Time Horizon, Costs of Equity Capital and Generic Investment Strategies of Firms
Journal
Family Business Review
ISSN
0894-4865
Type
journal article
Date Issued
2007-03-01
Author(s)
Abstract
Recent literature (McNulty, Yeh, Schulze, & Lubatkin, 2002) states that the assumptions behind the capital asset pricing model, in particular the irrelevance of time horizon, do not correspond to the characteristics of firms that prefer long-term investment horizons. I show that family firms display a longer time horizon than most of their nonfamily counterparts, since (1) family firms display a longer CEO tenure, (2) this type of firm strives for long-term independence and succession within the family, and (3) due to the fact that family firms are overrepresented on western European stock markets in cyclical industries in which business cycles inhibit short-term success. As the annual default risk of an investment diminishes with increasing holding period (Hull, 2003), the risk-equivalent cost of equity capital of firms with longer planning horizons (e.g., family firms) can be lower as well. Based on the assumption that economic value to shareholders is created when firms invest in projects with returns above the associated cost of capital (Copeland, Koller, & Murrin, 2000), I argue that long-term-oriented firms can tackle unique investment projects represented by two generic investment strategies-the perseverance and the outpacing strategy. The first one, the perseverance strategy, represents investment strategies in which long-term-oriented firms invest in lower return but equal risk projects than their more short-term-oriented counterparts. The second one, the outpacing strategy, comprises investment projects with higher risk and equal return than the short-term competitors.
Language
English
Keywords
Family Firms
Time Horizon
Costs of Equity Capital
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Sage
Publisher place
Thousand Oaks, Calif.
Volume
20
Number
1
Start page
1
End page
15
Pages
15
Subject(s)
Eprints ID
35992
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