top-rated free essay

Founding Family Ownership and Firm Performance: Evidencde from the S&P 500

By rishibajaj Mar 14, 2011 1070 Words
FOUNDING FAMILY OWNERSHIP AND FIRM PERFORMANCE: EVIDENCDE FROM THE S&P 500

The main of this paper is to evaluate the relation between firm performance and family ownership. There was a lot of belief that family ownership structure was very inefficient and less profitable as compared to the other ownership structures. Many reasons have been put forward for the same: owners may choose nonpecuniary consumption and draw resources away from profitable projects. Families often limit executive management positions to family members thereby restricting the more able and qualified individuals. Thus, prior literature has suggested that this ownership structure leads to a poor performance.

On the other hand, combining ownership and control can be used to eliminate managerial expropriation. A family’s historical presence and control of management and director posts allows them influence and maintain their control over the firm. At the same time, families have a long investment horizon, which leads to greater investment horizon. Hence, this leads to the question if family ownership structure enhances or hinders the performance of a firm. The research is based on a sample of firms from the S&P 500 from 1992 and 1999. It was seen that family firms constitute over 35% of the S&P 500 industrials and on average, families own nearly 18% of their undiversified equity.

The potential costs of family ownership are as follows; when founding families have substantial ownership then they may have the power and take decisions that benefit themselves at the expense of the firms performance. Their aims and objectives differ from the others. This would also reduce the probability of bidding by other agents, thereby reducing the value of the firm. Families are also capable of expropriating wealth from the firm through excessive compensation, related party transactions and special dividends. This has an impact on the company’s future growth plans and capital expansion plans leading to poor operating and stock price performance. At the same time, families acting on their own behalf can have an adverse impact on employee effort and productivity and they have incentives to redistribute income to themselves.

On the other hand, there are benefits of family ownership. Family influence can also provide competitive advantage. They have substantial interests to diminish agency conflicts and maximize their firms value. The family’s wealth has a strong positive correlation with the firms performance, so they would like to monitor managers and minimize the free rider problem inherent with small, atomistic shareholders. Founding families generally maintain a long-term interest in the firm so they are more willing to invest in long term projects and so are less likely to forgo good investment project. Family business also face reputation concerns arising from the family’s sustained presence in the firm and its effect on the third parties. In most family businesses, family members often take up the top management positions. This raises concerns that, then the family can more readily align the interests of the company with the family. This would also exclude the more able and talented outside professionals.

In the research of this paper we will focus on mainly 4 specific issues. Firstly, are family firms less profitable or less valuable? Secondly, does the relation between family ownership and firm performance differ for younger and older firms? Thirdly, does family ownership will influence performance? Fourthly, does the level of family involvement have a negative impact on their performance? The answers are based on largely public traded US firms. The main mechanism to identify the family business is by using the fraction of equity ownership of the founding family and/or the presence of the family members on the board of directors. This is not a problem for the younger firms but is one with old firms. This happens because over time the business tends to include relatives and other family members. This was resolved by looking into the history of each firm. Tobin’s q and return on assets (ROA) are the primary performance measures. Tobin’s q is an estimate of the ratio of market value of total assets divided by the replacement cost of the assets. We also introduce control variables to control for industry and firm characteristics. Firm size is the natural log of the book value of assets. Growth opportunities are measured as the ratio of R&D expenses to total sales. Firm risk is the standard deviation of monthly stock returns for prior 60 months. We control for debt in the capital structure by dividing long-term debt by the total assets. Firms’ age is measured by the number of years since the firms’ inception. The results show that using the Tobin’s q as the performance measure, family firms have significant greater valuations than non-family firms. Even using the ROA we can see that family firms have a better performance. Outside directors are prevalent in nonfamily firms than in family firms.

