Journal of Family Business Strategy xxx (xxxx) xxx–xxx

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Journal of Family Business Strategy

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Family firm R&D investments in the 2007–2009 great recession

⁎
Xian Suna, Soo-Hoon Leeb, Phillip H. Phana,
a
Carey Business School, Johns Hopkins University, 100 International Drive, Baltimore, MD 21202, United States
b
Strome College of Business, Old Dominion University, 2101 Constant Hall, Norfolk, VA 23508, United States

A R T I C LE I N FO A B S T R A C T

Keywords: Investments in research and development (R&D) are essential to innovation, long-term value creation, and
Family enterprise wealth accumulation. Since family wealth and firm performance are tightly coupled in family firms, how they
2007 recession invest during times of economic distress matters to their wealth accumulation over the generations. In this study,
R&D expenditures we examined the impact of the 2007 Great Recession on the R&D decisions of publicly-listed family firms in the
Crisis investments
United States. We compared family and non-family U.S. firms, excluding those in the financial sector, with total
Innovation
assets greater than $1 million for the period 1992 to 2015. Using the behavioral agency model, we hypothesized
Firm performance
Financial constraints that among firms that were not financially constrained during the economic crisis, family firms were more likely
Accounting ratios than non-family firms to invest in R&D. The results support this hypothesis, lending credence to the notion that
family firms undertook more risks when performance is below their long-term aspirations during economic
downturns.

1. Introduction
In the United States, family firms have a significant impact in the
economy, as they contribute 64% of the GDP, account for 62% of
total labor, and represent 78% of new job creation (Astrachan &
Shanker, 2003). Understanding how they respond to economic
downturns differently from non-family firms will add to our un-
derstanding of their unique role in building a resilient economy.
Family firms are defined as those owned and operated by one or
more members of a household who are related by blood, marriage,
or adoption (Miller, LeBreton Miller, Lester, & Canella, 2007,
LeBreton-Miller, Miller, & Lester, 2011; Zahra, Hayton, & Salvato,
2004). Compared to non-family firms, they have greater liberty to
make strategic decisions, which they do with the family in mind,
(Carney, 2005; Chua, Chrisman, & Sharma, 1999; Gómez-Mejía
et al., 2007). One strategic decision that firms make is in research
and development (R&D) investments. On the one hand, R&D in-
vestments can enhance a firm’s performance (Artz, Norman,
Hatfield, & Cardinal, 2010). On the other hand, R&D is a complex,
high-risk activity where returns are uncertain and the likelihood of
failure is high (Blazenko & Yeung, 2015). Findings on the differences
between family and non-family firms in R&D investments have been
mixed.
Some studies reported a negative relationship between family
ownership and R&D investment, suggesting that family firms dis-
courage risky long-term R&D investments (Chen & Hsu, 2009; Muñoz-
Bullón & Sanchez-Bueno, 2011; Munari, Oriani, & Sobrero, 2010).
Other studies, however, found a positive relationship (Craig & Dibrell,
2006; Gudmundson, Tower, & Hartman, 2003; Llach & Nordqvist,
2010). For family firms to invest its free cash flow in R&D implies less
dividend payout to family owners (Jensen, 1986). We infer that perhaps
family owners promote R&D investments only under certain conditions.
For example, Choi, Zahra, Yoshikawa, and Han, 2015 found that family
ownership was negatively related to R&D investments, but the re-
lationship became positive when growth opportunities were present.
Block (2012) found that although family ownership was negatively
related to R&D investments, family firms with active founders reported
higher levels of R&D investments. Thus, the extant literature hints at
external environmental contingencies and internal heterogeneity
within family firms to explain the mixed findings. Since R&D invest-
ments reflect both a risk-taking propensity and a decision on resource
utilization, any differences between family and non-family firms in this
strategic investment will highlight their differences in risk appetite
associated with long-term value creation.
Accordingly, in this study, we investigated the conditions under
which firms were likely to invest in R&D during an economic down-
turn. We focused on economic downturns since managers are forced
to consider trade-offs in their investment decisions. During economic
crises, firms face limits in their ability to access funds in the capital
markets for long-term investments, such as in R&D. Thus, they tend to
disinvest during crises. In fact, investing during an economic down-
turns represents an aggressive strategic posture (McDougall, Covin, &

⁎
Corresponding author.
E-mail addresses: Xian.sun@jhu.edu (X. Sun), slee@odu.edu (S.-H. Lee), pphan@jhu.edu (P.H. Phan).

https://doi.org/10.1016/j.jfbs.2018.02.004
Received 30 May 2017; Received in revised form 22 November 2017; Accepted 23 February 2018
1877-8585/ © 2018 Elsevier Ltd. All rights reserved.

