

F

T .

3.5

Optimal Debt and the Minority’s Shares

At the initial date, the family shareholders determine how much 1) debt and 2) minority shares the …rm
sells. In total the family shareholders receive F F + M F + DF = T F :For debt issuance, the …rm chooses the optimal coupon rate, denoted by cF , which trades o¤ theexpected bankruptcy costs and tax bene…ts. To …nd cF , di¤erentiate T F with respect to c and solve the…rst-order condition
cF =

r(1
(1

+ )V
)

1

2

+ +
(1
+ )

1
2

1

2

DRF =

DF
;
TF

(16)

FV F =

cF
:
r

(17)

2

:

(15)

The debt ratio, DRF , is thus

and the face value of debt, F V F , isThis is the di¤erence between the internal rate of return the debt holders receive and the risk-free rate.
Next, the credit spread, CS F , is
CS F =

cF
D

r;

(18)

For the portion of minority’s shares, if n is chosen to resolve the con‡ict between the family andminority shareholders, i.e., n = nF , b is irrelevant; it doesn’t a¤ect T F . To see see substitute nF into T F ,then b drops o¤ expression for T F .
The control premium, denoted by CP F , is the ratio between the value of one share of family shares
over that of minority shares, .i.e.,
CP F =F F =b:M F =(1 b)8(19)

It can be veri…ed that if n = nF , CP = 1:

4

The Value Functions of the Non-Family Firm

We next derive the value functions of claims in the non-family …rms, assuming that it is managed by amanager whose amenity potential is a fractionof cash ‡ows, and whose private bene…ts equals a factionof cash ‡ows. So a present value of his total bene…ts is ( + )V . A superscript N is used to denote thevalue functions of the claims in the non-family …rm. The manager’s claim, denoted by S N , is given by
S N = ( + )V

2

V
VBN

( + )VBN;(20)

and the value function of debt DN is given by
DN =

cN
+ (1
r

)VBN

cN
r

(1

)VBN

V
VBN

2

;

(21)

and the value function of equity is given by
E N = (1

)V

)cN

(1
r

)cN

(1

V
VBN

r

2

;

(22)

and the endogenous default threshold is
VBN =

2
2

c(1
1 r(1

)
:
)

2

+
(1

(23)

The optimal coupon cN is given by
N

c

r(1
=
(1

)V
)

1

2

1

2

1
2

)

;

(24)

and DRN , F V N , CS N ; and CP N are de…ned similarly to those of the family …rm.
The di¤erence in credit spreads between the family and the non-family …rms, denoted by DCS, is
DCS = S F

SN ;

(25)

and the value added to the family shares, denoted by V AF , is
V AF =F F =b
EN

1;

(26)

and the value added to the minority shares, denoted by V AM , is
V AM =M F =(1
EN

b)

1;

(27)

and the di¤erence in the debt capacity between the family and the non family …rms, denoted by DDC, is
DDC =

9

cF
cN

1:

(28)

5

Agency Cost of Debt in Family and Non-Family Firms

In the basic model, there is no investment or the possibility of asset substitution, so the only agency cost ofdebt is ine¢ cient liquidation of the …rm. First, notice that there is no …xed costs in the model, suggestingthat the …rst-best result is achieved when there is no default and no liquidation, i.e., VB = 0. This outcome
takes into account the costs and bene…ts of all claim holders, so it is Pareto e¢ cient. However, the …rst-best
result cannot be achieved because of the presence of debt in the …rm, which creates the agency cost of debt.
The closer the default threshold gets to zero, the lower the agency cost of debt, and vice versa. Now, noticethat if ine¢ ciency in the family …rm is not too high, i.e.,

is close to zero, VBF < VBN , suggesting lower

agency cost of debt in the family …rm. Notice also that VBF declines with , suggesting that the amenity
potential help reduce the agency cost of debt in the family …rm. Next, notice also that VBN increases with, suggesting that private bene…ts of control increase the agency cost of debt in the non-family …rm.

6

ExampleExample A
An example is helpful to illustrate how the model can be used to understand how amenity potential
and private bene…ts of control change the values of claims in the family and non-family …rms. We …rst
investigate the case in which the family uses dual-class shares and preferential dividends and compare it
to that in which non-family …rm uses no such structures. The following parameter values are used in thefollowing example: r = 0:06,

i = :30,c = 0:31,

d = 0:10,= 0:25, b = 0:2,

= 0:02,= 0:02,= 0:02, 2= 0:02. With is con…guration, The current value of the asset-in-place V = 0:5175 for bothfamily and non-family …rms
The base case outputs are given in Table 1. The default threshold of the family …rm is higher thanthat of the non-family …rm. The preferential dividends are 1:244, suggesting that for one dollar payment
to the family shareholders, the minority shareholders should receive 1:244 dollar. The value of family’sshares is equal to that of minority shareholders, so the control premium is 1:
Comparing to that of non-family …rm, the value of family’s shares is higher for both family and minority
shareholders. The face value of debt of the family …rm is lower than that of the non-family …rm, suggestinga lower debt capacity. Lower debt capacity lowers the debt ratio for the family …rm. Because the family…rm has lower level of debt and the default threshold is lower, the credit spread is lower.
Figures 1 and 2 show how the values of family and minority claims change aschanges for fourdi¤erent value of : 0:1, 0:2, 0:3, and 0:4. As expected, the value of both claims increases with both10