Prior literature suggests that founders bring unique, value adding skills to the firm that result in superior performance and markets valuations. However as the firm continues to age, family members have less to contribute suggesting that the better performance is observed in the younger firms in the sample. The analysis suggests that the relation between family holding and performance is not uniform over the entire range of family ownership; firm performance in increasing until families own one-third of the firms equity.

Our analysis potentially suffers from an endogeneity problem especially the issue is whether family ownership improves performance or strong performance prompts families to maintain their holdings. Families have information advantage over the other shareholders, because their large equity stakes and control of senior management. Families can more readily ascertain the firms future prospects so they retain ties to only those businesses with favorable outlooks.

Our large sample, cross sectional analysis indicates that family form perform at least as well as nonfamily firms. Using profitability based ROA, we find that family firms outperform non family firms. This result is robust to the measurement of ROA and is inconsistent with the hypothesis. The analysis also shows that the relation between family ownership in larger public firms and firm performance is not uniform across all levels of family ownership. However, the results can be further improved by extending the sample and increase the number of the firms. We can also improve our results by using better econometric technique.

Cite This Document

Related Documents

  • Founding Family Ownership and Firm Performance: Evidence from the S&P 500

    ...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...

    Read More
  • p and p from sparknotes

    ...first and foremost, a novel about surmounting obstacles and achieving romantic happiness. For Elizabeth, the heroine, and Darcy, her eventual husband, the chief obstacle resides in the book’s original title: First Impressions. Darcy, the proud, prickly noblewoman’s nephew, must break free from his original dismissal of Elizabeth as “not ...

    Read More
  • Different Types of Business Ownership; +'s and -'s

    ...There are many different advantages and disadvantages of different types of business ownership, such as being a sole trader, in a partnership, franchises and limited companies. Sole Trader The advantages of being a sole trader are as follows;  They are easy to set up – There are very few complicated forms to fill in and sole trade...

    Read More
  • Does Corporate Governance Enhance Firm Performance?

    ...DOES CORPORATE GOVERNANCE ENHANCE FIRM PERFORMANCE? BY: DR. RONALD IWU-EGWUONWU Introduction: Nations thrive on the performance of their economic units the major part of which are business firms that operate in their corporate jurisdictions. The quality of performance of these firms is of great interest to governments because by them a ...

    Read More
  • Effects of corruption on firm performance

    ...at the course CORRUPTION AND DEVELOPMENT »The effects of corruption on firm performance« Ljubljana, 27.5.2014 ABSTRACT In this seminar project we are going to present some of the basics of the effects that corruption has on firm performance. At the beginning of the paper we are going to describe the spread of corruption across co...

    Read More
  • Fdi Impact on Firm Performance

    ...Research Topic: FDI Impact on Firm Performance Research Question: Impact of Inward FDI on Firm Performance across Sectors: Evidence from Uzbekistan Research Objectives: • Determine the link between inward FDI and performance of domestic companies in Uzbekistan • Distinguish between vertical and horizontal spillover effects o...

    Read More
  • CEO compensation and firm performance

    ...relationship between the level of CEO’s compensation and firms’ performance. Before the enactment of the Sarbanes-Oxley legislation (SOX thereafter), which regulates the unethical wrongdoings, CEOs enjoyed unreasonable high remuneration despite of their mediocre performance. The overall focus of this report is to identify the relationship be...

    Read More
  • Ownership Concentration, Corporate Governance and firm Performance in Textile Sector of Pakistan

    ... Course Title Business research methods Assignment Research proposal Ownership Concentration, Corporate Governance and firm Performance in Textile Sector of Pakistan Submitted to Dr.Yasir Kamal Submitted by Farhan Akbar Program Msc. Finance Semester 3rd Dated: 5th of May 2014 Table of Contents 1. In...

    Read More

Discover the Best Free Essays on StudyMode

Conquer writer's block once and for all.

High Quality Essays

Our library contains thousands of carefully selected free research papers and essays.

Popular Topics

No matter the topic you're researching, chances are we have it covered.