Please cite this article as: Sun, X., Journal of Family Business Strategy (2018), https://doi.org/10.1016/j.jfbs.2018.02.004
X. Sun et al.
Herron, 1994). We compared the pattern of R&D investments be-
tween family and non-family firms from 1992 to 2015, which in-
cluded the 2007–2009 Great Recession. This Great Recession is the
most widespread and deeply felt economic crisis since the 1929–1939
Great Depression (Kashyap & Zingales, 2010; Leung & Horwitz,
2010). Exploring R&D investments during an economic crisis provides
an opportunity to compare the risk-taking behaviors of family and
non-family firms. The study design is likened to a natural experiment
in which a systemic shock is examined for its impact pre-post the
event between family and non-family firms. We surmise that family
firms that increase investments may be taking risks to promote their
socioemotional wealth (SEW), which are the non-financial goals, such
as to protect family social networks, fulfill family members’ socio-
emotional needs, or perpetuate a family dynasty (Gómez-Mejía,
Haynes, Nuñez-Nickel, Jacobson, & Moyano-Fuentes, 2007).
Most studies have assumed that family firms are homogeneous in
terms of their motivations and have neglected the sources of hetero-
geneity that drive differences in risk tolerance, including differences in
resource endowment, innovation goals, and the degree of family in-
volvement in the business (Chrisman, Chua, De Massis, Frattini, &
Wright, 2015). We exploit this heterogeneity by identifying the types of
family firms taking risks to invest in R&D during an economic recession.
This study contributes to the literature in the following ways. First, it
contrasts the differences between family and non-family firms making R
&D investments during an economic crisis. This study represents a first
attempt to understand the impact of the Great Recession on R&D in-
vestments. Second, it identifies the sources of family firm heterogeneity
influencing strategic decisions. It sheds light on the impact of economic
distress on R&D investments for different types of family firms. Finally,
since family firms are the dominant form of business in many econo-
mies, understanding how they make investments under conditions of
economic distress helps us better understand the resiliency of an
economy.
2. Theory and hypotheses
Family firms are governed and managed by a coalition of family
members. Managing a family firm often involves the exchange of re-
sources between the family and the firm. The family may support the
business by providing resources such as start-up capital, subsidized
labor in the form of members working for below market rate wages, and
managerial expertise; while the business supports the family with a
stream of cash flows, employment opportunities for family members,
and social status.
The management of resources in family firms is usually driven by a
view to protecting the family’s long-term financial returns because fa-
mily firms are the engine for the accumulation of family wealth
(Sharma, Chrisman, & Chua, 1997). The desire to perpetuate the busi-
ness for future generations and safeguard its continuation gen-
erationally often motivates family firms to manage their resources
conservatively (Chua et al., 1999; Gallo, Tàpies, & Cappuyns, 2004;
Zellweger, Nason, & Nordqvist, 2012). R&D investments may represent
one key difference between family and non-family firms in terms of
resource utilization, risk-taking, and long-term orientation.
Investments in R&D are essential to innovation, long-term value
creation, and wealth accumulation. However, R&D is unlikely to pay off
immediately and its returns are uncertain and highly skewed (Blazenko
& Yeung, 2015). Making R&D investments requires a risk-taking atti-
tude and a long-term horizon. In the next two sections, we explore the
behavioral agency model (BAM) and familiness as potential explana-
tions for the differences between family and non-family firms in their R
&D investments choices.
2.1. Behavioral agency model (BAM)
The BAM is a derivation of agency theory (Jensen & Meckling,
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Journal of Family Business Strategy xxx (xxxx) xxx–xxx
1976) and prospect theory (Kahneman & Tversky, 1979). It suggests
that the way executives frame a problem as a potential gain or loss,
relative to their aspirations or reference points, shapes their risk
preferences and risk-taking behaviors (Chrisman & Patel, 2012;
Wiseman & Gomez-Mejia, 1998). When events or choices are framed
positively, as a gain, individuals will be loss averse and select the
option that provides the surer, though smaller gain. However, when
faced with an event or choice that is framed negatively, as a loss,
individuals are likely to engage in more risk-taking behaviors to
improve the potential for a positive outcome, even though the ex-
pected value of the risky option may be lower. Gómez-Mejía et al.
(2007) argued that family firms are loss averse with respect to their
SEW. The consequences of loss aversion in SEW means that the fa-
mily firm would accept a significantly higher level of risk when
making strategic investments when faced with a potential loss of not
doing so.
R&D investment is a risky decision that firms make. Although R&D
investments create opportunities for renewal and growth, they increase
the firm’s risk because investments in R&D reduce the net amount of
resources available for other activities, and without the certainty of a
positive return (Blazenko & Yeung, 2015). Thus, firms will only invest
in R&D if they have the funds to do so. Since an economic downturn is a
negative event that increases bankruptcy risks, the BAM predicts that
family firms would engage in more risky activities when potential losses
to SEW or transgenerational family continuity is threatened by low firm
performance (Berrone, Cruz, & Gómez-Mejía, 2012; Gómez-Mejía et al.,
2007). ‘Loss framing’ creates a higher tolerance for more risks (Greve,
2003).
In the context of strategic investments, economic conditions re-
present the event that frames the choice sets confronting the deci-
sion maker. The attractiveness of R&D investments may differ in
different periods and its saliency could be extreme for family firms.
This is because a family firm’s ability to invest is often limited by the
availability of internally generated funds, since external sources of
capital, through borrowing or equity financing reduces the firm’s
SEW (Muñoz-Bullón & Sanchez-Bueno, 2011). External borrowing
reduces family control as bank covenants can impose fiscal restric-
tions on the borrower, while equity financing dilutes family own-
ership (Gallo et al., 2004). Thus, when firm performance is low,
which is more likely during an economic recession, the BAM predicts
that a loss aversion to SEW means that family firms would choose to
increase risky R&D investments, in the hopes of a future gain; more
so than non-family firms, that do not face SEW concerns. Thus, we
predict that:
Hypothesis 1. When funding is available during a crisis, family firms will
report higher levels of R&D investments relative to non-family firms.
Investment in R&D is essential for high-technology (hitech) firms
as innovation is critical to a sustained competitive advantage (Chen
& Hsu, 2009). Firms use technological innovation to nurture com-
petitive advantage and to overcome economic and financial down-
turns (Gudmundson, Hartman, & Tower, 1999). In particular, hitech
firms need to maintain a continuous, uninterrupted rate of R&D
investments for their innovations to accumulate technological,
product, or market capabilities (Córcoles, Triguero, & Cuerva,
2016). Where we might expect to see a greater separation in the
propensity to increase investments in R&D between family and non-
