Family Ownership and Frim Performance

8/6/2019 Family Ownership and Frim Performance

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Family ownership and firm performance: Empirical

evidence from Western European corporations

Benjamin Maury*

Department of Finance and Statistics, Swedish School of Economics and Business Administration,

P.O. Box 479, 00101 Helsinki, Finland

Received 17 November 2004; received in revised form 8 February 2005; accepted 24 February 2005

Available online 23 June 2005

Abstract

This paper empirically examines how family-controlled firms perform in relation to firms with

nonfamily controlling shareholders in Western Europe. The sample consists of 1672 non-financial

firms. Active family control is associated with higher profitability compared to nonfamily firms,

whereas passive family control does not affect profitability. Active family control continues to

outperform nonfamily control in terms of profitability in different legal regimes. Active and passive

family control is associated with higher firm valuations, but the premium is mainly due to economies

with high shareholder protection. The benefits from family control occur in nonmajority held firms.

These results suggest that 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 and control is high.

D 2005 Elsevier B.V. All rights reserved.

JEL classification: G3; G32Keywords: Family firms; Ownership structure; Corporate governance

1. Introduction

Family control is common in publicly traded firms around the world (Burkart et al.,

2003). For the US, Anderson and Reeb (2003) show that one-third of S&P 500 firms can

0929-1199/$ - see front matterD 2005 Elsevier B.V. All rights reserved.

doi:10.1016/j.jcorpfin.2005.02.002

* Tel.: +358 9 43133422; fax: +358 9 43133393.

E-mail address: [email protected].

Journal of Corporate Finance 12 (2006) 321341

www.elsevier.com/locate/econbase


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be classified as family-controlled. In Western Europe, the majority of publicly held firms

remain family-controlled (La Porta et al., 1999; Faccio and Lang, 2002). Such controlling

families often hold large equity stakes and frequently have executive representation. In

Western European corporations, founding families often continue to hold significant

equity stakes after they retire from managerial positions (Burkart et al., 2003). Despite the

vast amounts of capital these family owners administer in Europe, empirical evidence on

the performance of family firms remains sparse.

In the US, family firms tend to have higher valuations and profitability than

nonfamily firms (McConaughy et al., 1998; Anderson and Reeb, 2003). Villalonga and

Amit (2004) find that the bUS family premiumQ is mainly due to founding family CEOs.

Anderson and Reeb (2003) show that the gains from family control starts to taper off

when the ownership stake exceeds about 30%. In contrast to family premiums, Faccio et

al. (2001) report that family control may harm minority shareholders in East Asian firmswhere transparency is low. For Western Europe, I hypothesize that family control should

increase firm profitability, whereas value premiums should arise in such legal

environments that succeed in protecting their minority shareholders against family

opportunism.

Using a sample of 1672 non-financial firms from 13 Western European countries, I

show that family control is associated with 7% higher valuations (Tobins qs) and 16%

higher profitability (return on assets) in relative terms as compared to firms controlled by

nonfamily owners. The benefits to family control arise in nonmajority-controlled firms,

and are reflected in higher valuations at lower control levels but in higher profitability at

higher control levels. Active family control, in which the family holds at least one of thetop two officer positions, strongly increases profitability, whereas passive family control is

associated with profit rates comparable to nonfamily firms. Valuations are similar for

active and passive family control. The efficiency gains in terms of profitability from active

family control do not vary with the level of legal shareholder protection to a large degree,

whereas the value benefits from family control tend to disappear when minority

shareholders have lower legal protection. Firms without any controlling shareholder have

comparable valuations to family firms but do not have significantly different profitability

ratios from nonfamily-controlled firms.

The results in this paper are consistent with the argument that family control can reduce

the classical agency problem between owners and managers (Fama and Jensen, 1983), andgive rise to conflicts of interest between minority shareholders and the controlling family

when family control is tight (e.g., Shleifer and Vishny, 1997). It is also important to note

that while active family control increases profitability compared to nonfamily firms even

when different judicial settings are considered within Western Europe, such increased

profitability does not translate into higher valuations when shareholder protection is low.

These results fit rather well with recent evidence that family control can increase firm

value in a well-regulated economy (e.g. Anderson and Reeb, 2003), whereas family

control may harm minority shareholders due to the risk of expropriation when

transparency is low.

This paper proceeds as follows. Section 2 briefly reviews prior literature and discusses

expectations on the relation between family control and firm performance. Section 3

describes the data and presents descriptive statistics. Section 4 presents the empirical

B. Maury / Journal of Corporate Finance 12 (2006) 321341322


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results on the relation between family control and firm performance. Section 5 offers

robustness tests. Section 6 concludes the paper.

