This study investigates distinctive investment behavior of family firms to distinguish among the diverse theories on the characteristics of family firms. Agency theorists emphasize reduced agency conflicts in family owned and managed firms due to alignment of interests between owners and managers. By contrast, family business researchers emphasize family owners' priorities to retain control of the business and their risk preferences caused by long investment horizons and a desire for continuity. Drawing from agency and family business literatures, we set the hypotheses on two distinctive investment behaviors: aggressive investment and patient investment. Analyzing the data on investment of the listed firms in the Japanese electric machinery industry, we show that family firms invest more than non-family firms. Such aggressive investment can be caused by reduced agency conflicts as well as by owners' risk preference. However, further analysis finds several results which are consistent not with the agency perspective but with the family business perspective. We show that family firms continue to invest under volatile and stagnant environments. Such patient investment can be caused by the risk preferences of family owners who have long time horizons and a desire for continuity. Therefore, not only ownership structure (equity share holding of management) but also being a family business (priority and risk preference of family owners) is essential characteristics of family firms which cause their distinctive investment behavior.
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