family firms would be in the population of non-hitech firms, where R
&D investment is more discretionary. Thus, BAM predicts that in an
economic downturn, non-hitech family firms would take more risks,
such as increase R&D investments for a chance of a positive out-
come, compared to non-family firms. We predict that while there are
no differences in the propensity to make R&D investments between
family and non-family hitech firms during an economic crisis, non-
hitech family firms will take more risk by investing in R&D. Thus, we
predict that:
X. Sun et al.
Hypothesis 2. When funding is available during a crisis, family non-hitech
firms will report higher levels of R&D investments relative to their non-family
counterparts.
2.2. The role of familiness
SEW can also be explained by the construct of ‘familiness’. Unlike
the BAM, which we apply to explain differences in R&D investments
between family and non-family firms due to the economic environ-
ment, we turn to familiness to explain the differences due to the
heterogeneity in the population of family firms. Familiness has been
defined, from the resource-based view (Habbershon, Williams, &
MacMillan, 2003), as the idiosyncratic bundle of internal resources
and capabilities arising from the interactions between the family,
firm, and family members as an integrated social system. It has also
been defined, from social capital theory (Pearson, Carr, & Shaw,
2008), as the bonding capital among members tied in a relationship
by a shared vision and purpose to achieve collective goals. Recurring
interactions and interdependence among them result in resilient
trust in the collective (Arregle, Hitt, Sirmon, & Very, 2007). Also,
obligations and identification to the collective result in a focus on
the collective’s goals, which minimizes opportunistic behaviors
(Pearson et al., 2008). Familiness is associated with non-economic
performance outcomes, such as the preservation of family ties or
transgenerational value (Chrisman, Chua, & Litz, 2003). In sum,
familiness contributes to SEW, strengthens cohesion and facilitates
stewardship behaviors (Lee, Phan, & Ding, 2016), which lowers
expropriation risks in family more than non-family firms. The degree
of familiness depends on the degree of family involvement and level
of enduring interactions in the firm (Chrisman et al., 2003).
Hence, the management team in family firms that are influenced
by familiness will display more stable, positive, and effective be-
havioral dynamics related to cohesion and consensus, compared to
non-family firms (Ensley & Pearson, 2005). Specifically, family firms
have a commitment to wealth preservation that is not available in
non-family firms (Vallejo, 2008) and are therefore more likely to be
long-term oriented in its strategic choices (Gentry, Dibrell, & Kim,
2014; Lumpkin & Brigham, 2011; Zellweger, 2007). Managers en-
trenched in family firms will likely act to benefit the firm and family
because the strong ties, resilient trust, and strong identification
obligate them to behave like stewards (Mani & Lakhal, 2015;
Pearson et al., 2008). Conversely, the separation of ownership and
management control in non-family firms creates agency problems,
where managers with private information can exploit it for personal
gains (Alchian & Demsetz, 1972; Jensen & Meckling, 1976). Con-
sequently, managers in non-family firms, especially entrenched
ones, may act opportunistically in favor of short-term investments
with quicker payoffs that long-term value-creating R&D invest-
ments, where the payoffs are uncertain (Hoskisson & Hitt, 1988).
Thus, we hypothesize that having entrenched managers in family
firms will result in higher levels of R&D investments compared to
those of non-family firms. We surmise that this effect will be greater
for non-hitech firms where R&D spending is discretionary. Thus, we
predict that:
Hypothesis 3. When funding is available during a crisis, family non-hitech
firms with entrenched managers will report higher levels of R&D investments
relative to their non-family counterparts.
Another source of heterogeneity among family firms is whether
they are still managed by the family founder. Family founders hold
virtually all authority in their firms. Thus, they impose greater in-
fluence on the family firm compared to those without their founders.
3
Journal of Family Business Strategy xxx (xxxx) xxx–xxx
Moreover, family founders are a strategic resource in decision
making because they have more knowledge of the firm, demonstrate
higher levels of commitment, and are able to generate stronger
feelings of psychological ownership and stewardship motivations in
others (Cabrera-Suárez & Martín-Santana, 2013; Ensley & Pearson,
2005). Miller and LeBreton-Miller (2006) found that family CEOs
manifest fewer short-term decisions in acquisitions and undertake
more long-term R&D and capital expenditures.
Family founders also care about succession, since this is the method
by which control and family wealth is passed to the next generation
(Block, 2012). Hence, they are more likely to emphasize a long-term
horizon in their investment strategies (Zellweger, 2007). The longer
horizon means that family firms are more willing to decide in favor of
projects over which they have time to recover the cost of capital and
respond to environmental signals further out in the future (Craig &
Dibrell, 2006). Since outcomes from R&D investments require patience,
family founders are less likely to pull back from such investments when
faced with an economic shock, but will likely regard economic reces-
sions as opportunities to differentiate themselves from their competi-
tors by investing more. Thus, we predict that:
Hypothesis 4. When funding is available during a crisis, family firms with
founder CEOs will report higher levels of R&D investments relative to family
firms without founder CEOs.
3. Methods
3.1. Data and sample
The data of U.S. public firms with total assets greater than $1 mil-
lion for the period 1992 to 2015, excluding financial firms (SIC codes
6000-6999), were culled from Compustat. We matched this sample with
Standard and Poor’s ExecuComp database, which reports information
on the top five executive officers in these firms. We derived a sample of
2391 firms with 20,673 firm-year observations. To identify a family
firm, we followed the identification process used by Pérez-González
(2006) and Miller et al. (2007) in which a family firm exhibited at least
one of the following criteria: (a) two or more related individuals1 are
among the top five executive officers, (b) a top executive officer with at
least 5% ownership, and/or (c) a founder who is an executive officer.
There were 625 family firms in the sample with a total of 4514 family
firm-year observations. In our robustness checks, we reduced the
sample with more restrictive definitions of the family firm. Although
the number of observations for each estimation model varied slightly
according to the availability of the specific information, the results were
stable for various definitions of the family firm.
3.2. Measures
3.2.1. Dependent variable
R&D is operationalized as the ratio of a firm’s R&D investment to
sales revenue. This is the most common measure of R&D intensity in the
literature (Cohen & Klepper, 1992; Cohen, Levin, & Mowery, 1987).
3.2.2. Predictor variables
Crisis is a binary variable that indicates the year of the economic
crisis (1 = 2007, 2008, and 2009; 0 = otherwise). Family is a binary
variable that indicates the family status of the firm (1 = family firm;
0 = non-family firm). Financially unconstrained is a binary variable that
indicates if the market capitalization of a firm is in the top 25 percentile
of the sample at the end of each fiscal year (1 = financially un-