2. Theory and hypotheses

Do family firms outperform nonfamily firms? In the US, publicly traded family-

controlled firmsthat represent one third of the firmshave higher Tobins q values and

higher return on assets than comparable nonfamily firms (Anderson and Reeb, 2003;

Villalonga and Amit, 2004). These studies support the view that family ownership reduces

the classical agency problem between managers and shareholders. However, Anderson and

Reeb (2003) find that the positive effect associated with family ownership starts to taper

off at around 30% ownership. Holderness and Sheehan (1988) also find a tendency thatfirms majority-controlled by a family have lower performance than diffusely held firms.

Thus, family ownership may harm minority shareholders, for various reasons, when

control is highly concentrated.1 On these views, I hypothesize that there will be an

ownership range in which family-controlled firms will outperform comparable firms with

nonfamily controlling shareholders.

Are there systematic performance differences between active and passive family

control? Villalonga and Amit (2004) find that the higher valuation of family firms arises

when the founder serves as CEO or as Chairman of the board with a hired CEO. They

argue that the owner-manager agency problem in nonfamily firms is larger than the family-

minority owner conflict in founder-CEO firms, whereas the family-minority ownerconflict is larger in descendant-controlled firms than the owner-manager agency problem

in nonfamily firms. Morck et al. (1988) find that founding family members among the top

two officers in younger firms (in which they supply entrepreneurial talent) increase firm

value, whereas they or their descendants reduce value in older firms (in which they may

become entrenched). Theoretical models on succession assume that professional managers

will be more productive than family descendants (due to the restricted size of the labor

pool to choose from), but also that hiring a professional manager will lead to misalignment

of interests (Bhattacharya and Ravikumar, 2002; Burkart et al., 2003). Taken together, if

the benefits with having a family member among the top two executives will exceed the

costs, such managerial ties should improve firm performance.Does the impact of family ownership on firm performance vary with the legal

environment? Anderson and Reeb (2003) argue that family ownership in listed firms

operating in well-regulated and transparent markets reduces agency costs. On the other

hand, Faccio et al. (2001) claim that politically powerful families in control of public firms

have been able to expropriate minority shareholders in East Asia where transparency is

low. Faccio et al. (2001) also point out that controlling shareholders in Europe have less

control in excess of cash-flow rights than East Asian firms, and that controlling

shareholders in European firms have less incentive to expropriate because they hold on

1 Independent directors on the board (Anderson and Reeb, 2004) and outside shareholder monitoring (Maury

and Pajuste, 2005) may help reduce family opportunism.

B. Maury / Journal of Corporate Finance 12 (2006) 321341 323


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average more cash-flow rights. La Porta et al. (2002) propose that the positive influence of

entrepreneurial cash-flow rights on firm value should be greater in countries with inferior

protection of shareholders. Thus, I hypothesize that family ownership may be more

beneficial to firm value in legal environments where minority shareholders better can

protect themselves against family opportunism and where family owners participate with

significant cash-flow rights. However, this does not imply that the legal environment

should significantly affect the profit rate in family firms.

3. Data

3.1. Sample and data sources

The data set is obtained by combining Faccio and Langs (2002) sample of Western

European firms with ultimate ownership data and the January 2003 edition of the

WorldScope database. There are 5232 firms in the original ownership database, which

excludes firms that are majority controlled by foreign investors or controlled by nominee-

registered shareholders. Coverage of performance and control variables is found for 1672

non-financial firms (excluding SICs 60006900). Financial data come from the fiscal year-

end closest to end of 1998. The countries included are Austria (46 firms), Belgium (30),

Finland (73), France (209), Germany (259), Ireland (39), Italy (59), Norway (76), Portugal

(9), Spain (58), Sweden (104), Switzerland (75), and the UK (635). In the robustness

section, financial firms are analyzed separately (393 firms).

3.2. Ownership, and legal regime variables

I use four dummy variables to measure family control. The first variable, called

Family_all, is set equal to one if the largest controlling shareholder holding at least 10% of

the voting rights is a family, an individual, or an unlisted firm, and zero otherwise. The

second family ownership variable, named Family_unlisted, equals one if the family

controlling shareholder is an unlisted firm, and zero otherwise. Unlisted firms are often

closely held and therefore usually considered as one form of family control (Faccio and

Lang, 2002). The third variable, Family_identified, equals one if the largest controllingshareholder is an identified family or individual, but excludes unlisted firms as well as

family-managed firms from the family definition. The last family variable measures active

family control (Family_management) and is set equal to one if the controlling shareholder

is a family or an individual who holds the CEO, Honorary Chairman, Chairman, or Vice

Chairman position, and zero otherwise. The last definition of family control is intended to

distinguish active family control from more passive family ownership.2 In addition, a

variable called Widely held dummy is used to control for firms that do not have any

controlling shareholder at the 10% cut-off level.

2 Unfortunately, the Faccio and Lang (2002) data set does not separate between family CEO ownership and

family board ownership.



