Founding-Family Ownership and Firm Performance: Evidence from the S&P 500
The main argument of this paper by Anderson and Reeb is the question whether family ownership is beneficial or detrimental to the future of the company. The arguments against family ownership stress on the points of forgoing profit, limited human resource pool, usage of company resources for personal reasons and general low company performance. Other researchers attribute benefits to family ownership like greater monitoring of the firm, increased motivation as personal fortunes are tied to it, specialized knowledge and increased investment horizons. This paper supports family ownership. Using S&P 500 index, they have split the paper into the following categories: - Section I presents arguments on the impact of family ownership and influence in public firms. Section II discusses the data and provides summary statistics. In Section III, empirical results are provided. Section IV explores the robustness of the results, and Section V provides a summary and concludes the paper.
Section 1 starts by describing the drawbacks of family ownership. Fama and Jensen argue that family ownership tends to deviate the firm’s target from increasing shareholder worth to personal goals like firm continuity and technological innovations etc. Another argument that runs is that family ownership entrenches management and reduces the firm value and the possibility of takeovers. Special dividends and personal benefit are a very popular argument against family ownership.
We now look at the potential benefits of family ownership. Family ownership may lead to them having a competitive advantage and as their personal fortunes are attached to the firm they will always run the firm to its maximum potential and increase its value. This also helps to eliminate the free rider problem. Researchers have pointed out that family run firms have longer investment horizons and this avoids investment myopia. Lastly, the fact that the family’s reputation is also at stake, this also gives them long term dealing with customers, suppliers etc, building greater trust in these pillars. In their study of active versus passive families they come across similar arguments.
In their research, Anderson and Reeb address four main questions. The profitability of family firms versus nonfamily? Whether this measure is affected by the age of the family and the firm? Is this performance linear over all family holdings? Do family CEO’s have a negative impact on the firm? Their sample includes 2173 observations collected from 403 non-utility/banking firms from 1992 to 1999 using the S&P 500 index. Their first task was the classification of family firms and their relative size in the industry which can be found on Table 1 of the paper. They have gone on to describe their method of testing and the variables they use.
The findings of their study can be summarized as follows. The average firm in their sample is nearly 85 years old. It has a return on assets, based on EBITDA (net income), of 15.05% (5.16%). Family firms represent 35% of their sample. Among the family firms, 45% of the CEO’s are family members and 55% are outsiders or hired hands. Family firms, on average, are smaller than nonfamily firms but still of substantial size with mean total assets of $9.617 Billion relative to $14.999 Billion for nonfamily firms. Family firms also do not appear to use debt differently than nonfamily firms. With respect to accounting performance, they found little difference in the univariate analysis between family and nonfamily firms with the exception of ROA (using net income as the numerator), which indicates that family firms are significantly better performers. They find that family firms have significantly (at the 1% level) greater valuations than non-family firms, 1.593 versus 1.322 for family and nonfamily firms, respectively. They find a negative relation between family ownership and the presence of...
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