Toward a Property Rights Theory of the Family Firm

Exclusion

Exclusion helps protect the firm from negative externalities generated by other firms by forestalling actions that those parties may believe are beneficial to them but damaging to the focal firm (Coase, 1960). A firm’s ability to exclude competitors from creating negative externalities is important for protecting its property rights. Drawing on property rights theory, we define exclusion as a firm’s actions that prevent or limit other parties’ ability to imitate or expropriate the property rights a firm uses to exploit market opportunities. As noted above, the essence of exclusion lies in limiting market competition by either reducing the perceived gain associated with an opportunity or increasing the perceived costs of exploiting it.

Exclusion can be achieved either by deploying resources that competitors cannot imitate or by building barriers or exploiting preexisting barriers that limit competitors’ entry into the marketplace. Notably, some resources that prevent imitation are inherently non-tradable in the market (Barney, 1986), and some barriers may stem from initiatives aligned with non-market resources. Thus, we adopt the adage that success comes not only from winning battles but also from breaking the enemy’s resistance without fighting (i.e., The Art of War by Sun Tzu, Chapter 3). In that respect, our theory explains why some family firms can survive even when they do not achieve the same level of pecuniary returns as nonfamily firms.

Coase (1960) suggested that the right of exclusion is essential but not unlimited. Exclusion is vital because an inability to exclude could prevent owners from fully using their property, depreciate its transfer value (Alchian & Demsetz, 1972; Demsetz, 1967), and/or reduce the rents obtainable from it because of, for example, competitive imitation (Foss & Foss, 2005). Thus, the ability to exclude is a fundamental condition for property ownership (Merrill, 1998). Indeed, Demsetz (1967) contends that exclusion distinguishes private ownership from common ownership as defined above. In keeping with this distinction, we view business opportunities that have not been exploited as common property and base our theoretical arguments on how family owners exclude nonfamily agents from access to the rights associated with opportunities exploited by using the human and nonhuman assets of the family firm and on how family owners minimize externalities from the actions of other parties.

While exclusion has not always been the central construct, it has been widely recognized in the literature. For example, the strategic management literature argues that firms utilize isolating mechanisms (Lippman & Rumelt, 1982) to protect, limit, or prevent other firms from imitating the resource configurations that represent their strategy. This aligns with the logic of resource-based theorists who suggest that excluding competitors by developing valuable, rare, imperfectly imitable, and non-substitutable resources/capabilities is key to sustained competitive advantage (Barney, 1991, 1995). Moreover, scholars recognize that firms are often motivated to use strategic initiatives to create ex-ante and ex-post limits to competition (Peteraf, 1993) and prevent competitors from developing adequate responses (Andrevski & Miller, 2022; Chen & Hambrick, 1995). So, firms can intentionally target emerging or neglected market opportunities that competitors are not incentivized to capture because of the specificity or the magnitude of required investments or the lack of sufficient pecuniary returns (Chen & MacMillan, 1992).

Meanwhile, in the property rights literature, exclusion occupies a central position and can take multiple forms. Classic property rights theorists argue that exclusion stems from enforcing property rights that are multifaceted and partitionable (Alchian, 1977; Ostrom, 1990). The literature recognizes that firm decision-makers are expected to manage the partitioning of property rights so that the firm can discover and exploit new opportunities that generate and sustain superior performance (Kim & Mahoney, 2005, 2010). We theorize that family firms benefit from three bases of exclusion: goal-based, governance-based, and resource-based. These bases of exclusion constrain nonfamily firms by limiting the pecuniary returns associated with the opportunities (i.e., goal-based exclusion) or increasing the costs involved in accessing or appropriating the opportunities (i.e., governance- or resource-based exclusion).

Summary

In summary, to realize the benefits of property rights associated with business opportunities, family firms must, to the extent possible, identify opportunities that competitors are unable to access, exploit residual rights of claimancy and control in ways that restrict or limit opportunistic behavior and underinvestment in family resources, and deploy intangible family resources to prevent competitors from imitating the resources used to seize opportunities. Table 1 summarizes the key concepts and their definitions, and the following section applies those concepts to the development of a theory of the family firm.

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Table 1

Key Concepts and Definitions

Concept	Definition
Property	Tangible and intangible resources owned by specific parties (private property) or open to capture by parties lacking current ownership (common property) (Barzel, 1989; Kirzner, 1973).
Common property	Common property refers to a unique type of property to which the rights lack a clear owner and hence exclusion cannot be realized (Barzel, 1989; Demsetz, 1967). Market opportunities, for instance, can be theorized as common property before they are internalized by a firm, as they exist “out there” without being claimed by anyone.
Property rights	An owner’s right to use, receive income from, and transfer property as well as the right to exclude (or include) others from exercising those rights (Demsetz, 1967; Merrill, 1998).
Exclusion	Exclusion represents a firm’s efforts to build or take advantage of barriers that limit competitors’ likelihood of competing in the same marketplace for the same set of opportunities (Barzel, 1989). Exclusion can be achieved when benefits are reduced or costs are increased for other parties attempting to capture or appropriate property rights (Barzel, 1989; Foss & Foss, 2005; Kim & Mahoney, 2010).
Goal-based exclusion	Establishing ex-ante limits to competition by targeting market opportunities with pecuniary returns below the threshold typically expected by nonfamily firms (Chen & MacMillan, 1992) and nonpecuniary returns that are not valuable to nonfamily firms.
Resource-based exclusion	Attributes of resource bundles that create ex-post limits to competition by escalating the costs for competitors that attempt to capture, appropriate, or imitate them (Foss & Foss, 2005).
Governance-based exclusion	Governance mechanisms that allow family firm owners to enforce their property rights (Chi, 1994; Schulze & Zellweger, 2021) and prevent externalities.
Externality	Value consequences of actions taken by one party that affect other parties either positively or (more usually) negatively (Demsetz, 2002).