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The variable Ownership measures the proportion of cash-flow rights held by the largest

shareholder, and is available for shareholders with at least 5% of the control rights.3 This

variable is intended to capture the positive effect of cash-flow incentives on firm

performance. The variable Control minus ownership is the difference between the control

rights and the cash-flow rights held by the largest shareholder, and the variable is intended

to measure the entrenchment effect of excess control rights. The Multiple blockholders

dummy is set equal to one if there is another owner with at least 10% of th e votes in the

firm, and zero otherwise. The measure of antidirector rights comes from La Porta et al.

(1998, p. 1130) and it varies between 0 (lowest) and 5 (highest) in my sample depending

on the degree of legal minority shareholder protection in a country.4 The vast majority of

the ownership data come from end of 1996 (1527 firms). For 306 firms the data is from

end of 1997 or 1998. The remaining 232 firms ownership data come from the end of

1999. The fact that all ownership data do not come from the same year is not likely to be asignificant problem because the ownership stakes of the largest shareholders are relatively

stable over time (La Porta et al., 1999).

3.3. Performance variables

Firm performance is measured by Tobins q and return on assets (ROA). I estimate

Tobins q as the market value of common equity plus the book value of total assets minus

common equity and deferred taxes divided by the book value of total assets. This

definition of Tobins q is similar to the one used in La Porta et al. (2002). The return on

assets (ROA) is defined as (net income before preferred dividends+(interest expense ondebt-interest capitalized)*(1 tax rate)) all divided by the last years total assets times

100. As an alternative profitability measure, I use the return on equity (ROE) defined as

net income before preferred dividends minus preferred dividend requirement all divided by

last years common equity times 100. The results using return on equity are presented in

the robustness section.

To reduce the weight of extreme values, I have capped Tobins q, ROA, and ROE at the

5th and the 95th percentiles. All performance variables are measured at the end of 1998, or

the fiscal year-end closest to end of 1998.

3.4. Control variables

Several variables are used to control for industry and firm-specific characteristics.

Growth in net sales is used to proxy the value of growth opportunities. The variable is

3 In 163 non-financial firms, the largest shareholder holds less than 5% of the votes. The corresponding figure

for financial firms is 16.4 Antidirector rights measure how strongly the countrys laws favor outside investors against managers and

dominant shareholders. For each of the antidirector measures (one shareone vote, proxy by mail allowed, shares

are not blocked before shareholders meeting, cumulative voting or proportional board representation, legalmechanisms against oppression, preemptive rights to new issues, percentage of share capital to call an

extraordinary shareholder meeting less or equal to 10%) the country gets a 1 if the investor protection is in the

law. The antidirector rights index is the sum of these measures.



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measured as the average growth over the 3-year period 19961998, or available years.

Capital expenditures relative to sales measure the firms investment intensity. Both are

expected to have a positive relation to firm valuation. Firm size is measured by the

logarithm of total assets and leverage is measured by total debt divided by total capital.

Control variables are measured at the end of 1998, or the fiscal year-end closest to end

of 1998. I cap sales growth, capital expenditures/sales, and total debt/total capital at

the 5th and the 95th percentiles to reduce the weight of extreme values. Dummy

variables for two-digit SIC codes are used to control for industry effects.

3.5. Descriptive statistics

Table 1 presents summary statistics for the variables that are used in the analysis. The

average Tobins q for the sample firms is 1.53 and the return on assets is on average 5.86.The average sales growth is about 15%. Family firms represent 63% of the Western

European sample firms. In about 33% (0.21/0.63) of the family-controlled firms, the CEO,

Table 1

Summary statistics of variables

Variable Mean Median S.D. Min Max

Tobins q 1.53 1.26 0.80 0.74 3.79

Return on assets 5.86 5.93 7.79 12.61 20.57

Family_all 0.63 1.00 0.48 0.00 1.00

Family_management 0.21 0.00 0.41 0.00 1.00Family_identified (less management) 0.10 0.00 0.30 0.00 1.00

Family_unlisted 0.32 0.00 0.47 0.00 1.00

Widely held 0.13 0.00 0.34 0.00 1.00

Ownership 29.52 22.50 24.81 0.00 100.00

Control minus ownership 3.89 0.00 8.59 39.57 60.25

Multiple blockholders dummy 0.36 0.00 0.48 0.00 1.00

Firm size (log of sales in USD) 12.32 12.16 1.83 6.76 18.33

Capital expenditures / sales 7.83 4.83 8.96 0.57 36.67

Sales growth 15.16 8.85 22.57 12.71 79.85

Total debt / total capital 21.49 20.31 15.59 0.00 52.35

Antidirector rights 3.36 3.00 1.58 0.00 5.00

STDa 3.58 2.51 3.09 0.00 24.37

The table presents summary statistics for 1672 non-financial Western European firms. The variables are:

Tobins q; Return on assets; Ownership, the fraction of cash-flow rights held by the largest shareholder;

Control minus ownership, the difference between control and cash-flow rights held by the largest shareholder;