constrained; 0 = financially constrained). Financially unconstrained
1
Related by blood, marriage, or adoption. We used the last name to identify the re-
lationship among the top five executive officers.
X. Sun et al.
firms have easier access to resources in the capital markets for R&D
investments (Almeida, Campello, & Weisbach, 2004; Denis & Sibilkov,
2010; Paunov, 2012). Market capitalization data is drawn from the
Center for Research in Security Prices (CRSP). Hitech is a binary vari-
able that indicates if the firm is in one of the 45 North American In-
dustry Classification System (NAICS) codes related to technology-in-
tensive industries (1 = hitech firms; 0 = non-hitech firms), such as
computer equipment, electrical equipment, measuring and medical
equipment, communications, computer programming, and data services
(Chan, Martin, & Kensinger, 1990). In general, hitech firms have greater
R&D intensity (David, Hitt, & Gimeno, 2001). Managerial entrenchment
(1 = entrenched management; 0 = otherwise) is measured by the en-
trenchment index (E-Index) of Bebchuk, Cohen, and Ferrell (2009).
Firms that have poison pills or golden parachute provisions in their
bylaws create conditions for managers to be entrenched. Entrenched
managers enjoy freer rein to make long-term risky decisions without
fearing termination when short-term returns are poor (Berger, Ofek, &
Yermack, 1997; Faleye, 2007). Family Founder is a binary variable that
measures if a firm has a family founder (1 = family firms with founder;
0 = no family founder).
3.2.3. Control variables
We controlled for firm size because larger firms have more capacity
to invest in R&D. We measured firm size in three ways. The first is total
assets, which represents the firm’s total economic resources (Leary &
Roberts, 2005). It is measured by the natural logarithmic book value of
assets at the end of each fiscal year for each firm (LnTA). The second is
market-to-book ratio (MTB), which is the ratio of a firm’s market ca-
pitalization to its common equity book value. It is a measure of the
firm’s growth capacity, where firms with higher growth potential may
have greater propensity to engage in R&D (Cleary, 1999; Kaplan &
Zingales, 1997). The third is sales (Coles, Daniel, & Naveen, 2006),
which is measured by the natural logarithmic value of sales revenue
(LnSales). Another control variable that influences R&D investments,
but is not related to the relationships in our model, is the ratio of a
firm’s intangible asset to total assets (Intangible/TA). Examples of in-
novation-related intangible assets include patents (Xue, 2007). Since
generally accepted accounting principles (GAAP) treat externally ac-
quired resources as assets but R&D investments as expenditures, firms
with large innovation-related intangible assets would have less pro-
pensity to invest in R&D and vice versa. Another control variable we
considered is each firm’s leverage because firms’ indebtedness can re-
duce their risky investments since bank loans come with restrictive
covenants on the types of investments allowed (Coles et al., 2006).
Leverage is measured by dividing firm’s long-term debt by total assets.
The fourth control variable is earnings before interest, taxes, depre-
ciation, and amortization (EBITDA) scaled by total assets (EBITDA/TA).
Higher R&D investments, which are expenditures, reduce EBITDA.
Firms that need to maintain a specific level of EBITDA to meet their
solvency requirements may be forced to scale back on R&D to increase
EBITDA during a crisis. The fifth control variable is the level of the
firm’s cash holdings, which we standardized by the firm’s total assets
(Cash/TA). The sixth control variable is cash flow volatility, which is a
proxy for idiosyncratic firm risk. Firms with high cash flow volatility
tend to hold more cash as a precautionary measure for economic shocks
(Bates, Kahle, & Stulz, 2009). Firms that make heavy investments are
associated with greater cash flow volatility and firm-specific risk (Cao,
Simin, & Zhao, 2008; Chan, Lakonishok, & Sougiannis, 2001). In ac-
cordance with Bates et al. (2009), we measured cash flow volatility as
the standard deviation of operating cash flow to assets over the
4
Journal of Family Business Strategy xxx (xxxx) xxx–xxx
previous 10 years for each firm-year. Our seventh control variable is the
firm’s level of financial distress, which is a measure of bankruptcy risk.
Firms in financial distress are less likely to invest in R&D. We measured
financial distress with the Altman’s z score (Altman & Hotchkiss, 2005)
from each firm’s Compustat financial data. Firms with annual scores
below the 1.81 cutoff are considered Distressed.
3.3. Estimation model and statistical analysis
Since a firm’s R&D investment may be influenced by both firm-level
unsystematic risks and systematic risks from the external environment,
we used firm fixed-effects regression analysis, a commonly accepted
approach in the literature to identify how changes in firm-specific
factors affect investment decisions (Chaney, Sraer, & Thesmar, 2012).
The benefit of using firm fixed-effects analysis is in reducing potential
biases from omitted variables. Year effects were handled by including
year dummies to capture the influence of time-series aggregated trends.
We reported within R2 to show the goodness-of-fit of the firm-specific
control variables of their impact on R&D investments. Thus, to identify
the effects of family status on R&D investments and to control for un-
observable time invariant firm-specific effects on R&D, our estimation
model is as follows:
R&Dit = αi + δt + λFamilyit + υCrisis + β∙Familyit*Crisis + con-
trolsit + ϵit (1)
In (1), R&Dit is the dependent variable, which is the intensity of
R&D investment in year t for firm i. We included a firm fixed effect αi
as well as year fixed effect δt to capture aggregated specific R&D
investments from fluctuations in the external environment. Our
firm-level control variables (controlsit) are LnTAit, Leverageit,
MTBit, (Intangibleit/TAit), LnSalesit, (Cash flow volatility)it,
(Cashit/TAit), Distressedit, and (EBITDAit/TAit). These variables
capture the effects of changes in the firms’ characteristics, growth
opportunities, and profits resulting from strategic policies over time
that could influence R&D investments but are not core to our study.
Familyit*Crisis is the interaction term between Familyit and Crisis.
The coefficient ϵit is the coefficient of interest, which is the effect of
family firms on R&D investments during the crisis period. In sum, we
test our hypotheses by examining the effect of family status on R&D
investments for the entire sample around the financial crisis period
using STATA 14.
4. Results
Table 1 reports the summary statistics for the total sample that in-
cluded family and non-family firms. Table 1 shows that the average size
for family firms was significantly smaller than the population mean and
so in comparison with non-family firms, the differences were greater,
where the average value of total assets and market value were $2732
million and $4149 million versus $7086 million and $6955 million
respectively for family and non-family firms. Table 1 also shows that
only 21.7% of family firms were financially unconstrained compared to
32.3% of non-family firms. Thus, the data may indicate that family and
non-family firms have differential access to the capital markets. Con-
sequently, Table 1 shows that family firms held more cash and had
lower leverage, possibly to avoid borrowing at higher costs of capital.
They also faced greater cash flow volatility compared to non-family
firms, possibly because of limited financing options, which may lead to
underinvestment in long-term strategic projects. However, more family
X. Sun et al. Journal of Family Business Strategy xxx (xxxx) xxx–xxx

