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Does family business excel in firm performance? An institution-based view

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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

  1. The comparison excludes state-owned firms since their governance structure and market activities are subject heavily to government intervention.

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Authors and Affiliations

  1. Department of Management, School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong

    Weiping Liu

  2. Department of Management, City University of Hong Kong, Kowloon, Hong Kong

    Haibin Yang & Guangxi Zhang

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  1. Weiping Liu
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  2. Haibin Yang
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  3. Guangxi Zhang
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Corresponding author

Correspondence to Haibin Yang.

Additional information

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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