Goal-Based Exclusion

When markets are in equilibrium, risk-adjusted total returns are assumed to be equal for all opportunities (Fama & French 2004; Fama & Miller 1972). However, it has been demonstrated that assets can earn both pecuniary and nonpecuniary returns, meaning that in at least some instances, total returns can have both pecuniary (e.g., ROI, ROA) and nonpecuniary (e.g., reputation) components (Chua & Schnabel, 1986). This suggests that, in equilibrium, opportunities that provide nonpecuniary returns will have lower pecuniary returns than opportunities that do not provide nonpecuniary returns (Chua & Schnabel, 1986). In this respect, it has been recognized that family firms may derive various nonpecuniary returns, in particular FCN returns, from family ownership and control that are either not available or not as valuable to nonfamily firms (Zellweger et al., 2012) and have no market value outside of their value to the family. As mentioned above, in this article, we focus on family-centered nonpecuniary (FCN) returns that emanate from the affective benefits of family ownership and control of a firm, such as the ability to behave unilaterally and idiosyncratically, to act altruistically to family members, and to engage in transgenerational succession (Berrone, Cruz, & Gómez-Mejía, 2012; Chua et al., 1999; Gómez-Mejía et al., 2007; Schulze, Lubatkin, Dino, & Buchholtz, et al., 2001). Thus, as pointed out by Chua et al. (2018), to assess the overall performance of family firms, it may be necessary to account for these FCN returns, the accumulation of which leads to SEW, which is the stock of affective benefits associated with family control (Gómez-Mejía et al., 2007).

Nonpecuniary goals are likely to exist in family and nonfamily firms (cf. Cyert & March, 1963; Chrisman & Patel, 2012). As they are common to both, these goals generally do not differentiate family firms from nonfamily firms (Chua, Chrisman, De Massis, & Wang, 2018). However, FCN goals are not common to both and indeed only exist in family firms. Thus, as our theory is developed in a comparative sense, we intentionally focus on family-centered nonpecuniary (i.e., FCN) goals as a driver of the distinctiveness between family and nonfamily firms.

Scholars who study the differences between family and nonfamily firms have focused on variations in goals, because goals tend to be one of the key reasons for the differences in strategic behavior of family and nonfamily firms (e.g., Duran, Kammerlander, van Essen, & Zellweger, 2016; Patel & Fiet, 2011; Skorodziyevskiy, Chandler, Chrisman, Daspit, & Petrenko, 2024; Skorodziyevskiy, Sherlock, Su, Chrisman, & Dibrell, 2024). For example, scholars argue that family firms are more reluctant than nonfamily firms to engage in strategic change in some instances, and more willing in others, because of the concerns for the nonpecuniary SEW endowments associated with firm ownership (e.g., Berrone et al., 2012; Chrisman & Patel 2012; Gómez-Mejía et al., 2007). Thus, studies acknowledge that FCN goals and returns (i.e., SEW) are important in family firm decision-making, acting in a way that is similar to the endowment effect (Gómez-Mejía et al., 2007; Zellweger et al., 2012) by increasing the value of the firm for the family through ownership rather than market value or price.

Because achieving FCN goals creates value for the family, family firms may engage in trade-offs between achieving pecuniary and FCN goals (Chrisman, Memili, & Misra, 2014). In fact, the literature suggests that this trade-off or “family effect” may lead family firms to accept lower pecuniary returns on their investment than nonfamily firms (Chua et al., 2018; Osakwe et al., 2022; Zellweger, 2007). Based on this reasoning, we argue that since family firms value FCN returns more than nonfamily firms (cf. Berrone et al., 2012; Gómez-Mejía et al., 2007), they may be willing to accept lower pecuniary returns if an investment also yields FCN returns. As suggested above, we recognize that all firms have nonpecuniary goals that can yield nonpecuniary returns for stakeholders (Cyert & March, 1963), but we assume that nonpecuniary goals other than FCN goals, which are exclusive to family firms, are, on average, equally important to family and nonfamily firms, essentially canceling each other out. Thus, consistent with the family firm literature, we focus only on pecuniary and FCN goals and assume family firms pursue pecuniary and FCN goals while nonfamily firms pursue only pecuniary goals (Chua et al., 2018). For the sake of parsimony, and because of their assumed equal importance, we do not discuss further the nonpecuniary goals or returns that can exist for both family and nonfamily firms, including those associated with the private benefits of control as discussed in the finance literature (e.g., Jensen & Meckling, 1976; Morck, Shleifer, & Vishny, 1988) or with social responsibility as discussed in the management literature (e.g., Carroll, 1979). Using this basis for comparison in our theorizing, we assume the total returns of family firms equal the sum of their pecuniary and FCN returns, whereas the total returns of nonfamily firms equal their pecuniary returns only. Furthermore, we also assume that family and nonfamily firms benefit from achieving goals and that, on average, both types of firms can attain similar levels of benefits from goal achievement, which we equate with their required return. We illustrate this simple equality assumption below using NFF to denote nonfamily firms and FF to denote family firms:

