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Inter vivos transfers of ownership in family firms

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Abstract

This paper examines the determinants of inter vivos (lifetime) transfers of ownership in German family firms between 2000 and 2013. Survey evidence indicates that owners of firms with strong current business conditions transfer ownership at higher rates than others. When a firm’s self-described business condition improves from “normal” to “good,” the relative likelihood of an inter vivos transfer increases by 46 percent. Inter vivos transfer rates also rose following a 2009 reform that reduced transfer taxes. These patterns suggest that transfer taxes significantly influence rates and timing of inter vivos ownership transfers.

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Notes

  1. The majority of firms around the world are family firms (La Porta et al. 1999; Faccio and Lang 2002). See Burkart et al. (2003) on basic theoretical considerations regarding succession in family firms.

  2. See Schinke (2016) on how the tax reform influenced inter vivos transfers to different types of recipients including the core family, other close relatives, and unrelated recipients.

  3. On inheritance and inter vivos transfer taxation and legislation see, e.g., Gale et al. (2001), Ellul et al. (2010), Hines (2010, 2013), Kopczuk (2009, 2013a, b) and Wrede (2014). Transfer taxes may give rise to declines in investment, slow sales growth, and a depletion of cash reserves around family successions (Tsoutsoura 2015).

  4. See § 201 subsection two of the valuation law (Bewertungsgesetz).

  5. On theoretical models of intergenerational private exchanges within the family under alternative assumptions as to the nature of relations between parents and children, see Cremer et al. (1992).

  6. On how family ownership, control, organization, and management influence firm value and firm performance see Jacquemin and de Ghellinck (1980), Villalonga and Amit (2006), Bertrand et al. (2008) and Minetti et al. (2015).

  7. In the absence of sufficient life insurance coverage, liquidity problems driven by estate tax liabilities may force heirs of family firms to sell business assets (Astrachan and Tutterow 1996; Brunetti 2006; Houben and Maiterth 2011).

  8. On exit strategies in family firms see also DeTienne and Chirico (2013) and Wennberg and DeTienne (2014).

  9. A firm is defined as a family firm if most voting capital is held by one or several interconnected families.

  10. See Seiler (2010) on nonresponse in business surveys.

  11. The survey questions are “Have there been inter vivos transfers of assets in your firm since the year 2000? Yes, in the year…/no,” and “Have you paid the gift tax since the year 2000? Yes, in the year …/no”.

  12. The survey statement is “We evaluate our present state of business as good/satisfactory/bad.” The simplicity of this survey question makes it easily understood by potential respondents, and contributes to the high response rate. Complete questionnaires are available at https://doi.org/10.7805/ebdc-bep-2012.

  13. See Hoenig (2009, 2010) on how survey and balance sheet data are linked.

  14. See Seiler (2012) for more information.

  15. Given asymmetries in reporting, it is likely that even fewer transfers would have been recorded if the survey instead asked beneficiaries about receipts of transferred business assets (Gale and Scholz 1994).

  16. Data on legal forms and numbers of employees are not available for the entire sample; consequently, Figs. 1, 2, and 3 are each based on different samples.

  17. These specifications, and indeed the available data, do not distinguish between wealth effects (Poterba 2001; Hrung 2004; Villanueva 2005) and ownership effects (more valuable firms have more owners and therefore more potential donors).

  18. 13 percent of inter vivos transfers were accompanied by a tax payment in the same year or during the following three years (see Table 1).

  19. Replacing the current state of business variable with 0–1 dummies for either good or bad business conditions (two separate specifications) and replacing the number of employees variable by dummy variables for each category of number of employees produces results very similar to those reported in Table 3, as does estimation of standard errors in the Table 3 baseline regressions using bootstrap and jackknife procedures or using standard errors robust to heteroskedasticity and clustered at the individual level [Huber/White/sandwich standard errors—see Huber (1967) and White (1980)]. Limiting the sample to firms with fewer than 1,000 employees likewise has little effect on the results reported in Table 3.

  20. Firm size is correlated with industry and legal form: firms in the retail and the services industries have, on average, fewer employees than firms in the construction and manufacturing industries, and firms operating as proprietorships have, on average, fewer employees than firms operating as corporations or partnerships.

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Acknowledgements

We are grateful to the Editor and two anonymous referees for many helpful comments and suggestions that are incorporated in the paper. We would also like to thank Sebastian Escobar, Ben Lockwood, Liya Palagashvili, Dirk Schindler, Thomas Stratmann, Agnes Strauss, the participants of German Economic Association (Augsburg 2016), the CESifo Public Sector Economics conference (Munich 2016), European Association of Law and Economics (Vienna 2015), Congress of the International Institute of Public Finance (Dublin 2015) and Public Choice Society Meetings (San Antonio 2015), and seminars at the ifo Institute, Paris School of Economics, University of Michigan, Swiss Economic Institute at the ETH Zurich, Centre for Business Taxation at Oxford University, University of Bayreuth, and University of Munich for their helpful comments. We are grateful to the Foundation of Family Businesses, on whose behalf we conducted a survey on inheritances, inter vivos transfers, and transfer taxation (the Inheritance and Gift Tax Survey–IGTS) among owners of family firms in February and March 2014.

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Authors and Affiliations

  1. University of Michigan, Ann Arbor, MI, USA

    James R. Hines Jr.

  2. Ifo Institute, Munich, Germany

    Niklas Potrafke, Marina Riem & Christoph Schinke

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  1. James R. Hines Jr.
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  2. Niklas Potrafke
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Appendix

Appendix

Because the study relies on survey data, response behavior may raise sample selection issues. Firms making inter vivos transfers could be overrepresented in the sample since the topic of the questionnaire is inheritance, inter vivos gifts, and their taxation. Firms unfamiliar with the inheritance and gift tax law because they did not experience a succession or did not make inter vivos transfers may have been less likely to participate because they did not think they had anything to contribute to the survey. Appendix Table 7 compares family firms responding to the IGTS to firms not responding. T tests reported in Appendix Table 7 indicate that the means of credit conditions and firm age are not statistically different in the two subsamples. Firms responding to the survey had a somewhat worse current state of business and expected development of employment than firms not responding (2.07 and 2.10; 1.98 and 2.00). Firms responding to the survey tend to be somewhat smaller than non-response firms as measured by log total assets and log total equity (14.58 and 14.87; 13.12 and 13.41). A Chi-squared test does not reject the null hypothesis that response behavior is independent of the federal state within Germany (P value of 0.51, see Fig. 5), but Chi-squared tests indicate that response behavior varies with numbers of employees, industry, and legal form. Firms responding to the survey tend to have fewer employees than firms choosing not to respond.Footnote 20 The results of the Chi-squared tests and t tests notwithstanding, there is little evidence that sample selection is an important issue in interpreting the results, since differences between the subsamples are small and the categorical variables assume multiple values in both of the subsamples. Furthermore, there is little reason to expect self-classification as a family firm in the Ifo Business Climate Survey to be prone to sample selection, since firms answered this question prior to learning the topic of the IGTS.

Table 7 Survey response behavior
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See Fig. 6.

Fig. 6
figure 6

Response rates and firm characteristics. Note The figure presents distributions of IGTS survey respondents and non-respondents by size (numbers of employees), federal state within Germany, industry, and legal form of operation. The figures display results of a Pearson Chi-squared test that response behavior is independent of numbers of employees/federal state/industry/legal form

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Hines, J.R., Potrafke, N., Riem, M. et al. Inter vivos transfers of ownership in family firms. Int Tax Public Finance 26, 225–256 (2019). https://doi.org/10.1007/s10797-018-9508-1

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