Multiple blockholders dummy, equals one if there are other controlling shareholders with at least 10% of votes

in the firm; Family_all, a dummy variable that equals one if the controlling shareholder is a family or an

unlisted firm and zero otherwise; Family_unlisted, a dummy variable that equals one if the controlling

shareholder is an unlisted firm, and zero otherwise; Family_identified, a dummy variable that equals one if the

controlling shareholder is an identified family without managerial or board representation, and zero otherwise;

Family_management, equal to one if a member of the identified controlling family is the CEO, Honorary

Chairman, Chairman, or Vice Chairman, and zero otherwise; Widely held, a dummy variable that equals one if

the firm has no shareholder with at least 10% of the votes, and zero otherwise; Sales growth (3 years); Capitalexpenditures/sales; firm size (log of total assets in USD); Total debt/total capital; Antidirector rights, the index

of antidirector rights in a country; and STDa, the standard deviation of 5-year net income/total assets (available

for 1632 firms).



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Table 2

Summary statistics by ownership

Variable Family Family

management

Family

nonmanagement

Nonfamily Widely

held

Family management

vs. family nonmanagement

Mean Mean Mean Mean Mean t-stat

Tobins q 1.54 1.58 1.51 1.41 1.73 1.23

Return on assets 5.56 6.52 5.09 5.69 7.53 2.84***

Ownership 37.55 39.56 36.56 23.44 2.33 1.93*

Control minus ownership 4.10 4.22 4.04 5.41 0.20 0.30

Multiple blockholders dummy 0.41 0.34 0.44 0.45 0.00 2.81***

Firm size (log of sales in USD) 12.08 11.70 12.27 12.65 12.88 5.06***

Capital expenditures / sales 7.80 6.41 8.48 7.83 7.99 3.45*** Sales growth 15.46 16.37 15.02 12.91 17.64 0.91

Total debt / total capital 22.03 21.41 22.33 20.77 20.22 0.88

Antidirector rights 3.05 3.09 3.03 3.61 4.34 0.61

STDa 3.49 3.50 3.48 3.80 3.62 0.09

Observations 1056 348 708 392 224

*, **, ***Significant at the 10%, 5%, and 1% levels, respectively.

The table presents summary statistics for 1672 non-financial Western European firms by ownership. The ownership categories a

family or an unlisted firm; Family management, the identified controlling family is the CEO, Honorary Chairman, Chairman

Family nonmanagement; the controlling shareholder is classified as family but does not have managerial ties; Nonfamily, control

and not widely held at the 10% cut-off level; Widely held, the firm has no shareholder with at least 10% of the votes. The va

Ownership, the fraction of cash-flow rights held by the largest shareholder; Control minus ownership, the difference between

largest shareholder; Multiple blockholders dummy, equals one if there are other controlling shareholders with at least 10% of

Capital expenditures/sales; firm size (log of total assets in USD); Total debt/total capital; STDa, the standard deviation of 5-y

1632 firms), and Antidirector rights, the index of antidirector rights in a country.


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Table 3

Frequency and valuation of family and nonfamily firms by industry

SIC Industry description Family Nonfamily Widely held Total % Family

firmsof total

Freq. Mean

Q

Freq. Mean

Q

Freq. Mean

Q

01 Agricultural productioncrops 3 1.57 3 100

02 Agricultural productionlivestock 1 1.02 1 100

08 Forestry 2 0.76 2 2.27 4 50

09 Fishing, hunting, and trapping 1 0.99 1 100

10 Metal mining 1 1.01 3 1.19 3 1.82 7 14

12 Coal mining 1 0.74 1 100

13 Oil and gas extraction 24 1.10 3 1.49 4 1.62 31 77

14 Nonmetallic minerals, except fuels 5 1.12 2 1.22 2 1.73 9 5615 General building contractors 24 1.17 14 1.05 9 1.11 47 51