T o t a l R e q u i r e d R e t u r n N F F = T o t a l R e q u i r e d R e t u r n F F

(1)

If, as we assume, nonfamily firms are more likely to pursue pecuniary goals in comparison to family firms (e.g., Burkart, Panunzi, & Shleifer, 2003; Chua et al., 1999, 2018; Gómez-Mejía et al., 2007), they should be expected to focus on opportunities that lead to the achievement of pecuniary goals because their total required returns, which are analogous to the cost of capital, come entirely from the achievement of pecuniary goals. Thus:

T o t a l R e q u i r e d R e t u r n N F F = R e q u i r e d P e c u n i a r y R e t u r n N F F

(2)

On the other hand, family firms are assumed to seek both pecuniary and FCN goals. When the returns attached to the achievement of both types of goals are valued, as is the case in most family firms, an ability and willingness to trade off pecuniary returns for FCN returns, or vice versa, to achieve required total returns exists, although there are limits to the trade-off because family firms must still achieve a minimum level of pecuniary returns to survive (cf., Chua et al., 2018; Chua & Schnabel, 1986; Osakwe et al., 2022). Thus,

T o t a l R e q u i r e d R e t u r n F F = R e q u i r e d P e c u n i a r y R e t u r n F F + R e q u i r e d F C N R e t u r n F F

(3)

If we then substitute Equations (2) and (3) into equation (1) we obtain the following equation:

R e q u i r e d P e c u n i a r y R e t u r n F F + R e q u i r e d F C N R e t u r n F F = R e q u i r e d P e c u n i a r y R e t u r n N F F

(4)

Again, assuming both types of firms gain similar levels of benefits from goal achievement, Equation (4) is equivalent to:

R e q u i r e d P e c u n i a r y R e t u r n F F = R e q u i r e d P e c u n i a r y R e t u r n N F F − R e q u i r e d F C N R e t u r n F F

(5)

Therefore, since FCN returns can be a valuable substitute for pecuniary returns (Chua & Schnabel, 1986; Osakwe et al., 2022), the required pecuniary returns (or cost of capital) for family firms will be less than the required pecuniary returns for nonfamily firms as long as required FCN returns of family firms are greater than zero. In this case:

R e q u i r e d P e c u n i a r y R e t u r n F F < R e q u i r e d P e c u n i a r y R e t u r n N F F

(6)

Schumpeter (1934) notes that it is possible to order opportunities from high to low based on the pecuniary returns they can generate. Thus, even though family firms are likely to require some threshold levels of both pecuniary and FCN returns (Chua et al., 2018), they should be able to select from a wider pool of potential opportunities than nonfamily firms that cannot trade off one type of return for the other to achieve their goals. In other words, compared to family firms, nonfamily firms will more likely be attracted to opportunities that yield pecuniary returns that meet the requirements of their pecuniary goals because the pecuniary returns of nonfamily firms are the sole determinants of their total required returns. Assuming that the total required returns of family and nonfamily firms are comparable, the minimum pecuniary returns required by family firms must be lower because they obtain FCN returns as well. This expands the set of opportunities available to family firms compared to nonfamily firms. Unless nonfamily firms are willing to accept lower total returns from competition than family firms, they will be effectively excluded from the pursuit of opportunities that have expected pecuniary returns that fail to meet their required total returns. Put differently, as suggested in the following proposition, one of the reasons family firms are more prevalent than nonfamily firms is that their FCN goals open opportunities for them from which nonfamily firms are largely excluded.

Similarly, FCN goals can provide family firms with access to long-term opportunities from which nonfamily firms are economically excluded (Lumpkin & Brigham, 2011). We treat long-term opportunities separately because perhaps the most important FCN goal, and indeed a defining feature of family firms, is transgenerational sustainability, a vision to keep the firm under family ownership and control across multiple generations of the family (Chua et al., 1999). Thus, considering long-term opportunities is crucial for our theory. In comparison, nonfamily firms are likely to focus more on shareholder wealth maximization and short-term opportunities. Owners and managers of any type of firm have a finite lifespan, and the concern of nonfamily owners and managers for future generations of unrelated owners and managers is likely to be less than in family firms where future owners and managers are usually related by blood to current owners and managers. If the time horizon of nonfamily firms is shorter than it is for family firms, the discount rates of nonfamily firms for evaluating the value of long-term opportunities should be higher. If family firms attach lower discount rates to the pecuniary returns of long-term opportunities, the range of projects that meet the cost of capital of family firms should be wider than the range of projects that meet the cost of capital of nonfamily firms.