firms operate in hitech industries,2 had higher MTB, higher operating heterogeneity within family firms and their relationships with R&D
performance measured as the ratio of EBITDA to total assets, in line investments.
with previous studies (Anderson & Reeb, 2003; Chen., Chen, Cheng, & In Table 5, we examined internal factors within financially un-
Shevlin, 2010), and were less likely to experience financial distress constrained non-hitech firms and their relationships with R&D invest-
measured as the Altman’s z score.3 Unlike previous studies (Patel & ments. Here, we looked at the management team of these firms by
Chrisman, 2014), our sample did not show significant differences in R& splitting the sample by the median value of the sample’s entrenchment
D between family firms and non-family firms. Since financial con- index (E-Index5 = 3), wherein a higher value indicates higher man-
straints significantly differentiated family from non-family firms, we agerial entrenchment. In Model 1 of Table 5, the results showed that
considered the financial constraints faced by family firms for more in- financially unconstrained family firms in non-hitech firms with en-
sights on their investment decisions (Almeida et al., 2004; Denis & trenched managers increased their R&D investments more than their
Sibilkov, 2010). non-family counterparts (β = 0.099, p < 0.001), providing support for
Table 2 shows the intercorrelations among the variables. The cor- Hypothesis 3. When the management team was not entrenched, Model
relations confirmed the descriptive statistics in Table 1 whereby family 2 of Table 5 shows that there were no significant differences in R&D
firms were smaller, more financially constrained, faced higher cash investments between family and non-family firms.
volatilities, had less intangible assets but had higher MTB, lower Finally, in Table 6, we report the results of another source of het-
leverage, higher operating profit, and more cash holdings. Next, we erogeneity in family firms. The data shows that as long as the founder is
report the regression results to show how firms without financial con- still managing the business, R&D investment increased during the crisis
straints during the financial crisis made their R&D investments. period if the business was financially unconstrained (Model 1), and
Model 1 in Table 3 shows that firms increased their R&D invest- more so in non-hitech firms (Model 2), as well as when managers were
ments during the crisis (p < .05) but there were no differences be- entrenched in the firm (Model 3). Thus, Hypothesis 4 is supported.
tween family and non-family firms. Given that family and non-family
firms differed in financial constraints in Table 1, we split the sample by 5. Discussions
financial constraints to better understand the results. A firm is finan-
cially unconstrained when it falls into the top quartile of firms by In family firms, concepts of performance and wealth maximization
market capitalization (Denis & Sibilkov, 2010). Model 2 in Table 3 have different meanings when compared to non-family firms (Berrone
shows that financially unconstrained family firms increased R&D in- et al., 2012; Gómez-Mejía et al., 2007; Zellweger et al., 2012). In this
vestments significantly more than their non-family counterparts paper, we used the BAM, derived from agency and prospect theories on
(β = 0.027, p = 0.009). Model 3 shows no differences in R&D invest- managerial risk-taking, to characterize this difference. Family firms
ments between family or non-family firms when they are financially may require a different paradigm to explain their investment decisions
constrained. Thus, R&D investment is conditioned by a firm’s financial because of the presence of kinship ties. We used the Great Recession as
capability. We conducted a robustness check on the relationship be- a natural experiment in our research design to determine if family firms
tween resource capability and R&D investment. We found that firms at were more likely to view a negative short-term shock as a threat and
risk of bankruptcy, with Altman’s z scores less than 1.81, significantly
reduced their R&D investments (p < 0.001). The results in Model 2
indicate that family firms with financial capability undertook higher Table 1
risks compared to non-family firms. This result supports the BAM ar- Summary Statistics.
gument in Hypothesis 1.
Variables Average Family Firms Non-Family Difference
Since R&D investment in hitech industries is the primary driver of (n = 20,673) (n = 4514) Firms
value creation, we predicted that a financial crisis will have less impact (n = 16,159)
on these firms’ R&D investments compared to non-hitech firms. Since
Total Assets ($ mil.) 6081 2732 7086 4354**
Table 3 indicates that only financially unconstrained firms have the
Market Cap ($ mil.) 6307 4149 6955 2806**
financial resources to invest in R&D and our robustness checks showed Financially 0.298 0.217 0.323 0.106**
that distressed firms were more likely to decrease their R&D invest- Unconstrained
ments, we split the sample of financially unconstrained firms by hitech Age since IPO 10.279 9.447 10.633 1.186**
and non-hitech industries4 in Table 4 to explore differences between MTB 3.060 3.186 3.022 −0.164**
Intangible/TA 0.152 0.136 0.157 0.021**
family and non-family firms. As expected, Model 1 in Table 4 shows
R&D 0.285 0.321 0.274 −0.047
that the crisis had no statistically significant impact on the R&D in- Hitech 0.200 0.211 0.197 −0.014**
vestments of financially unconstrained hitech firms. However, Model 2 Leverage 0.202 0.163 0.214 0.051**
in Table 4 shows that financially unconstrained non-hitech firms in- EBITDA 0.135 0.134 0.131 −0.003*
Cash/TA 0.149 0.186 0.138 −0.048**
creased their R&D investments during the crisis (β = 0.036,
Cash flow volatility 0.075 0.086 0.071 −0.015**
p < 0.001), which is consonant with the notion that the lower cost of Distressed 0.163 0.127 0.175 0.048**
capital represented opportunities for firms to invest at a more efficient Sales ($ mil.) 4.887 2.262 5.675 3.413**
rate. More importantly, Model 2 in Table 4 shows that it was the family
firm in non-hitech industries that increased its R&D investments during Our sample includes U.S. public firms from 1992 to 2015 excluding financial institutions.
the crisis (β = 0.043, p = .003). This result supports Hypothesis 2, Family firms refer to those firms who meet one of the following criteria: (a) two or more
individuals are related6 among the top five officers (b) a top officer has at least 5%
which stated that non-hitech family firms took more risks compared to
ownership (c) a founder is a top officer. +, *, and ** denote statistical significance at the
their non-family counterparts. Next, we examined some sources of 10%, 5%, and 1% levels.

