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Two issues

Two issues. Why should uncertainty should matter for I and what is the effect of uncertainty on I 2. Where is risk a version coming from?. Issue1: effect of uncertainty on I. Irreversibility => Uncertainty makes I less responsive to demand I/K = a(1- u )Y/K

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Two issues

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  1. Two issues • Why should uncertainty should matter for I and what is the effect of uncertainty on I 2. Where is risk a version coming from?

  2. Issue1: effect of uncertainty on I • Irreversibility => Uncertainty makes I less responsive to demand I/K = a(1-u)Y/K • Obtained under risk neutrality • Generates inaction (high u (may) => no investment • u enters interacted with Y/K=>no direct role for u 2. Risk aversion • => entrepreneur maximizes a concave utility of profits • => u lowers investment: level of u is what matters, Batra& Ullah, 1974 under DARA) • Empirically levels seems to play no role (but emphasis is on risk aversion) • Results instead are as if Family firms proxy for irreversibility (back to this later)

  3. Issue2: where is RA coming from and why higher in Family Firms? Idea: in widely held firms shareholders are fully diversified • They behave as risk neutral vis a vis any specific firm (risk is small) • Max Eπ In family firms risk is large => shareholders look at EU(π) • Shareholder preferences matter • U is concave 2. Fine in a frictionless market where managers act in the interest of shareholders (maximize the value of the firm for them). • What about if we introduce frictions? • Should not this bring in the risk aversion of the manager? If managers choose I and are paid according to firm performance, shouldn't they maximize EU( a+bπ ) ? • Why risk aversion of managers systematically lower than risk aversion of family-firm owners? • Intuition can go both ways

  4. Possible way out • Debate these issues • Take no stance and let the data speak • Argue that finding consistent with family forms being more prudent than non-F firms • Problem: are we sure family-firm dummy is really capturing risk aversion? • Could be proxying for other variables relevant for effect of u (e.g. market power) • Findings suggest something is there but hard to argue it is differences in risk attitudes

  5. Back to irreversibility • Possible explanation (more consistent with data) : in F-firms capital is more irreversible than in non-F firms • Why? • Various reasons for irreversibility • Specificity (no reason more if F firms) • Co-movement (no reason why more in F-firms)

  6. Back to irreversibility:2 • Lemon’s premium • Family firm assets may carry a larger lemon’s premium • F-firms are more opaque • Less info is generally available • Family/firm boundaries are blurred => facilitates assets transformation and appropriation • This could generate predictions that are consistent with the results

  7. Suggestions • Keep both avenues open, do not bet on one • Irreversibility=> uncertainty lowers sensitivity of I to Y • RA=> u lowers I directly • Can contrast the two, results more in line with 1 • Family form indicator very good, is a plus of the paper=> perhaps more emphasis

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