The advantage of family firms over nonfamily firms in the pool of feasible opportunities does not necessarily mean that family firms will be more long-term oriented than nonfamily firms (Chua, Chrisman, Wang, & Wu, 2025). However, family firms will have more long-term opportunities available, which directly address family firms’ desire for transgenerational sustainability (Chua et al., 1999). Furthermore, family firms are less likely to face endgame scenarios in their search for opportunities (Patel & Fiet, 2011) because familial relationships among current and future owners and managers are expected to result in altruistic behavior toward successors, even though altruism may not be reciprocated (Eddleston, Kellermanns, & Sarathy, 2008; Schulze et al., 2001). There is also evidence that discount rates are lower when decisions affect people with close relationships to the decision-maker (Jones & Rachlin, 2006; Rong, Grijalva, Lusk, & Shaw, 2019). This suggests that family firms can gain exclusionary benefits if they have a wider range of long-term opportunities than nonfamily firms. This also suggests that, all else equal, FCN goals can reduce the cost of capital, enabling family firms to survive longer. Thus, we propose:

Although family firms may invest in opportunities from which nonfamily firms are excluded, family firms may also pursue opportunities that offer expected pecuniary returns that are high enough to attract competition from nonfamily firms. In these instances, the ability of family firms to trade off pecuniary and FCN returns to achieve their goals will not protect them from nonfamily competitors. Yet, when the expected returns associated with an opportunity exceed the total required pecuniary returns of family firms, slack can be created, which will not exist, to the same extent, for nonfamily firms that benefit only from achieving pecuniary goals.

As explained earlier, the achievement of FCN goals allows family firms to attain total returns that exceed their pecuniary returns. But if the expected returns, stemming from an opportunity, exceed the goal threshold, it may be possible for family firms to invest the excess pecuniary returns in other activities. Nonfamily firms cannot fully duplicate these investments because they require a higher level of pecuniary returns to achieve the same level of total returns and gain no compensatory benefit from FCN returns. So, if the required pecuniary returns of family firms are lower than the required pecuniary returns of nonfamily firms (Equation 6), and if the expected returns from an opportunity meet the required returns of nonfamily firms, then family firms will be able to obtain the returns required to achieve pecuniary goals and have slack resources available to invest as shown in Equation (7) below.

S l a c k F F = R e q u i r e d P e c u n i a r y R e t u r n N F F − R e q u i r e d P e c u n i a r y R e t u r n F F

(7)

As suggested by Equation (4) above, these investments can be made in resources that generate either pecuniary returns or nonpecuniary benefits with short-term or long-term payback periods.

In family firms, the most frequent investments tend to be in family human capital (Sirmon & Hitt, 2003). Even when family managers are less capable than individuals from outside the family, investing in family human capital contributes to family firms’ FCN goals as well as the ability to protect their property rights. First, as part of the family system, the human capital of family managers is more difficult for other firms to appropriate compared to the human capital of nonfamily managers working for either family or nonfamily firms. Put differently, family managers are subject to the “family handcuff” owing to their family membership (Gómez-Mejía, Larraza-Kintana, & Makri, 2003: 227). Second, increasing the human capital of family management strengthens the family’s control over nonhuman assets through their expertise in the use of those assets, which helps secure the loyalty of other nonfamily and family employees whose work depends on the use of those assets (Hart & Moore, 1990). Third, investing in family managers can reduce conflicts of interest and information asymmetries, thereby decreasing the need for costly formal control mechanisms (Pollak, 1985). Fourth, family managers can generate higher FCN returns, and at a lower cost, than the additional net pecuniary returns that can be generated by hiring more capable nonfamily managers (Chrisman et al., 2014). Therefore, investing in the human capital of family managers can generate higher total returns (pecuniary + FCN) than investing in the human capital of nonfamily managers. The higher return of this investment may be compounded by an increase in the bonding and bridging social capital of family owners and managers, further protecting family firms’ property rights from expropriation and enabling the capture of additional opportunities (Sirmon & Hitt, 2003).

A family firm might achieve higher total returns by hiring family managers who generate higher FCN returns and lower pecuniary returns than by hiring nonfamily managers who generate higher pecuniary returns but no FCN returns (Chrisman et al., 2014). Ultimately, investing slack pecuniary returns in activities that yield FCN returns could provide exclusionary benefits, making the property rights of family firms more difficult for competitors to appropriate. Hence, goal-based exclusion can enhance governance- and resource-based exclusion, creating complementarities (Hart & Moore, 1990) that are difficult for nonfamily firms to duplicate.

Governance-Based Exclusion

Although investor-ownership is the most widely known form of firm governance, firms may also be owned by their customers or suppliers, as well as the workers who provide the firm with the labor necessary for its productivity (Hansmann, 1988). Family firms represent a hybrid type of governance in which the family, particularly in the early stages of development, represents the firm’s primary source of both capital and labor. As we shall discuss below, the hybrid nature of family firms provides advantages by reducing the possibility of externalities associated with opportunism but can also create disadvantages over time if the interests of the providers of capital and the providers of labor begin to diverge.

