Abstract
We offer an institution-based view to the classic inquiry on the relationship between family business and firm performance, which has been dominated by traditional theories such as agency theory and the resource-based view. Specifically, we argue that institutions define family business characteristics such as ownership concentration and family management, and also affect the performance of family business. Our research contributes to a reconciliation of prior inconsistent findings and calls further attention to the embedded nature of family business in institutions.
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Notes
The comparison excludes state-owned firms since their governance structure and market activities are subject heavily to government intervention.
References
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We would like to thank Mike Peng (Editor-in-Chief Emeritus) for his constructive comments and hands-on editorial assistance. Thanks also go to two APJM reviewers and Yi Jiang for their very helpful comments.
Appendices
Appendix I Comparison of family vs. non-family firms*
Author | Sample | Conclusion | Theory used |
---|---|---|---|
Anderson & Reeb, 2003b | 403 firms from S&P 500, 1992–1999 | Family firms are significantly better performers than non-family firms in terms of ROA and Tobin’s Q; In well-regulated and transparent markets, family ownership in public firms reduces agency problems without leading to severe losses in decision-making efficiency. | Agency theory |
Barth et al., 2005 | Norway firms, 1996 | Family-owned firms are less productive than non-family-owned firms. | Agency theory |
Claessens et al., 2002 | East Asian firms | In East Asian economies, the excess of large shareholders’ voting rights over cash flow rights reduces the overall value of the firm, albeit not enough to offset the benefits of ownership concentration. | Agency theory |
Demsetz & Villalonga, 2001 | 511 firms from all sectors of the US economy, 1976–1980 | No statistically significant relation between ownership structure and firm performance. | Agency theory |
Ownership structures differ across firms because of differences in the circumstances facing firms, such as scale economies, regulation, and the stability of the environment in which they operate. | |||
Lins, 2003 | 1, 433 firms from 18 emerging economies. | Firm values are lower when a management group’s control rights exceed its cash-flow rights. These effects are significantly more pronounced in countries with low shareholder protection. | Agency theory |
Maury, 2006 | 1, 672 non-financial firms in 13 Western European countries | (1) Family control outperform non-family control in terms of profitability in different legal regimes; (2) Family control lowers the agency problem between owners and managers, but gives rise to conflicts between the family and minority shareholders when shareholder protection is low; (3) Family control increase profitability in legal environments with strong governance regulations. | Agency theory |
Morck et al., 1988 | 371 Fortune 500 firms, 1980 | Younger founder-controlled firms are more valuable; For older firms, Tobin’s Q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder. | Agency theory |
Tobin’s Q first increases, then declines, and finally rises slightly as ownership by the board of directors rises. | |||
Schulze, Lubatkin, Dino, & Buchholtz, 2001 | American family businesses, 1995 | Private ownership and owner management not only reduce the effectiveness of external control mechanisms, they also expose firms to a “self-control” problem created by incentives that cause owners to take actions which “arm themselves as well as those around them.” | Agency theory |
Westhead & Howorth, 2006 | 905 private firms in the UK | Closely held family firms did not report superior firm performance. | Agency and stewardship theories |
*Institutional effects are italicized.
Appendix II Family ownership concentration and firm performance
Author | Sample | Conclusion | Theory used |
---|---|---|---|
Anderson & Reeb, 2003a | 319 firms in S&P 500, 1993–1999 | Firms benefit from the presence of founding families; Firm gains from family control starts to taper off when the ownership stake exceeds 30%. | Agency theory |
Carney & Gedajlovic, 2002 | 106 publicly traded Hong Kong firms in 1993 | Coupled ownership and control is positively related to accounting profitability, dividend payout levels and financial liquidity, and negatively related to investments in capital expenditures. | Agency theory, resource-based view |
Claessens et al., 2002 | 1,301 publicly traded firms in eight East Asian countries | Firm value increases with the cash-flow ownership of the largest shareholder, falls when the control rights of the largest shareholder exceed its cash-flow ownership. | Agency theory |
La Porta et al., 2002 | 539 large firms from 27 wealthy economies | Lower valuations for firms in countries with worse protection of minority; Higher firm valuations in countries with better protection of minority shareholders and in firms with higher cash-flow ownership by the controlling shareholder. | Agency theory |
Morck et al., 1988 | 371 Fortune 500 firms in 1980 | First increasing and then diminishing returns to concentration and negative returns after about 30% concentration. | Agency theory |
Morck et al., 2000 | Canadian public corporations | Family ownership, particularly when in the hands of the successors to the founder, negatively affects firm performance. | Agency theory |
Schulze et al., 2003a | 1,464 American family businesses, 1995 | During periods of market growth, the relationship between the use of debt and the dispersion of ownership among directors at family firms is U-shaped. | Agency theory |
Shleifer & Vishny, 1997 | (1) Family ownership add value when the political and legal systems of a country do not provide sufficient protection against the expropriation of minority shareholder; (2) As ownership gets beyond a point, large owners are wealthy enough to prefer to use firms to generate private benefits of control that are not shared by minority shareholders. | Agency theory | |