2
Our hitech definition is consistent with Chan et al. (1990) that includes companies in
the pharmaceutical, electronics, information processing, instruments, semiconductor, and
telecommunications industries.
5
See “Entrenchment Index of Bebchuk, Cohen and Ferrell has been applied to more
3
The z score is a measure of bankruptcy risk, where financially distressed firms have z than 300 research papers” (https://today.law.harvard.edu/more-than-300-research-
scores below 1.81. papers-have-applied-the-entrenchment-index-of-bebchuk- cohen-and-ferrell/) Accessed,
4
We identified 45 industries using NAICS codes. In general, they included computer May 30, 2017.
6
equipment, electrical equipment, measuring and medical equipment, communications, Related by blood, marriage, or adoption. We use the last name to identify the re-
computer programming and data services. lationship among the top five officers.

5
X. Sun et al. Journal of Family Business Strategy xxx (xxxx) xxx–xxx

Table 2
Correlations.

Family R&D LnTA MTB Financially LnSales Intangible/TA Hitech Leverage EBITDA Cash/TA Cash Flow Distressed
Unconstrained Volatility

Family 1.000
R&D 0.002 1.000
LnTA −0.199- −0.068- 1.000
** **
MTB 0.020** 0.012 −0.031-
+
1.000
**
Financially −0.097- −0.022- 0.565** 0.202** 1.000
Unconstrained ** **
LnSales −0.177- −0.154- 0.911**−0.019- 0.545** 1.000
** ** **
Intangible/TA −0.048- −0.022- 0.174**−0.020- 0.116** 0.128** 1.000
** ** **
Hitech 0.015**−0.012- −0.131- 0.076**−0.009** −0.184- 0.051** 1.000
+
** **
Leverage −0.105- −0.008- 0.259**−0.108- −0.001** 0.184** 0.143** −0.157- 1.000
** ** ** **
EBITDA −0.084- −0.092- 0.497** 0.044** 0.268** 0.461** 0.046** −0.004- 0.029** 1.000
** ** **
Cash/TA 0.113** 0.085**−0.361- 0.190**−0.059** −0.426- −0.191** 0.332**−0.328** −0.078- 1.000
** ** **
Cash Flow 0.103** 0.064**−0.381- 0.105**−0.162** −0.452- −0.002 0.316**−0.249** −0.108- 0.557** 1.000
Volatility ** ** **
Distressed −0.057- 0.040** 0.100**−0.170- −0.053** −0.027- 0.048** −0.031- 0.357** 0.036**−0.058** 0.005 1.000
** ** ** **

+
, *, and ** denote statistical significance at the 10%, 5%, and 1% levels.