In family firms, governance emanates from the owning family’s personalized control and particularistic pursuit of its goals (Carney, 2005). These characteristics provide family firms with the power and legitimacy to make decisions, often without recourse to the wishes of other shareholders or stakeholders. From a property rights perspective, this means that the family’s involvement in governance is a necessary condition for the pursuit of FCN goals or the use of family resources. Conversely, the ability to pursue FCN goals and use family resources tends to increase the value of family ownership (Zellweger et al., 2012), making owners more likely to keep the firm in the family. This is perhaps the greatest strength and weakness of family firms. Family involvement that combines ownership and control, potentially minimizes agency costs and maximizes commitment (Pollak, 1985). However, it also exposes family firms to the potential for principal-principal conflicts if the pecuniary and nonpecuniary interests of family members begin to diverge or personal relationships begin to deteriorate (cf., Eddleston & Kellermanns, 2007; Hansmann, 1988) because of family members’ dual stakes in ownership and management. This problem could be more pronounced in family firms with multiple generations in the business or those operated by multiple families (Chrisman, Madison, & Kim, 2021).

Another type of conflict can occur if family owners succumb to bifurcation bias, a condition that exists when family managers are treated as de facto stewards and nonfamily managers are treated as de facto agents (Verbeke & Kano, 2012). Bifurcation bias can lead to a breakdown in relationships among family firm members and create fault lines between family and nonfamily managers. Bifurcation bias can create managerial disadvantages for family firms if it leads to the avoidance of hiring qualified nonfamily managers or if it creates disincentives for nonmanagers that lead to opportunistic behavior such as shirking (Alchian & Demsetz, 1972). Furthermore, as suggested above, bifurcation bias can increase the risk of underinvestment by nonfamily managers.

Simply put, there are two types of conflicts that damage collective decision-making and create negative externalities in family firms. The first one is of a personal nature either among family members or between family and nonfamily members. The second one is about the priorities between pecuniary and FCN goals and how to achieve them. Both types of conflicts can reduce pecuniary or FCN returns, and often, the two types of conflicts overlap.

Resource-Based Exclusion

Resources can be viewed as bundles of property rights (Foss & Foss, 2005) in that property rights are sanctioned behaviors among decision-makers in the use of potentially valuable resources (Kim & Mahoney, 2010). Similarly, the family business literature recognizes that family-owned and -managed firms may possess valuable family-endowed resources that are rare and difficult to imitate (Habbershon, Williams, & MacMillan, 2003; Sirmon & Hitt, 2003). Using the terminology of property rights theory, family owners can capture a higher level of economic rents from family resources because competitors are largely excluded from access to those property rights (Demsetz, 1967). Unlike goal-based exclusion, which is likely to be important when a family firm targets market opportunities with low pecuniary returns, resource-based exclusion is more likely to be important when a family firm’s resources provide the basis for competitive advantages. Resource-based exclusion is realized when it is costly for competitors to either acquire the resources from factor markets or imitate them. Certain types of family resources, such as family-based social capital, are non-tradable (e.g., Dierickx & Cool, 1989; Gedajlovic & Carney, 2010) and thus are not likely to be obtained by nonfamily firms. In fact, there is simply no factor market in which organizations can bid for family-based social capital (cf. Barney, 1986). In addition, the knowledge resources embedded in family social capital and human capital, are imperfectly mobile, meaning that nonfamily firms would encounter difficulty in acquiring these resources from family firms or duplicating them (cf. Peteraf, 1993). The imperfect mobility of family resources arises from their knowledge-based and socially complex nature, which develops through family members’ long-term engagements in the firm and is embodied in the bonding of family members in a family firm through familial relationships. To convince family members to leave the family firms, nonfamily firms would need to compensate them pecuniarily for their loss of SEW (Berrone et al., 2012). But such compensation may exceed the economic value of family members in the external job market (Chrisman et al., 2014), meaning that nonfamily firms may be unwilling (or unable) to pay such compensation. Taken together, nonfamily firms may be excluded from obtaining certain types of family resources because the value of these resources is firm-specific, meaning that these resources are less valuable and/or more costly to acquire for nonfamily firms than family firms, and that at least part of the value of family-based resources is lost once the family member is separated from the family (Zellweger et al., 2012).

Furthermore, knowledge resources in family firms are often tacit, imperfectly imitable (e.g., Habbershon et al., 2003), and associated with family interactions (Arregle, Hitt, Sirmon, & Very, 2007). These characteristics mean that nonfamily firms face uncertainty and difficulty replicating these resources (Gedajlovic & Carney, 2010). Given that some tacit knowledge is only shared among family members, nonfamily competitors might not understand the kind of knowledge that is responsible for superior performance in the family firm or may not know how it is used. Indeed, owing to causal ambiguity, even family owners may fail to realize the source of their competitive advantages or disadvantages. If so, family owners’ biases toward family-based heritage assets (Verbeke & Kano, 2012) may have hidden benefits as well as costs.

In addition, tacit knowledge, which refers to learned skills and path-dependent organization routines (Ambrosini & Bowman, 2001), is often created, accumulated, and shared since childhood by family members and reinforced by their participation in business activities from an early age (Cabrera-Suarez, De Saa-Perez, & Garcia-Almedia, 2001; Sirmon & Hitt, 2003). Thus, unless nonfamily firms can replicate the early life and growth experiences of the owning family, they are excluded from fully replicating the tacit knowledge generated in a family firm. Furthermore, there are apt to be many different and interrelated types of tacit knowledge linked together in a complex family system, which further increases the difficulty of replication.