16 Heavy construction, except buildings 11 1.23 6 1.11 17 65

17 Special trade contractors 5 1.28 4 1.36 9 56

20 Food and kindred products 73 1.36 17 1.32 12 1.65 102 72

21 Tobacco products 1 2.01 2 3.13 3 0

22 Textile mill products 24 1.12 10 1.05 2 0.91 36 67

23 Apparel and other textile products 23 1.58 4 1.08 5 1.83 32 72

24 Lumber and wood products 11 1.15 4 0.88 2 1.66 17 65

25 Furniture and fixture 11 1.32 3 1.33 2 2.71 16 69

26 Paper and allied products 26 1.11 10 0.95 2 1.14 38 68

27 Printing and publishing 22 1.49 5 1.87 5 2.24 32 69

28 Chemicals and allied products 49 1.79 16 1.31 11 1.84 76 6429 Petroleum and coal products 3 1.20 2 1.11 1 1.42 6 50

30 Rubber and misc. plastics products 17 1.21 9 1.34 2 1.43 28 61

31 Leather and leather products 5 1.65 4 1.19 1 2.05 10 50

32 Stone, clay, and glass products 45 1.27 13 1.37 5 1.32 63 71

33 Primary metal industries 20 1.23 15 0.99 4 1.35 39 51

34 Fabricated metal products 30 1.25 12 1.54 10 1.40 52 58

35 Industrial machinery and equipment 69 1.42 30 1.39 16 1.49 115 60

36 Electronic and other electronic equipment 55 1.55 14 1.80 9 1.93 78 71

37 Transportation equipment 29 1.55 11 1.37 9 1.60 49 59

38 Instruments and related products 28 2.17 5 1.21 9 2.16 42 67

39 Miscellaneous manufacturing industries 18 1.24 4 1.16 2 0.90 24 75

40 Railroad transportation 1 1.11 1 2.93 1 1.02 3 33

41 Local and interurban passenger transit 4 1.01 1 2.27 5 80

42 Trucking and warehousing 10 1.61 2 1.18 2 1.18 14 71

44 Water transportation 31 0.95 9 1.02 2 1.58 42 74

45 Transportation by air 8 1.65 6 1.07 5 1.30 19 42

47 Transportation services 3 1.22 4 1.44 7 43

48 Communications 16 2.80 10 2.56 2 3.12 28 57

49 Electric, gas, and sanitary services 14 1.78 27 1.73 11 1.55 52 27

50 Wholesale tradedurable goods 64 1.64 14 1.57 12 1.88 90 71

51 Wholesale tradenondurable goods 37 1.37 15 1.41 10 1.51 62 60

52 Building materials and garden supplies 7 1.36 2 1.05 2 1.13 11 64

53 General merchandise stores 9 1.32 6 1.37 4 1.77 19 4754 Food stores 13 1.60 4 1.26 3 1.54 20 65

55 Automotive dealers and service stations 11 1.00 8 0.95 1 1.25 20 55

56 Apparel and accessory stores 9 1.51 7 1.37 2 1.17 18 50



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chairman, or vice chairman comes from the controlling family. In about 51% (0.32/0.63)

of the family firms, the controlling shareholder is an unlisted firm. Firms without any

controlling shareholder represent only 13% of the sample firms.5 Although not reported in

Table 1, nonfamily-controlled firms have the following types of controlling shareholders

50% financial institutions, 26% miscellaneous types, 18% the State, 4% widely held

corporations, and 1% cross-holdings. The mean ownership fraction is 29.52% and the

mean difference between control rights and cash-flow rights by the controlling shareholder

is 3.89%.

Table 2 shows summary statistics for different ownership categories for Western

Europe as a whole. Tobins qs are higher in family firms than in nonfamily firms but

lower than in widely held firms. Returns on assets are not significantly different

between family and nonfamily firms, whereas they are higher in diffusely owned firms.

Family-managed firms have higher returns on assets than family firms without

managerial ties, but similar valuations. Ownership is more concentrated in family than

in nonfamily firms. Family firms are also smaller in size than nonfamily and diffusely

held firms.

SIC Industry description Family Nonfamily Widely held Total % Family

firms

of totalFreq. Mean

Q

Freq. Mean

Q

Freq. Mean

Q

57 Furniture and home furnishings stores 9 2.43 2 1.74 11 82

58 Eating and drinking places 10 2.21 4 1.45 5 1.41 19 53

59 Miscellaneous retail 19 1.57 5 1.81 1 1.39 25 76

70 Hotels and other lodging places 14 1.37 5 1.09 1 0.95 20 70

72 Personal services 2 1.41 1 1.27 3 67

73 Business services 67 2.57 12 2.25 18 2.62 97 69

75 Auto repair, services, and parking 1 1.39 1 0

76 Miscellaneous repair services 2 0.80 2 100

78 Motion pictures 6 2.24 1 1.22 7 8679 Amusement and recreation services 17 1.50 5 0.84 4 1.21 26 65

80 Health services 9 1.41 4 1.33 13 69

82 Educational services 1 1.86 1 2.76 2 50

84 Museums, botanical, zoological gardens 1 2.35 1 0

87 Engineering and management services 24 1.86 13 1.47 7 2.50 44 55

92 Justice, public order, and safety 1 0.74 1 100

95 Administration of environmental quality

and housing programs

1 1.19 1 100

96 Administration of economic programs 1 1.29 1 100

The ownership categories are: Family, the controlling shareholder is a family or an unlisted firm; Nonfamily, the

controlling shareholder is a nonfamily owner; and Widely held, the firm has no controlling shareholder with at

least 10% of the votes. Mean Q is the average Tobins q value. SIC codes are two-digit standard industry

classification codes.

5 For comparison, Faccio and Lang (2002, p. 378) report (using the 10% cut-off level for control) that family-

controlled firms represent about 56%, whereas diffusely-owned firms represent about 14% of their sample

comprising of 5232 firms.

