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Time Horizon, Costs of Equity Capital and Generic Investment Strategies of Firms

abstract Recent literature (McNulty, Yeh, Schulze, & Lubatkin, 2002) states that the assumptions behind the capital asset pricing model, in particular the irrelevance of time horizon, do not correspond to the characteristics of firms that prefer long-term investment horizons. I show that family firms display a longer time horizon than most of their nonfamily counterparts, since (1) family firms display a longer CEO tenure, (2) this type of firm strives for long-term independence and succession within the family, and (3) due to the fact that family firms are overrepresented on western European stock markets in cyclical industries in which business cycles inhibit short-term success. As the annual default risk of an investment diminishes with increasing holding period (Hull, 2003), the risk-equivalent cost of equity capital of firms with longer planning horizons (e.g., family firms) can be lower as well. Based on the assumption that economic value to shareholders is created when firms invest in projects with returns above the associated cost of capital (Copeland, Koller, & Murrin, 2000), I argue that long-term-oriented firms can tackle unique investment projects represented by two generic investment strategies-the perseverance and the outpacing strategy. The first one, the perseverance strategy, represents investment strategies in which long-term-oriented firms invest in lower return but equal risk projects than their more short-term-oriented counterparts. The second one, the outpacing strategy, comprises investment projects with higher risk and equal return than the short-term competitors.
   
type journal paper
   
keywords Family Firms, Time Horizon, Costs of Equity Capital
   
language English
kind of paper journal article
date of appearance 1-3-2007
journal Family Business Review
publisher Sage (Thousand Oaks, Calif.)
ISSN 0894-4865
volume of journal 20
number of issue 1
page(s) 1-15
review double-blind review
   
citation Zellweger, T. (2007). Time Horizon, Costs of Equity Capital and Generic Investment Strategies of Firms. Family Business Review, 20(1), 1-15.