The value-creating function of family resources partially relies upon other family resources, and the overall configuration of family-based resources is indivisible in the sense that the economic value of the family firm will rapidly depreciate if a subset of the collection of family resources is removed. For example, two unique types of family resources are patient capital and survivability capital. Patient capital refers to financial resources that are “invested without the threat of liquidation for long periods,” while survivability capital represents pooled financial, human, and capital assets that “family members are willing to loan, contribute, or share for the benefit of the family business” (Sirmon & Hitt, 2003: 343). Patient capital and survivability capital are indivisible from social capital because neither can be obtained unless the family’s social capital is strong. Similarly, social capital is less likely to endure if family members are unwilling to provide the family firm with patient and survivability capital.

Thus, in family firms, family-endowed resources are indivisible such that they are more valuable collectively inside the family firm than separately outside the family firm (cf. Chi, 1994; Hart & Moore, 1990). The complementarity of family resources (cf. Grossman & Hart, 1986) largely stems from the fact that family members often share a converging understanding of the business and often have high trust in each other (Muñoz-Bullón, Sanchez-Bueno, & De Massis, 2020). Trust facilitates alignment of interests and collective decision-making, which Hansmann (1988) suggests are essential for effective ownership. As such, some of the resources found in family firms are likely to be less valuable to nonfamily firms, which generally lack comparable levels of mutual understanding and trust amongst owners, managers, and employees. If family-endowed resources are less valuable in a nonfamily firm context, the incentive for nonfamily firms to appropriate those resources is diminished. In sum, some family resources are non-tradable, imperfectly mobile, imperfectly imitable, and indivisible, all of which helps exclude nonfamily firms from accessing, obtaining, or using these resources to imitate family firms. Thus, we propose:

Incomplete Exclusion: The Importance of Goals, Governance, and Resources of Family Firms

The discussion thus far is based on an underlying assumption that entrepreneurs will often choose the family form of organization over the nonfamily form because they can (1) pursue opportunities that have pecuniary returns that are lower than those acceptable to nonfamily firms but offer long-term FCN returns that some entrepreneurs will find attractive, (2) exploit a system of family governance characterized by close family relationships and strong residual rights of claimancy and control that can reduce opportunism and underinvestment, and (3) use non-tradable, imperfectly mobile, inimitable, and indivisible family resources that are difficult to duplicate. All three features directly relate to the multi-generational aspect of family involvement in business. But it is also possible that some family firms might lack or lose some of these exclusionary benefits over time. Below, we discuss incomplete combinations of goals, governance, and resources and explain why organizations with incomplete combinations of these characteristics may be unstable and less likely to continue to compete as family firms in the long-term or, in some cases, survive as firms.

Limits to the Scale and Scope of Family Firms

From a property rights perspective, and in keeping with the requirements of a theory of the firm, goals, governance, and resources help explain the scale and scope of family firms. Indeed, these aspects of a theory of the family firm have frequently appeared in the literature that discusses how SEW endowments influence strategic change in family firms (e.g., Chrisman & Patel, 2012; Gómez-Mejía et al., 2007; Gómez-Mejía, Makri, & Larraza-Kintana, 2010). The FCN goals of family firms require that the family retains ownership and control of the firm’s property rights, a situation that does not exist in nonfamily firms. This limits the extent to which family firms can increase their scale and scope in comparison to nonfamily firms because, at some point, expansion requires that capital be obtained from external sources, and professional nonfamily managers hired. In both instances, family firm owners must sacrifice some amount of their rights of claimancy or control to other investors to grow beyond the level possible using only resources obtained directly from the firm’s internal cash flows and the family. Many family firms are unwilling to grow beyond this point because to do so reduces their FCN returns and strains the capacity of the governance system (Stewart & Hitt, 2012), which can potentially lead to principal-principal agency problems between family and nonfamily owners. Documented examples of family firms with particularly serious principal-principal conflicts include Parmalat in Italy (Enriques & Volpin, 2007) and SARL Peronnet in France (Johnson, La Porta, Lopez-de-Silanes, & Shleifer, 2000).

In contexts where the institutional environment offers weak property rights protection, hiring nonfamily managers can jeopardize the use rights and pecuniary returns of family owners (e.g., Ilias, 2006). Even among larger family firms that have already traded some of their FCN returns for pecuniary returns to grow, the literature shows that there can be limits to their willingness to sacrifice additional FCN returns to continue to grow and develop (e.g., Chrisman & Patel, 2012; Gómez-Mejía et al., 2007). Indeed, research suggests that family firms of all size classes are smaller than comparable nonfamily firms (e.g., Anderson & Reeb, 2003; Cromie, Stephenson, & Monteith, 1995; Kotey, 2005; Villalonga & Amit, 2006).

Another constraint on the scale and scope of family firms compared to nonfamily firms is strong attachments to the heritage resources developed from the initial investments of the entrepreneurs who founded the firm (Sharma & Manikutty, 2005; Verbeke & Kano, 2012). Growth often involves strategic change (Skorodziyevskiy, Sherlock, et al., 2024), which can entail investments in new assets and divestments of old assets. However, heritage resources may be of special significance to family owners if they generate FCN returns. Furthermore, because family involvement is indispensable to the management of heritage assets, the use of these assets may reinforce the property rights of family owners and reduce the probability that successors will underinvest in their human capital because of fear of holdup (cf. Hart & Moore, 1990). Consequently, family firms will often be reluctant to pursue opportunities that require divestment of heritage assets because this will potentially be inconsistent with the family’s goals, governance, and resources. Moreover, as noted above, if heritage assets are socially complex and tied to the family’s SEW, their value may be underestimated because the FCN value of heritage assets may have a synergistic relationship with their pecuniary value. Thus, the desire to maintain the ownership rights associated with family resources represents a primary factor that limits the scale and scope of family firms in comparison to nonfamily firms.