Table 3 (continued)



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Table 3 presents descriptive statistics on average Tobins qs in different owner

categories for each two-digit SIC code. Family ownership is a common feature of most

industries in Western Europe; it is particularly common in large industries like food and

kindred products (SIC 20), electronic and other electric equipment (SIC 36), wholesale

tradedurable goods (SIC 50), and business services (SIC 73).

4. Regression results

In this section, the relationship between firm performance and family ownership is

analyzed. In Tables 4 through 6, regressions are performed using a country fixed-effects

(within) specification. The country fixed-effects specification is supported by the Breusch

and Pagan (1980) Lagrange multiplier test. Robustness tests are left for Section 5.The principal result in Table 4 is that family-controlled firms have higher firm

performance than firms controlled by other types of owners. The Family_all variable, in

column 1, shows that firm valuation (Tobins q) under family control rises by about 7%

compared to firms with nonfamily controlling shareholders (family coefficient/average

Tobins q without diffusely owned firms). When ROA is the performance metric (column

4), family firms also have about 16% higher firm profitability in relative terms (family

coefficient / average ROA without diffusely owned firms). Thus, the results provide

evidence on benefits with family control compared to control by nonfamily owners,

plausibly due to lower agency costs, in Western European firms.

In Table 4, the effects of active versus passive family control on firm performance arealso examined. Active family control defined as holding one of the top two officer seats

(Family_management) improves the accounting profit dramatically, the coefficient rises

from 0.9 to 2.0 (column 5), whereas valuations are not affected by the choice of active

versus passive family involvement in the firm (column 2). Thus, while active family

owners deliver higher profits, such tight family control does not materialize in increased

valuation levels. The same pattern is found when active family control is analyzed on a sub

sample of only family firms (columns 3 and 6). Taken together, the findings on active

family control support the hypothesis that family management can increase efficiency as

discussed in Section 2.

Table 5 investigates the impact of nonlinearities in the effects of family control on firm performance. Again, an interesting difference between valuations profits rates arises:

family control is associated with increased valuation at moderate control levels (1020%

and 3040% of votes), whereas family control starts to increase profit rates at higher

control levels (above 30% of votes).6 Table 5 also compares family ownership in separate

samples consisting of nonmajority- and majority-controlled firms. Family firms have

higher performance in nonmajority-controlled firms, while no significant relation is found

in majority firms (in which family firms represent 85% of the firms). Thus, it would be

incorrect to argue that family-control always increases firm performance because the

6 These family control dummies for different control ranges assume that the effect of the control group

(nonfamily firms) stays constant.



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results suggest that family opportunism may increase at high control levels. The results

support a nonmonotonic relationship between family control and firm performance that

was discussed in Section 2.

In Table 6, the sample is split into firms operating in countries with above the median

score of antidirector rights (Panel A) and those equal to or below the median score (Panel

B).7 Family firms have significantly higher valuations when shareholder protection is

above the median level, whereas the family firm coefficient is positive but insignificant

when shareholder protection is lower. Firms with active family control (Family_manage-

ment) have higher profit rates than nonfamily firms in both samples.8 The profitability

gains from family management vary between 2.063 and 1.721 depending on the level of

investor protection. Taken as a whole, family-controlled firms have higher profit rates than

nonfamily firms especially in family managed firms in both the high and low shareholder

protection samples within Western Europe. These results favor the idea outlined in Section2 stating that the level of legal shareholder protection has a different impact on the

valuation as compared to the profitability of family firms, and that this difference is driven

by the agency problem between the controlling family and minority shareholders.

The results in Tables 4 and 5 also show that widely held firms, in which there is no

controlling shareholder, appear to have higher valuations (but not higher profit rates) than

nonfamily firms. For comparison, minority shareholders in nonmajority-controlled firms

enjoy approximately equally high Tobins q values in family-controlled and diffusely

owned firms (column 2 of Table 5). Table 6 further shows that diffusely held firms only

perform better than nonfamily-controlled firms when investor protection is of good

quality. Thus there is a trade-off between liquidity and control when shareholder protectionis good (see, Bolton and von Thadden, 1998; Becht, 1999). One explanation for the

valuation of diffusely owned firms arises from the liquidity and risk-diversification

benefits obtained through such dispersed ownership structures.9

The other governance related variables in Tables 4 through 6 include the fraction of

cash-flow ownership held by the controlling shareholder. The ownership variable

measuring the incentive effect of cash-flow rights is insignificantly related to firm

performance in the full sample and in family firms in Tables 4 and 6. One reason for

the low significance of the ownership variable may be that cash-flow incentives matter

more on continents and in economies that feature lower quality of minority

shareholders protection (La Porta et al., 2002; Durnev and Kim, 2005) than incountries in Western Europe. The ownership variable is significantly negatively related

to valuation in nonmajority firms (Table 5, column 2) and to ROA in majority firms

(Table 5, column 6).

9 Although not reported in the tables, the positive effect of diffusely held firms on valuations appears to be

driven mainly by firms in which control-rights by the largest shareholder are below 5% rather than in the range

510%.

