Business Groups, Hierarchies and Risk Preferences: How Family CEOs Respond to Performance Shortfalls

Despite their global presence, family business groups have not gained much attention from scholars concerning the behavioral theory of the firm (BTOF). As a hierarchical organization, family business groups as a whole are managed by the group chairperson while his or her family members sometimes run individual member firms as subunits and become family CEOs. Prior studies in the BTOF have revealed that subunits in a hierarchical organization take a risk in response to their performance below aspiration levels and, in doing so, may have assumed that subunit managers have a non-family relationship with top managers. But this assumption limits the application of the BTOF to family CEOs because they are bound to the group chairperson by kinship. We fill this gap by examining how member firms run by family CEOs respond to their underperformance. We develop a novel theory that family CEOs are concerned about how their firm’s underperformance might spill over and hurt their family’s socioemotional wealth and so their firm becomes risk averse in the face of the performance shortfalls. We test this argument using matched samples of member firms managed by family CEOs and professional CEOs in Korean business groups. We also find that underperforming firms become more risk averse when their CEO is the chairperson’s direct descendants, rather than non-direct family members, and the chairperson pays attention to regulation policies challenging the family-dominant governance structure. This study makes a number of theoretical contributions to research in the BTOF and research on family businesses.