Financial wealth, socioemotional wealth and IPO underpricing in family firms:a two-stage gamble model

Kotlar, Josip and Signori, Andrea and De Massis, Alfredo and Vismara, Silvio (2018) Financial wealth, socioemotional wealth and IPO underpricing in family firms:a two-stage gamble model. Academy of Management Journal, 61 (3). pp. 1073-1099. ISSN 0001-4273

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Abstract

There are competing theoretical explanations and conflicting empirical evidence for the initial public offering (IPO) underpricing phenomenon in family firms. The behavioral agency model predicts that loss-averse family firms discount their shares more than nonfamily firms to minimize losses of socioemotional wealth (SEW). Conversely, the endowment effect in prospect theory suggests that family owners maximize their financial wealth (FW) by including SEW in perceptions of firm value and demanding a higher IPO price to relinquish it. We reconcile these seemingly incompatible predictions by examining dynamic properties of the reference point in decision framing. Conceiving IPO pricing as a two-stage gamble, we theorize that initial SEW losses entailed by the listing decision increase the disposition of family owners to underprice IPO shares to possibly offset these losses, or "break even." We thereby advance the behavioral agency model with the aversion to loss realization logic to explain how family owners' decision frames and preferences change during the IPO process, depending on initial losses of current SEW and new expectations of future SEW. Our analysis of 1,807 IPOs in Europe supports our theoretical expectations, clarifying the trade-off between FW and SEW and explicating the dynamic properties of mixed gambles in family firms.

Item Type:
Journal Article
Journal or Publication Title:
Academy of Management Journal
Additional Information:
Copyright © 2017 Academy of Management. All rights reserved.
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1400/1405
Subjects:
ID Code:
86848
Deposited By:
Deposited On:
28 Jun 2017 13:58
Refereed?:
Yes
Published?:
Published
Last Modified:
25 Nov 2020 04:43