Family firms are different from nonfamily firms because the combination of family ownership, family control, and family management
leads to certain distinctive structural effects. These effects, along
with the demonstrated importance of family firms in the global
economy, have the potential to affect asset market equilibrium
and the cost of capital for both family and nonfamily firms. We
propose an equilibrium model that incorporates the key features
characterizing family firms – receipt of nonpecuniary socioemotional benefits, holding a nontraded and non-diversified control
block, and information asymmetry between the family and other
investors. The resulting information and competitive equilibrium
model shows that the costs of capital for family and nonfamily
firms operating inside the same economy are different. These differences yield important implications for corporate finance in terms
of investment and financing at the macro level.