7 Countries above the median antidirector rights score 3 include Ireland, Norway, Spain, and the UK; and those

equal to or below the median score include Austria, Belgium, Finland, France, Germany, Italy, Portugal, Sweden,

and Switzerland.8 The reported pattern also arises when the split is based on the legal origin of a country such as common law

(generally higher protection) and non-common law (generally lower protection).



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Table 6

Firm performance, investor protection, and family control

Tobins q Tobins q ROA ROA

(1) (2) (3) (4)

Panel A. High investor protection countries (antidirector rights above the median score)

Constant 0.648 (0.83) 0.658 (0.85) 9.860 (1.13) 10.257 (1.18)

Family_all 0.204***,w (3.04) 1.203 (1.60)

Family_management 0.183** (2.10) 2.063** (2.11)

Family_identified

(less management)

0.200* (1.84) 1.294 (1.06)

Family_unlisted 0.219*** (2.81) 0.626 (0.72)

Widely held firms

(no controlling

shareholder)

0.191** (2.16) 0.192** (2.17) 0.309 (0.31) 0.320 (0.32)

Ownership 0.000 (0.08) 0.000 (0.10)

0.015 (

0.72)

0.016 (

0.81)Control minus

ownership

0.001 (0.22) 0.001 (0.21) 0.015 (0.26) 0.013 (0.24)

Multiple blockholders

dummy

0.060 (0.97) 0.062 (0.99) 1.040 (1.50) 0.964 (1.38)

Firm size (log of

assets in USD)

0.020 (1.13) 0.019 (1.05) 1.450*** (7.32) 1.493*** (7.43)

Capital expenditures/

sales

0.001 (0.39) 0.001 (0.38) 0.133*** (3.77) 0.131*** (3.71)

Sales growth (3 years) 0.006*** (5.35) 0.006*** (5.35) 0.075*** (5.82) 0.075*** (5.80)

Total debt/total capital 0.007*** (3.88) 0.007*** (3.89) 0.161*** (7.79) 0.158*** (7.59)

Two-digit SIC codes Included Included Included Included

R2 0.35 0.35 0.26 0.26 Number of observations 808 808 808 808

Panel B. Low investor protection countries (antidirector rights equal to or below the median score)

Constant 2.548*** (3.83) 2.530*** (3.80) 10.726* (1.73) 10.207 (1.65)

Family_all 0.012w (0.19) 0.647 (1.13)

Family_management 0.043 (0.58) 1.721** (2.49)

Family_identified

(less management)

0.041 (0.48) 0.828 (1.04)

Family_unlisted 0.011 (0.17) 0.105 (0.17)

Widely held firms

(no controlling

shareholder)

0.099 (0.85) 0.100 (0.86) 0.009 (0.01) 0.009 (0.01)

Ownership 0.001 (0.64) 0.001 (0.60) 0.001 (0.13) 0.002 (0.15)

Control minus ownership 0.005** (2.28) 0.006** (2.36) 0.002 (0.07) 0.007 (0.33)


dummy

0.052 (1.04) 0.055 (1.09) 0.289 (0.62) 0.384 (0.82)

Firm size (log of

assets in USD)

0.015 (1.08) 0.013 (0.94) 0.313** (2.44) 0.366*** (2.84)


sales

0.002 (0.65) 0.002 (0.67) 0.034 (1.02) 0.031 (0.94)

Sales growth (3 years) 0.009*** (7.04) 0.009*** (6.98) 0.067*** (5.74) 0.065*** (5.60)

Total debt/total capital 0.009*** (5.69) 0.009*** (5.75) 0.100*** (6.76) 0.105*** (7.11)

Two-digit SIC codes Included Included Included IncludedR2 0.30 0.30 0.17 0.18

Number of observations 864 864 864 864



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The estimate of excess control is negative and significant in value models in Tables

4 and 6, as expected due to the potential entrenchment effect with excess control, but

insignificantly related to ROA. This result is consistent with Claessens et al. (2002)

who find that excess control is associated with lower valuations in East Asian firms. In

Table 5, excess control looses significance in valuation models due to the correlation

between family dummies for high control levels. While excess control is significantly

negatively related to ROA in majority-controlled firms, it is not significantly related to

ROA in nonmajority firms (Table 5). Further analysis in Table 6 shows that excess

control lowers firm value when shareholder protection is of poorer quality (Panel B),

whereas such excess control does not affect valuations when investor protection is of

better quality (Panel A).

The dummy variable for the presence of multiple controlling blocks is generally

insignificantly related to firm performance in the full sample and in family firms, butsignificantly negatively related to ROA in majority-controlled firms in Table 5. One

explanation for the overall insignificance of the presence of multiple blockholders is that

the incentives to monitor or collude with the leading shareholder are affected by the

relative size and type of the other blockholders (Maury and Pajuste, 2005). It seems likely

that control contestability becomes important from a valuation perspective when

shareholder protection is of lower level. Although the issue of who monitors the

controlling family deserves a closer analysis, the connection between family control and

different types of monitors, including independent board members and financial

institutions, is beyond the scope of this paper.