Table 3
R&D Investments of Family Firms during the Crisis.

All Financially Unconstrained Financially Constrained

n = 20,673 n = 6843 n = 13,830
(1) (2) (3)

Crisis 0.738* 0.049** 0.048+

Familyit*Crisis 0.111 0.027** 0.165
Familyit 0.041 −0.007 0.134
LnTAit 3.982** 0.123** 5.207**
Leverageit −1.388** −0.015 −1.546**
MTBit 0.081** 0.001* 0.123**
Intangibleit/TAit −4.234** −0.045** −5.120**
LnSalesit −4.811** −0.165** −6.295**
Cash flow volatilityit 5.334** −0.082 3.736+
Cashit/TAit −5.526** −0.034+ −6.730**
EBITDAit/TAit −9.575** −0.172** −10.725**
Distressedit −0.819** −0.031** −0.791**
Year dummies Yes Yes Yes
Within R2 0.150 0.152 0.183
Prob. > F 0.000 0.000 0.000

These models are firm fixed-effect regressions. The dependent variable is R&D expenditure scaled by sales revenues. Financially Unconstrained firm refers to those firms that have market
capitalization ranked in the top quartile annually. +, *, and ** denote statistical significance at the 10%, 5%, and 1% levels.

avoid making long-term investments or as an opportunity to invest in
long-term value creation. A financial crisis represents a loss frame, in
the parlance of prospect theory, and a risk to the continuity of the firm.
Differences in the risk-taking behaviors of family and non-family firms
during this period is a test of whether the BAM can adequately explain
family firms’ choices on long-term investments that reveal their un-
derlying preferences to protect their SEW goals. We looked at the in-
herent tension between long-term strategic decisions in response to a
short-term external shock between family and non-family-firms. Our
results are unequivocal. Among the firms that can afford it, (i.e., fi-
nancially unconstrained), family firms chose to view the Great Reces-
sion as a risk-taking opportunity to create competitive advantage by
investing in R&D, unlike non-family firms. Our results indicated that
family firms in non-hitech intensive industries increased their R&D
investments more than their non-family counterparts. This unexpected
empirical finding is easily understood if we applied the BAM to the
results. The Great Recession is a negative event, which placed firms in
the loss framing zone in investment decisions. This translates to firms

6
X. Sun et al. Journal of Family Business Strategy xxx (xxxx) xxx–xxx

Table 4 Table 5
R&D Investments of Financially Unconstrained Family Firms During the Crisis by Hitech7 R&D Investments of Financially Unconstrained Family Firms During the Crisis by
Industries. Entrenched Management.

Financially Unconstrained Financially Unconstrained Financially Unconstrained Financially Unconstrained

and Hitech Firms and Non-Hitech Firms Non-Hitech Firms with Non-Hitech Firms with Less
N = 1741 N = 5102 Entrenched Management Entrenched Management
(1) (2) n = 2428 n = 2674
(1) (2)
Crisis 0.129 0.036**
Familyit*Crisis −0.003 0.043** Crisis 0.020 0.039*
Familyit −0.001 −0.001 Familyit*Crisis 0.099** 0.022
LnTAit 0.028** 0.160** Familyit 0.024 −0.016
Leverageit 0.008 −0.029 LnTAit 0.174** 0.154**
MTBit 0.001 0.001 Leverageit −0.112** 0.042+
Intangibleit/TAit 0.010 −0.063** MTBit 0.002** −0.001
LnSalesit −0.036** −0.211** Intangibleit/TAit 0.005 −0.100**
Cash flow volatilityit −0.060 −0.056 LnSalesit −0.237** −0.197**
Cashit/TAit −0.039** −0.005 Cash flow −0.514** 0.285*
EBITDAit/TAit −0.228** −0.127** volatilityit
Distressedit −0.008 −0.043** Cashit/TAit 0.050 −0.068+
Year dummies Yes Yes EBITDAit/TAit −0.153* −0.088+
Within R2 0.223 0.176 Distressedit −0.038** −0.051**
Prob. > F 0.000 0.000 Year dummies Yes Yes
Within R2 0.250 0.145
These models are firm fixed-effects regressions. This test includes observations that are Prob. > F 0.000 0.000
financially unconstrained. The dependent variable is R&D expenditure scaled by sales
revenues. The sample is split by whether the firm is in a hitech industry or not. Hitech is a These models are firm fixed-effects regressions. This test includes observations in finan-
dummy variable that equals 1 if a firm in one of the 45 NAICS industries defined by Chan cially unconstrained non-hitech firms. The dependent variable is R&D expenditure scaled
et al. (1990). +, *, and ** denote statistical significance at the 10%, 5%, and 1% levels. by sales revenues. The sample is split by the median value of the entrenchment index at
3.0. +, *, and ** denote statistical significance at the 10%, 5%, and 1% levels.