Thomsen & Pedersen, 2000 | 435 European largest companies | Family ownership is associated with a negative MBV premium in the United Kingdom, but not on the continent. | Agency theory |
Zahra, 2003 | 409 US manufacturing firms | Family ownership and involvement in the firm as well as the interaction of this ownership with family involvement are significantly and positively associated with internationalization. | Stewardship theory |
Appendix III Family CEO and firm performance
Author | Sample | Conclusion | Theory used |
---|---|---|---|
Anderson & Reeb, 2003b | S&P 500 Industrial firms from 1993–1999 | A positive performance effect when family members serve as CEOs relative to unrelated CEOs; Family firms with family CEOs experience the greatest reductions in firm risk relative to non-family firms or to family firms with outside CEOs. | Agency theory |
Barontini & Caprio, 2006 | 675 publicly traded firms in 11 Continental Europe countries | When a descendant takes the position of CEO, family-controlled companies are not statistically distinguishable from non-family firms in terms of valuation and performance. | Agency theory |
Barth et al., 2005 | Firms in Norway Business and Industry (NHO) in 1996 | Family-owned firms managed by outside CEOs are equally productive as non-family-owned firms, while family-owned firms managed by a person from the owner family are significantly less productive. | Agency theory |
Durand & Vargas, 2003 | Survey by the Bank of France in 1997 | Owner-controlled firms have a greater productive efficiency than agent-led firms. | Agency theory |
Gomez-Mejia et al., 2001 | 276 Spanish newspapers over 27 years (1966–1993) | Non-family firms monitor CEOs better; Firm performance and business risk are much stronger predictors of chief executive tenure when a firm’s owners and its executive have family ties and that the organizational consequences of CEO dismissal are more favorable when the replaced CEO is a member of the family owning the firm. | Agency theory |
McConaughy, 2000 | 82 founding family controlled firms | Family CEOs have superior incentives for maximizing firm value and, therefore, need fewer compensation-based incentives. | Agency theory |
Morck et al., 1988 | Canadian firms | Tobin’s Q increases when the founding family holds one of the top two positions; Heir-controlled firms showed low industry-adjusted financial performance relative to other firms of same ages and sizes. | Agency theory |
Westhead & Howorth, 2006 | 905 independent private companies in the UK | The management rather than the ownership structure of a family firm was associated with firm-performance. Private family firms should avoid employing family members in management roles. | Agency theory, stewardship theory |
Appendix IV Founder CEO vs. descendant CEO and firm performance
Author | Sample | Conclusion | Theory used |
---|---|---|---|
Jayaraman et al., 2000 | US public corporations | Founder management has no main effect on stock returns over a 3-year holding period, but that firm size and firm age moderate the CEO founder status—firm performance relationship. | Agency theory, resource-based view |
McConaughy, Walker, Henderson, & Mishra, 1998 | US founding family controlled firms | Descendant-controlled firms are more efficient than founder-controlled firms. | Agency theory |
Morck et al., 1988 | 371 Fortune 500 firms in 1980 | For older firms, Tobin’s Q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder. | Agency theory |
Morck et al., 2000 | Canadian firms | Firms controlled by heirs of the founder show lower profitability than founder and family outsider controlled firms in the same industry; New wealth created by founders enhances firm value, but managerial entrenchment and distorted incentive structures impede the growth of firm value in descendant-inherited firms. | Agency theory |
Perez-Gonzalez, 2006 | US nonfinancial, nonutility firms in COMPUSTAT in 1994 | Firms where incoming CEOs are related to the departing CEO, to a founder, or to a large shareholder by either blood or marriage underperform in terms of operating profitability and market-to-book ratios, relative to firms that promote unrelated CEOs. | Agency theory |
Villalonga & Amit, 2006 | Fortune 500 firms during 1994–2000 | Controlled by heirs of the founder show lower profitability than founder and family outsider controlled firms in the same industry. The conflict between family and non-family shareholders in descendant-CEO firms is more costly than the owner manager conflict in non-family firms. | Agency theory |
Appendix V Family control of the board and firm performance
Author | Sample | Conclusion | Theory used |
---|---|---|---|
Anderson & Reeb, 2004 | Founding-family controlled firms in S&P 500 | In firms with continued founding-family ownership and relatively few independent directors, firm performance is significantly worse than in non-family firms; A moderate family board presence provides substantial benefits to the firm. | Agency theory |
Boyd, 1990 | 147 firms in Moody’s manuals and Compact Disclosure database | Boards are smaller in a more uncertain environment and have an increased number of interlocks. This relationship was stronger in high-performing firms. | Agency theory, resource dependency theory |
Ford, 1988 | Inc. 500 firms | Greater numbers of outsiders had significantly less influence or importance. The presence of outsiders may actually reduce the influence of the board. | Resource dependency theory |
Schulze et al., 2001 | American family businesses in 1995 | Outsider representation on boards shows a significant negative effect on firm performance. | Agency theory |
Vance, 1964 | Firms with insider-dominated boards performed better than firms with outsider-dominated boards for the successful, large, publicly-owned companies. | Agency theory, resource dependency theory |
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Liu, W., Yang, H. & Zhang, G. Does family business excel in firm performance? An institution-based view. Asia Pac J Manag 29, 965–987 (2012). https://doi.org/10.1007/s10490-010-9216-6
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DOI: https://doi.org/10.1007/s10490-010-9216-6