Family-owned
firms are common worldwide and comprise a significant share of assets and
economic activity. However, there is debate about how family ownership influences
firm behavior and performance. Stewardship theory (Davis et al., 1997; Stark
& Falk, 1998) suggests that family-owned firms may do better when families
are concerned about preserving the reputation and performance of the firm and the
family name. However, agency theory suggests
that family-owned firms are likely to underperform since family owners may focus
on the family, or certain family members, over the economic value of the firm
(Jensen & Meckling, 1976; Schulze et al., 2001).
Much of
the existing evidence on the relative performance and behavior of family-owned
and non-family-owned firms relies on samples of larger, established, often
public firms (for example, Anderson & Reeb, 2004; Bertrand & Schoar,
2006; Le Breton-Miller et al., 2011) or focuses on succession (for example,
Perez-Gonzalez, 2006; Bennedsen et al., 2007; Ellul et al., 2010). There is
less evidence of how family ownership influences private firms. The scarcity of
evidence represents a gap in our understanding, since scholars, practitioners,
and policymakers would like to understand how the initial ownership and
organization of young firms is related to their future performance.
This study,
which uses detailed data on the owners and financials of private firms across
Europe, documents the selection of firm types and ownership structures. By
observing young firms, we identify ways that business opportunities may be
differently selected by family and non-family owners. We also distinguish
between firms owned by a married couple and those owned by other types of
family members, such as parents and children or siblings. We find that family
owners tend to choose opportunities with higher returns and more stability, yet
more limited growth potential. Family-owned firms also have more limited investment
opportunities, especially with married shareholders. We discuss several things
that may drive these patterns.
What is a family-owned firm? We define family-owned firms as
those having at least two shareholders that are family members. Thus, our focus
is on family ties between owners, rather than family ties between employees and
owners or between current and future owners. Family-owned firms represent 20%
of firms in our sample of 210,464 firms, and 30% of the 130,802 firms with at
least two shareholders. Family-owned firms are prevalent across all industries,
comprising up to 50% of firms in such industry segments as automotive repair
and agriculture, and as little as 10% in industry segments such as accounting
and advertising. We find a substantial share of family-owned firms in both
high- and low-tech industries. For instance, close to 30% of the firms in
chemicals are family-owned, which is very similar to the share of family-owned
firms in building construction (28%).
Family
ownership is associated with more stable, but slower growing, young firms.
Family-owned firms on average have returns on assets that are 1.6 percentage
points higher, profit margins that are 1.1 percentage points higher, and
survival rates that are 2.5 percentage points higher than non-family-owned
firms. These differences are even stronger for firms in which the two leading
shareholders are married. The higher returns, profit margins, and survival
rates in family-owned firms are associated with greater cash reserves. Family-owned
firms also rely less on outside debt relative to non-family-owned firms, and
have lower operating costs, such as employee wages, relative to non-family-owned
firms. Lower wages explain close to 30% of the liquidity reserves of
family-owned firms, and a third of the profitability dispersion.
These
patterns hold with the view that family-owned firms manage their cash
conservatively, spending less on wages and other operating costs and retaining
more of their earnings in the firm. The greater cash reserves of family-owned
firms may help them to better weather shocks and signal stability to suppliers,
customers, and employees, which may keep profit margins high and increase their
survival rates. However, these spending policies are also associated with lower
rates of investment and growth. Sales growth rates of family-owned firms are on
average 1.7 percentage points lower than for non-family firms, and 11
percentage points lower for firms under the age of 10 (the sample median).
Why? Several things may explain these
patterns, including different management practices between private family and
non-family-owned firms. The stewardship view suggests that family-owned firms focus
on the reputation and stability of the firm, sacrificing current growth for a
higher chance of survival. However, our results are also consistent with the
agency view that some value may be sacrificed in order to maintain stability.
This is not the same as the use of the firm's resources to benefit current
family members at the expense of the firm's current stability and value (for
example, Schulze et al., 2002), since cash stays within the firm rather than going
to current higher wages or dividends. However, our findings suggest this cash
could be more profitably deployed by investing in the firm.
Our
results do not suggest that family-owned firms perform better or are more
likely to survive because there are fewer conflicts of interest or better
monitoring between owners and managers. We do find that they exhibit higher
returns, profits, and survival relative to single-shareholder firms in which
the owner and manager are the same person. We also find that family-owned firms
exhibit lower investment and growth. Overall, our analysis highlights distinct
trade-offs to family ownership in private, especially young, firms in which
stability is valued over investment and growth.
What does this mean? Without drawing broad policy
implications from our analysis, our findings suggest that family ownership is
neither a dominant nor dominated ownership form in young, private firms in
terms of the outcome measures we consider – returns, profit margins, survival,
and growth. Rather, our findings suggest trade-offs to family ownership in
young firms as measured by these outcomes. Thus, environments or policies that
encourage family ownership of private firms would also likely embody the
trade-off of greater stability and slower growth of firms.
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