and . However, the e¤ects on the value of debt claims are di¤erent. The debt value increases with , but
decreases with , as seen in Figure 3. The similar e¤ects are observed in the changes in the debt ratio in
Figure 4.
Figures 5 and 6 show that, compared to the non-family …rm, the value added to the family shareholders
declines with , but increases with , suggesting that the bene…ts of family …rm are higher for …rms withlower growth or higher risk.
Figure 7 shows that the di¤erence in credit spreads between the family …rm and the non-family …rm
declines asincreases ordecreases. The di¤erence in the debt capacity between the family and thenon-family …rms is shown in Figure 8. For most part of the …gure, the di¤erence is negative, suggestingthat the family …rm has lower debt capacity than that of the non-family …rm. This di¤erence becomes
smaller for higher

and lower. Notice that for very highand very low, the di¤erence becomes

positive, suggesting that it is possible for family …rms to have higher debt capacity.

7

No Promised Preferential Dividends

In this section, we investigate what happens when the …rm sets up dual-class share system, but does
not explicitly promise preferential dividends. Some …rms promise the low-vote shares at least the same
dividend per share as paid to the high-vote shares. This structure allows for the possibility of preferential
dividends without guaranteeing them. The following promise by the Alberto Culver Company is typical:“Class A and B are entitled to cash dividends, except that no dividends may be paid in Class B unless anequal or greater dividend is paid on Class A, and dividends may be paid on Class A in excess of dividends
paid, or without paying dividends on Class B.”
Because of the dual-class share structure, if the family shareholders do not o¤er preferential dividends,
the minority shareholders do not have any bargaining power to ask for extra dividends. The only credible
threat they have is to stop …nancing the …rm when cash ‡ows are not enough to …nance the coupon
payments. At this point the family and the minority shareholders may negotiate preferential dividends.
We use superscript R to denote the functions and variables in case no preferential dividends are promised
ex ante. The negotiation threshold is denoted by VNR and the default threshold by VBR . For arbitrary

11

choices of VNR and VBR , the value of the family’s claims is
FR

=

( +

+ (b

n)(1

( +

+ (b

)c
r

2

V
VNR

)VNR

n(1

b(1

)) V

n)(1

)) VBR

b(1

b)(1
r

)c

(1

b)(1
r

)c

V
VBR

2

)c

V
VBR

2

r

;

(29)

:

(30)

and the value of the minority’s claims is
MR

=

(1

b + n)(1

(1

)V

+n(1

)VNR

(1

b + n)(1

2

V
VNR

)VBR

After the negotiation of preferential dividends, the interest of the family and minority shareholders
are aligned, so the default threshold is the same as that in the case in which the …rm pays preferential
dividends, i.e., VBR = VBF . Since the default threshold is the same as the case the …rm pays preferential
dividends, the value of debt’s claims is the same, i.e., DR = DF .
The negotiation threshold in this case is the reservation threshold of the minority shareholders in casethe …rm never pays dividends and is given by
VNR =

2
2

c(1
1 r(1

)
)

:

(31)

Example B
Table 2 shows the results of the model when there is no promised preferential dividends. The minority
shareholders negotiate the dividends at VNR = 0:1152, slightly above the default threshold. The value of thefamily’s shares increases and that of minority shares declines, resulting in the control premium of 1:3263.
Figure 9 shows that the value added for the family shareholders increases withand decreases with. Figure 10 shows the e¤ects on the value added to the minority shareholders. It should be noted thatthe value added can be either negative or positive depending on the values ofand .

The fact that the value added for the minority shareholders becomes negative is not surprising since
they are not promised to receive preferential dividends and the cash ‡ows are appropriated by the family.
However, what should be noted as well is that the appropriation of the minority shareholders occurs when
the debt holders in the family …rm enjoy the lower default threshold. (Their debt become safer.) As a12

result, although the value added to the minority shareholders becomes negative, the credit spread between
the family …rm and the non-family …rm does not become positive.
Figure 10 also reveals that there are cases in which the value added to minority shareholders arestill positive even after the appropriations. These are the cases in which

is low and/or

is high. In

other words, the value added may be positive for …rms with low growth and/or high risk. The intuition
behind this result is that such …rms have more chances of facing the states in which the controlling family
shareholders have to negotiate with the minority shareholders, increasing the value of the minority’s claims.