Opportunities Family Firms Exploit

Studies show that family firms of all sizes (e.g., SMEs, large firms) and scopes can be found and even flourish in virtually any industry and institutional environment (e.g., Gedajlovic, Carney, Chrisman, & Kellermanns, 2012; La Porta et al., 1999; Skorodziyevskiy, Sherlock, et al., 2024; Villalonga & Amit, 2006). This may be because the goals, governance, and resources of family firms provide the advantages (and disadvantages) of both investor-owned and worker-owned firms (cf. Hansmann, 1988). However, it is useful to briefly elaborate on the types of opportunities that are particularly apt to provide family firms with the exclusionary advantages that we have enumerated. These include opportunities that provide lower expected pecuniary returns, higher expected FCN returns, and greater ability to trade off pecuniary and FCN returns, and that enable family firms to maximize the benefits of their governance structure and resources.

First, as Carney (2005) discusses, family firms have advantages in pursuing opportunities characterized by scarcity, low barriers to entry, mature technologies, and high labor intensity. In these environments, pecuniary returns generally approach those associated with perfect competition and thus have lower value to nonfamily firms that gain few, if any, offsetting nonpecuniary benefits. Such environments are especially prevalent in emerging economies (Skorodziyevskiy, 2025), where firms engaging in low-wage production of commodities tend to be located.

Second, in some industries, the very nature of the goods and services themselves provides nonpecuniary returns such as glamour, status, or reputation to owners. Demsetz and Lehn (1985) suggest that sports (e.g., Dallas Cowboys, football; Manchester United, soccer; New York Yankees, baseball) and media businesses (e.g., Fox News) are two prominent examples (see also Burkart et al., 2003). To this list, we would add businesses devoted to collectibles, including art (e.g., Hauser & Wirth, Switzerland) and wine (e.g., E. & J. Gallo Winery, US), which provide nonpecuniary returns through the possession, preservation, and cultivation of the objects themselves, even though the owners may act only as temporary caretakers (Chua & Schnabel, 1986; Le Breton-Miller & Miller, 2015).

Finally, nonpecuniary returns and family resource advantages are potentially high in industries that offer owners unusual potential to involve family members in ways that achieve their goals for transgenerational sustainability (Chua et al., 1999). For example, family firms have traditionally dominated agriculture (e.g., Cargill, Inc., US) and craft (e.g., Fabindia, India) businesses (e.g., Hansmann, 1988; Le Breton-Miller & Miller, 2015; Pollak, 1985), which require long-term training and mentoring to inculcate tacit knowledge and build commitment through master and apprentice relationships. At the same time, family firms benefit from a less expensive and more reliable family labor force, which helps offset the low pecuniary returns that are characteristics of many of these opportunities. This allows family firms to increase not only their scale but also their scope.

The importance of FCN returns associated with family social capital and altruism is likely more pronounced in businesses when property rights protection is made more complicated and costly by difficulties in metering productivity. From a property rights view, metering productivity (Alchian & Demsetz, 1972) is directly related to the residual right of claimancy, as challenges in monitoring might enhance the importance of informal governance mechanisms often used in family firms (Chi, 1994). Consistent with our discussion of governance-based exclusion, when it is difficult to monitor business activities directly, involving family members in the firm becomes more advantageous because it reduces the possibility of opportunistic behavior. For example, family firms tend to be prevalent in retail and service industries in which the measurement of productivity must account for both low product and service standardization and the simultaneity of production and consumption (Fang, Memili, Chrisman, & Penney, 2017).

Like goal- or governance-based exclusion, resource-based exclusion might also vary by industrial or institutional context, which could be responsible for the higher importance of certain types of resources. As family resources are likely to be non-tradable, imperfectly mobile, inimitable, and indivisible, their value is expected to be more pronounced in family firms than similar resources in nonfamily firms. Numerous scholars (e.g., Carney, 2005; Gedajlovic & Carney, 2010; Pearson, Carr, & Shaw, 2008) suggest that, unlike nonfamily firms, family firms might have a unique advantage in obtaining and utilizing family social capital, which facilitates the creation and development of family human capital (cf. Coleman, 1988). Thus, in contexts where privileged access to exclusive networks (Lester & Cannella, 2006), “handshake deals” with business partners (Steier, 2001), and mutual adaptations in business relationships (Bertrand & Schoar, 2006) are valuable, family firms might obtain an advantage over nonfamily firms. In addition, Gedajlovic and Carney (2010) suggest that in contexts where tacit knowledge is important, family firms might have an advantage and thus be more prevalent than nonfamily firms. On the other hand, because the family is limited in size and the intellectual capacity of its members may, over time, regress to the mean, family firms may find long-term survival difficult in contexts where rare and unusual abilities or complex technologies are required (Pollak, 1985). The fate of Wang Laboratories after the ascension of An Wang’s sons and his subsequent death illustrates this dilemma (Kenney, 1992). Therefore, we propose the following:

Going Beyond Existing Theories in Family Business Literature

Existing family business theories tend to emphasize distinct aspects of family involvement using SEW, agency theory, or the resource-based view (RBV). By contrast, we use property rights to integrate all three aspects, providing a more holistic view of the advantages and disadvantages of family firms. We base our arguments primarily on the concept of exclusion (Merrill, 1998) and secondarily on the concept of externalities (Coase, 1960). Our conceptualization of exclusion suggests that organizations can prevent competitors from appropriating their property rights by developing and exploiting barriers that reduce the returns or increase the costs of imitation.

