All in the Family

The top cited paper in the Strategic Management Journal in the last two years is “Risk abatement as a strategy for R&D investments in family firms” by Pankaj C. Patel & James J. Chrisman.  It has already been cited 13 times, according to ISI, and thus ranks as a “highly cited paper”.

That said, my first response to it was “oh boy, here we go again”.  The theory, though crisply stated, appears almost impossible to identify.  From the abstract:

“The behavioral agency model suggests family firms invest less in R&D than nonfamily firms to protect their socioemotional wealth. Studies support this contention but do not explain how family firms make R&D investments. We hypothesize that when performance exceeds aspirations, family firms manage socioemotional and economic objectives by making exploitative R&D investments that lead to more reliable and less risky sales levels. However, performance below aspirations leads to exploratory R&D investments that result in potentially higher but less reliable sales levels. Using a risk abatement model, our analyses of 847 firms over 10 years supports our hypotheses.”

Yikes, I thought, we have at least two endogenous variables: family ownership and R&D investment.  How are the authors going to solve this problem?  I clicked Ctrl Find “endogenous”.  No response.  Uh oh.  The needle on my bullshit-a-meter flipped into the red danger zone.  But I shouldered on, before turning to the issue (see below).

From my own work on aspirations and behavior, I knew that endogeneity was just one of the vexing problems the authors would face in their analysis.  Another one related to separating out changes in the mean from shifts in the variance.  In other words, actions can be taken to effect returns or actions can be taken to reduce variance.  How did Patel and Chrisman solve this problem? 

This time, I was most pleasantly surprised.  The authors mastered and adapted a method from agricultural economics which improves on previous approaches used in strategic management.  It makes sense that such an approach would come from ag-econ, because as the authors say, in agriculture  “certain inputs such as land, labor and capital affect the mean yield, whereas other inputs such as pesticides lower downside variability but do not necessarily increase the mean levels or upside variability of crop yield.”  Patel and Chrisman use this approach to try to separate out how family firms use R&D. 

The approach uses two simultaneous equations.  Here is how Patel and Chrisman describe the method: 

They then interpret the coefficient estimates for B’ to test their hypotheses.  Interpreting the interaction between R&D and family ownership in a split sample (above or below aspiration) analysis, they conclude that when

“performance is at  or above historic aspiration levels, family firms'  R&D investments are more likely to reduce risk by  decreasing the variance of sales than those of non- family firms. In support of H2, we find that when  performance is below aspirations the risk-reducing  properties of a family firm's R&D investments  are lower than those of nonfamily firms since the  interaction of the family firm and R&D variables  is positive.

A primary motivation of this study was to debunk several assumptions about family firms that seem to have emerged in the literature. One of these is that family firms value non-economic goals more highly than economic goals. Another is that in response to these differences, family firms simply invest less in R&D than non-family firms. We recognized that if these assumptions were true, the family form of organization would be rare, particularly among larger firms, because just investing less in R&D would lead, over time, to underperformance and their eventual decline as an organizational form. Thus, we theorized that these assumptions were not strictly true in that (1) family firms do not necessarily value non-economic goals more than economic goals but instead simply value non-economic goals more than non-family firms, and as a consequence (2) use their R&D investments to pursue strategies that are different than non-family firms to achieve a possibly expanded, but certainly different, goal set. We were also influenced by observations in the literature using the resource-based view (e.g., Sirmon & Hitt, 2003) that family firms are likely to possess unique configurations of resources that support unique strategies. In other words, while usually invest less, they make those investments strategically.

We therefore theorized two things that diverged from the extant literature: (1) family firms seek to achieve a balanced and not necessarily inconsistent set of economic and non-economic goals, and (2) they do so by following different strategies that are consistent with their idiosyncratic resource configurations. Based on these ideas, we expected to find that family firms, more so than non-family firms, would implement R&D strategies that yielded a more reliable and less risky level of growth than non-family firms. As we explain in the paper, this is jointly a function of their desire to protect their socioemotional wealth (by preserving firm control and reputation), their undiversified financial wealth embedded in the firm, and their distinctive resources. Recognizing that owing to their greater ability, through control, to pursue and therefore changes strategies as it suits family owners, we also expected to find that family firms are more likely to increase the aggressiveness of their (R&D) strategies when the family’s socioemotional and financial wealth are threatened. As was shown, our expectations proved correct. We take this to mean that within their bounds of experience and knowledge, family firms do not behave irrationally. Thus, in addition to allowing for the substantial variations that occur among family firms (Chrisman & Patel, 2012), future research needs to more fully consider the entire range of goals, strategies, and resources that distinguish firms governed by family rather than non-family owners and managers.  

Chrisman, J.J., & Patel, P. (2012). Variations in R&D investments of family and non-family firms: Behavioral agency and myopic loss aversion perspectives. Academy of Management Journal, 55, 976-997.

Sirmon, D.G., & Hitt, M.A. (2003). Managing resources: Linking unique resources, management, and wealth creation in family firms. Entrepreneurship Theory and Practice, 27, 339-358.

That’s it for the top cite SMJ paper.  Next up the top paper in ASQ.

Your faithful reporter.  Eeyore.