Figure 2
The timeline shows a horizontal line across the top, divided into three labeled sections from left to right. Above the left section is the heading “Start of New Period, t” with light-colored subtitle text that reads “(Dynamic Family and Firm Effect)”. Above the center section is the heading “End of Period t” with light-colored subtitle text that reads “(Family Team and Compensation Effect)”. Above the right section is the heading “Period t plus 1” with light-colored subtitle text that reads “(Heterogeneous Dynamics)”. Below the left section are two bullet statements: “Family and Company attributes for firms A and B are realized” and “Governance and Stewardship-Agency balance for firms A and B are realized”. Below the center section are four bullet statements: “Family firm efficiencies E subscript A, t and E subscript But are realized. E subscript A, t less than 1 and E subscript B, t less than 1”, “Firms A and B decide to combat inefficiency”, “C E O(A) has high compensation C E O(B) has low compensation”, and “Firm A has Non-Family Team, more focus on downward arrow financial loss. Firm B has Family Team, less focus on financial loss”. Below the right section are two bullet statements: “Upward arrow Efficiency in firm A: E subscript A, t plus 1 greater than E subscript A, t due to Non-Family Team financial focus and C E O(A)’s effectiveness” and “Downward arrow Efficiency in firm B: E subscript B, t plus 1) less than E subscript (B, t)”.Heterogeneous efficiency dynamics: family firm adapts to adverse efficiency. The figure presents a timeline of the DFM model. After a drop in efficiency in period t, each firm attempts to correct the shortfall. The outcome depends on family involvement in management, and on executive compensation. Non-Family management teams are more successful at raising efficiency in t + 1 due to their greater focus on financial loss. CEOs are more successful in raising efficiency if they have higher compensation, among other qualities. Thus, Family involvement and Compensation have opposite effects