8

Voting Agreements as Control Mechanism

When the family does not set up a dual class share structure, they may retain the control of the …rm byusing voting agreements, under which a shareholder gives up the voting right of his share to another. We
use superscript A to denote the variables and value functions of the family …rm that uses voting agreements.
Compared to the dual-class share system, the voting agreements are "softer" mechanism. The minority
shareholders have more chance of collectively bargaining for higher dividend payments. The possibility ofcollective action depends on a lot of factors such as the dispersions of shares, the cost of bargaining, etc. If
the minority shareholders have more bargaining power, they will want to demand for preferential dividend
payments sooner. To capture this, de…neas the bargaining power of minority shareholders. Then thenegotiation threshold is given by
VRA = V + (12)
2

(1 b)c(11 r (1 b + n)(1

)
))

:

(32)

The value functions and the rest of the variables remain the same as those in the case in which the…rm does not promise preferential dividends. If the minority shareholders have all the bargaining power,i.e.,= 1, the negotiation occurs right away, and the results will be the same as those of the case of thedual-class shares in which the …rm promises preferential dividends. If the minority shareholders have nobargaining power, i.e.,= 0, the results will be the same as those of the case of dual-class shares in which

the …rm does not promise preferential dividends.
Example C
In this example, we show that the value of minority’s shares increases if the family use voting agreement
as controlling mechanism. Assuming the minority shareholders has su¢ cient bargaining power, i.e.,= 0:5,

the negotiation occurs relatively fast at the negotiation threshold of 0:3164. The value of family’s sharesdeclines and the value of minority’s shares increases. The control premium reduces to 1:201.

13

9Conclusion

In this paper, we show that the amenity potential and private bene…ts of control in family …rms may havea di¤erent e¤ects on di¤erent claim holders of a …rm. The results depend on the dividends policy and thegovernance structure of the …rm. Amenity potential and private bene…ts of control in family …rms may
increase the value of debt claims, because it aligns the interests of the family shareholders and that of thedebt holders (at the expense of the minority shareholders.) When the control mechanism permits higher
possibility of negotiation for higher dividends, the value of the minority’s claims increases. Therefore, thevalue of minority shares in a …rm that uses dual-class share structure, which makes negotiations di¢ cult,tends to be lower than that of a …rm that use "softer" control mechanism which makes negotiation more
likely such as voting agreements.

14

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15

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16

Table 1
Family Firm Promises Preferential Dividends
Outputs

Definition

Family Firm

Non-Family Firm

Default Threshold
Ratio of Class-B over Class-A
Family Share Value
Minority Share Value

VB(1-b+n)/(1-b)/(b-n)/bF/bM/(1-b)0.110722
1.243903
0.315698
0.315698

Manager's Claim
Face Value of Debt
Debt Value
Equity Value
Debt Ratio
Credit Spread

S
c/r
D
E
D/(D+E)
c/D - r0.283754
0.226519
0.315698
0.417764
0.015160

Table 2
Family Firm Does Not Promise Preferential Dividends
Outputs

Definition

Negotiation Threshold
Family Share Value
Minority Share ValueControl Premium

VN
F/b
M/(1-b)(F/b)/(M/(1-b))

Family Firm
0.115241
0.393066
0.296356
1.32633

Table 3
Family Firm Uses Voting Agreements as a Controlling Mechanism
Outputs

Definition

Negotiatin Threshold
Family Share Value
Minority Share ValueControl Premium

VN
F/b
M/(1-b)(F/b)/(M/(1-b))

17

Family Firm
0.316370.364581
0.303477
1.201350.118653

0.009634
0.2921550.230866
0.291076
0.442321
0.015928

Figure 1: Value of Family's Claim
$
0.7
0.6
0.5
0.4
0.3
0.2

0.01

0.02

0.1

0.03

0.2

0.3

0.04

0.4

Figure 2: Value of M inority's Claim
$
0.7
0.6
0.5
0.4
0.3
0.2

0.01

0.02

0.1

0.03

0.2

0.3

18

0.4

0.04

Figure 3: Value of Debtholders' Claim
$
0.8

0.6

0.4

0.2

0.01

0.02

0.1

0.03

0.2

0.3

0.04

0.4

Figure 4: Debt Ratio

70

60

50

0.01

0.02

0.1

0.03

0.2

0.3

19

0.4

0.04

Figure 5: Value Added to Family Shareholders

8.5

8.0

7.5

0.01

0.02

0.1

0.03

0.2

0.3

0.04

0.4

Figure 6: Value Added to M inority Shareholders

8.5

8.0

7.5

0.01

0.02

0.1

0.03

0.2

0.3

20

0.4

0.04

Figure 7: Difference in Credit Spreads
Basis P oints
0.01

0.02

0.03

0.04

5

10

15

20

0.1

0.2

0.3

0.4

Figure 8: Difference in Debt Capacity

2

0.01

0.02

0.03

2

4

6

0.1

0.2

0.3

21

0.4

0.04

Figure 9: Value Added to Family Shareholders No Prf . Div.
70

60

50

40

0.01

0.02

0.1

0.03

0.2

0.3

0.04

0.4

Figure 10: Value Added to M inority Shareholders No Pref . Div.

2

0.01

0.02

0.03

2
4
6
8

0.1

0.2

0.3

22

0.4

0.04

Figure 11: Control Premium

80
70
60
50
40

0.01

0.02

0.1

0.03

0.2

0.3

23

0.4

0.04