Disadvantages of Family Business

Although we mainly focus on the advantages of the family form of organization, our theory also sheds light, at least indirectly, on the disadvantages faced by family firms. According to our framework, these disadvantages may arise from three key aspects. First, some family firms may struggle to maintain exclusion because their goals are weak or ambiguous, their governance is ineffective owing to excessively strict, lax, or biased policies, or their family-based financial or managerial resources are inadequate. In such cases, family firms may lose the essence of their “familiness” (Habbershon et al., 2003) and fail to behave or perform as predicted. However, we also contend that disadvantages often arise not from a single factor but from misalignment among multiple factors related to the goals, governance, and resources of family firms. Second, disadvantages may arise when family firms attempt to grow beyond their optimal scale and scope, requiring the owning family to include nonfamily shareholders or debtholders and hire nonfamily managers before their governance structure is capable of handling them. Finally, certain disadvantages may emerge from specific characteristics of the family or the environment such as when internal conflicts among family members are present or special skills are needed for growth or innovation. Together, these aspects highlight the limitations of our propositions, delineate the boundaries of our theory, and suggest potential avenues for future research that could further inform family business scholars.

To further illustrate how our theory can explain the disadvantages of family businesses, we focus on two examples discussed in the literature. First, nepotism is a common issue in family firms, which occurs when family members are promoted regardless of their qualifications. Although not without potential benefits (Jaskiewicz et al., 2013), nepotism is more likely to represent a direct violation of governance-based exclusion, as it allows certain family members to seek returns disproportionate to the resources they contribute to the business. Nepotism may render monitoring functions and relational contracting ineffective and distort the human capital investments of family members and nonfamily members.

Second, principal-principal agency problems may arise when the owning family exploits nonfamily shareholders by diverting resources to family members or by otherwise pursuing objectives that benefit family owners at the expense of nonfamily owners. It can also result from a violation of goal-based exclusion when coalitions of family owners that place different weights on pecuniary and nonpecuniary goals emerge. These two forms of the principal-principal problem, which are not necessarily mutually exclusive, are likely to invoke very different and unique types of challenges for family firms.

Nonfamily Management in Family Firms

Limitations in the family labor pool may force some family firms to hire nonfamily managers if they wish to grow (e.g., Carney, 2005; Verbeke & Kano, 2012). According to our theory, nonfamily managers can be conceptualized as agents holding an “incomplete” bundle of control and claimancy rights compared to family agents because the exclusions created by nonfamily managers are no different from those found in nonfamily firms. As a result, nonfamily managers may advocate for opportunities with risk-return properties that meet their own interests rather than those of family owners, potentially undermining the foundation of goal-based exclusion. These conflicting interests lead to externalities when the achievement of the goals of nonfamily managers reduces the ability of family owners and managers to achieve their goals (and vice versa). For example, over the past two decades several nonfamily senior managers at Samsung, a large family-controlled chaebol, have been implicated in bribery, embezzlement, and political rent-seeking schemes, actions that clashed with the longer-term vision and more conservative risk posture held by the controlling family.

Furthermore, nonfamily managers lack full control over properties endowed by the family system, leading to weaker resource-based exclusion and the erosion of governance-based exclusion (Chrisman et al., 2014; Chua et al., 2009). Thus, the impact of nonfamily management may be mixed because of the FCN goals and relational contracts frequently employed by family firms. Indeed, research suggests that nonfamily managers only have a positive impact on family firms with below-average performance (Fang, Chrisman, Daspit, & Madison, 2022).

A related question is whether there are ways to inculcate nonfamily members into a family firm such that the firm retains its familiness while facilitating growth (e.g., Lee, Lim, & Lim, 2003). Theoretically, this question relates to whether family firms with nonfamily managers can retain some aspects of the exclusionary benefits typically associated with family management. For this to occur, nonfamily members must be able to function as quasi-family members. In fact, several studies have shown that in certain cultural contexts, this is achieved by fully integrating nonfamily members into the family. For example, in Japan, nonfamily managers are transformed into family managers through arranged marriage or adult adoption (Mehrotra, Morck, Shim, & Wiwiattanakantang, 2011, 2013).

Additionally, our discussion in the section on Incomplete Exclusions highlights that family firms can professionalize but sometimes at the risk of evolving into organizational forms that deviate from our understanding of a family business. Put differently, the firm may continue to exist and even prosper, but over time, it may no longer be a “family business.” From a practical perspective, the key lies in what the family intends to achieve through the business. If the family focuses on superior performance, then governance- and resource-based exclusion may be enough. But if the family intends to maintain the essence of the family business, reflected by the embodiment of the three types of exclusions, then relying too much on nonfamily management and isolating the family from the business may not be effective.