Entrepreneurial Orientation in Next Generation Family Firms: Do Ownership Succession Financing and Family Governance Matter?

Abstract

Prior research has been inconclusive regarding the effect of the involvement of later generations on the firm’s entrepreneurial orientation (EO). Whereas some authors (e.g., Kellermanns & Eddleston, 2006) argue that the entry of a new family generation increases the firm’s EO due to the fresh ideas that are brought in by next-generational family members, others maintain that descendants are less entrepreneurial oriented compared to the founding generation. In this paper, we posit that the entrepreneurial posture of next-generation family firms depends on the way the transfer of ownership was financed. More specifically, successors that acquired the firm by paying a purchase price (i.e., successor financing) show a higher degree of entrepreneurial spirit compared to successors that obtained the business for free (i.e., predecessor financing), because of the higher successor discretion in the former type of firms. However, as the new generation enters management and/or ownership, family complexity increases, which, ultimately, may lead to increased conflicts and lower family cohesion. Using insights from the systems theory, we suggest that the effect of ownership succession funding is dependent on the instalment of specific family governance practices (FGPs). This premise is based on the fact that PGPs are regarded to enhance communication between the family and business subsystem, thereby mitigating conflicts and increasing family unity (Suess, 2014). Using a sample of 260 privately-held family firms, our results show that successor financing positively influences the firm’s EO and that this positive effect is dependent on the family governance context.