Real Option, Idiosyncratic Risk, and Corporate Investment : Evidence from Taiwan Family Firms

We examine the relation between family presence and corporate investment policy. Our analysis centers on two incentives that potentially lead to differences in investment policy between family firms and nonfamily firms: family owners' risk aversion and their real option to invest. Our findings indicate that (1) investment patterns differ between family and nonfamily firms; (2) family firms devote significantly more resources to total investment activity and R&D projects than nonfamily firms; and (3) the investment policy appears to be driven by the significantly stronger relation between total investment and idiosyncratic risk for families with more real options (i.e., investment opportunities). Our robustness tests using IV-3SLS regressions provide further support of the real option argument. Further testing indicates that family firms receive more patents/patent citations per R&D dollar than nonfamily firms; suggesting that family monitoring may explain the higher R&D efficiency associated with family firms. To our knowledge, this paper is the first of its kind to propose the real option argument to explain the relation between family presence and firm investment policy