undertaking more risks by making more R&D investments. Since family

firms had more to lose in an economic crisis, to SEW and economic Table 6
outcomes, they undertook more risky investments compared to non- R&D Investments of Family Firms with Family Founders During the Crisis.
family firms. In sum, the results lend support to the BAM predictions
Financially Financially Financially
that a negative event, such as an economic recession, is viewed as a Unconstrained Unconstrained Unconstrained Non-
risk-taking opportunity by family firms more so than by non-family Firms Non-Hitech Firms Hitech Firms with
firms. Entrenched
Our results also support the notion of familiness. Family firms Management
n = 6843 n = 5102 n = 2285
whose managers are entrenched acted as stewards to increase, rather
(1) (2) (3)
than decrease R&D expenses during crisis periods. This familiness effect
on increased R&D investments was prevalent and more pronounced in Crisis 0.049** 0.036** 0.015
family firms with founder CEOs. We can therefore, conclude that these Family 0.038** 0.069** 0.149**
Founder*Cris-
investments were made to protect the long term SEW goals of the family
is
firm. It is especially notable that this result was particularly strong Family Founder −0.016 0.003 0.118**
among non-hitech firms, in which R&D investments is clearly more Control Variables Yes Yes Yes
discretionary when compared to that of the high-tech sector. This long- Year dummies Yes Yes Yes
term orientation in favor of R&D investment was not found for non- Within R2 0.153 0.177 0.174
Prob. > F 0.000 0.000 0.000
family firms or family firms who do not have entrenched managers.
Since family founders have greater motivations to ensure the continuity These models are firm fixed-effect regressions. The dependent variable is R&D ex-
of the business, the results support the role of familiness as a means to penditure scaled by sales revenues. The family firms include the founder(s) as a top ex-
promote transgenerational firm continuity through long-term strategic ecutive officer. The control variables are the same as those in Table 3. +, *, and ** denote
investments. statistical significance at the 10%, 5%, and 1% levels.
Although R&D is considered a risky investment, it has the potential
for a significant positive impact on firm value (Villalonga & Amit, decisions in R&D investments (Beneito, Rochina-Barrachina, & Sanchis-
2006). Overall, the results indicate that among the firms that have Llopis, 2015).
excess capital during economic downturns, only family firms were This study represents the first attempt to understand the impact of
motivated to undertake the risk necessary to build long-term firm value. economic contraction on firms’ behaviors in R&D investments. The
A crisis may actually be a good time to make investments in R&D for availability of financial resources that a firm has during an economic
firms with access to capital markets because the cost of capital is lower. recession influence R&D investments, differentially in family and non-
Also, firms can take advantage of the crisis period where costs of pro- family firms. Specifically, among the firms with excess capital, family
duction and capacity utilization are lower, to invest in R&D for product firms tend to view the external threat of an economic downturn as a
innovation and improvement. Firms that increase their R&D invest- risk-taking opportunity. This study also demonstrated how family firm
ments during a crisis may reap benefits in an economic upswing. This heterogeneity explained important strategic decisions. Specifically, fa-
finding is consistent with some studies that argue for anti-cyclical mily firms with embedded managers or founder CEOs were more likely
to invest in R&D despite an economic recession. We surmise that they
do so to protect transgenerational continuity and SEW. Also, we iden-
7
45 NAICS coded industries, including computer equipment, electrical equipment,
tified some dimensions of heterogeneity within family firms that were
measuring and medical equipment, communications, computer programming and data associated with R&D investments during economic downturns. Since
services. family firms are the dominant form of businesses in many economies,

7
X. Sun et al.
understanding how they make investments under conditions of eco-
nomic distress helps us better understand the resiliency of an economy.
In using accounting data from public sources, one limitation of the
study is the lack of fine-grained information on where firms invested
their R&D expenditures. Related to this limitation is our inability to
ascertain the motivations behind the firms’ reasons for their R&D in-
vestments, which are unavailable from the public data. We could only
surmise the reasons to be due to risk preferences based on differences in
the results obtained from the data. Another limitation is not having an
actual count of the number of family employees and their tenure in the
family firm as our measure of family involvement or entrenchment in
the family business. This would have allowed us to better characterize
the size of the familiness effect. A final limitation is not linking R&D
investments to firm performance because the effect from investments
on performance is difficult to isolate. However, given the heterogeneity
of the sample, firm performance is not very easy to compare across
industries and types of firms.
Nevertheless, these data limitations provide opportunities for a fu-
ture study using survey methodology to validate the results we found. A
fruitful avenue for future research relates to identifying other con-
tingencies that may explain the transgenerational nature of family
firms. For example, different forms of organizational resources, such as
intellectual, human capital, reputational, market access, financial,
physical, technological, and sources of supply (Hanlon & Saunders,
2007) may be important sources of heterogeneity that influence the
decision-making process in family firms facing crises. We suggest
opening the black box to understand the underlying mechanisms, such
as the composition of the management team, the organization structure
of the business, the knowledge, skills, and attitudes (KSA) of the family
employees relative to non-family employees to understand differences
in the strategic decision processes between family and non-family firms.
It is not enough to measure what these firms do strategically or tacti-
cally, but we also need to know why. Our findings also suggest that
future research needs to consider the baseline condition of the family
firm (such as cash flows) in their studies.
6. Conclusion
This study showed differences between family and non-family firms
in terms of how they responded to an economic downturn. Among the
firms with excess funding, family firms viewed external threats as a
risk-taking opportunity. This risk-taking behavior was more pro-
nounced for non-hitech family firms where investment in R&D was
discretionary. Contrary to corporate governance predictions of self-
seeking agency problems, management entrenchment in family firms
was associated with more long-term investments in R&D. This result
was similar to having founder CEOs in the family firms who were more
committed to the transgenerational continuity and SEW goals of the
family firm. Overall, this study showed that the family and non-family
firm behaviors related to long-term orientation became more salient
when firms faced economic distress. The results may indicate one
strength that family firms have over non-family firms, which is their
willingness to undertake long-term investment strategies during eco-
nomic downturns. Our results may provide a small glimpse into the
prevalence and resiliency of family firms.
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