Control variables include size, growth, capital expenditures, and leverage. Sales growthis positively whereas leverage is negatively related to valuation and ROA. Firm size is

positively related to ROA, but unrelated to valuation. The variable capital expenditures to

sales is mostly significantly negatively related to ROA, but positive although generally

insignificantly related to valuation.

Notes to Table 6:


The table presents results of country fixed-effects (within) regressions for a sample of 1672 non-financial Western

European firms. The dependent variable is Tobins q in columns 12 and ROA in columns 34. The independentvariables are: Family_all, a dummy variable that equals one if the controlling shareholder is a family or an

unlisted firm and zero otherwise; Family_unlisted, a dummy variable that equals one if the controlling

shareholder is an unlisted firm, and zero otherwise; Family_identified, a dummy variable that equals one if the

controlling shareholder is an identified family without managerial or board representation, and zero otherwise;

Family_management, equal to one if a member of the identified controlling family is the CEO, Honorary

Chairman, Chairman, or Vice Chairman, and zero otherwise; Ownership, the fraction of cash-flow rights held by

the largest shareholder; Control minus ownership, the difference between control and cash-flow rights held by the

largest shareholder; Multiple blockholders dummy, equals 1 if there are other blockholders with at least 10% of

votes and zero otherwise; Widely held, a dummy variable that equals one if the firm has no shareholder with at

least 10% of the votes, and zero otherwise; Sales growth (3 years); Capital expenditures/sales; firm size (log of

total assets in USD); Total debt/total capital; and dummy variables for two-digit sic codes. The high investor

protection sample (Panel A) includes firms from countries with an antidirector rights score 4 or above, whereasthe low investor protection sample (Panel B) includes firms from countries with an antidirector rights score 3 or

below. t-values are in parentheses. w, ww, wwwdenote that the family firm coefficient is statistically different in the

high investor protection and the low investor protection samples at the 10%, 5%, and 1% levels, respectively.



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5. Robustness tests

5.1. Endogeneity

There is reason to believe that family ownership is affected by firm performance to some

extent, because the controlling family may retain control only of firms with favorable

prospects. Demsetz and Lehn (1985) and Demsetz and Villalonga (2001) argue that the market

succeeds in bringing forth ownership structures that are close to optimal. They suggest that

ownership structures are firms-specific because of differences in the circumstance facing firms

such as economies of scale, regulation, and the stability of the environment in which they

function. Demsetz and Villalonga (2001) also note that compensation plans, insider trading

possibilities, and corporate takeovers suggest that firm performance may affect the ownership

structure of firms. The question is whether systematic performance differences will arisebetween family firms and nonfamily firms despite the potential endogeneity of family control.

I address the self-selection or reverse causality problem using the Heckman (1979) two-

step treatment effects model.10 In the treatment effects model, I model family control as an

endogenous choice. To meet the exclusion restrictions necessary for identification, the first-

stage probit model includes the variability in the profit rate used in Demsetz and Lehn (1985)

and a performance measure (either Tobins q or ROA), as suggested by Demsetz and

Villalonga (2001), since firm performance may itself affect the ownership structure. The

antidirector rights index is included in the models because ownership may vary across

countries depending on their legal systems (Shleifer and Wolfenzon, 2002).11 The probit

model also includes all other control variables that enter the second-stage (outcome)regression, but excludes those two-digit SIC dummies that perfectly predict family firms. In

addition, log of market value of equity is used as a size measure in the first-stage, whereas log

of assets enters the second-stage model.12

In Table 7, the first-stage regression shows that family firms are negatively related to firm

risk, antidirector rights and size (other control variables are not shown to conserve space).

Family firms are also positively related to Tobins q and ROA, although the ROA coefficient

is not statistically significant. Thus families are more likely to control high Tobins q firms.

The second-stage regression shows that the family firm (treatment) coefficient is positive

and significant at the 1% level using both Tobins q and ROA. The k is statistically

significant, indicating that single-equation estimates are biased. Taken together, theHeckmans model shows that family firms perform better than nonfamily firms.

5.2. Industry issues

The analysis in this paper has focused on non-financial firms because valuation ratios and

accounting profit rates are not comparable for financial firms to those of non-financial firms.

10 I also estimated the family firm coefficient using an instrumental-variables 2SLS model and found similar

results as with the treatment model. However, I present Heckmans (1979) model in Table 7 because it is

preferable since the endogenous regressor (family firm dummy) is dichotomous.11 The coefficients for the family firm dummy are qualitatively similar when the antidirector rights index is

excluded from the models and country dummies are included in the second stage regression.12 Using log of asset size in the first-stage yield similar results.



17/21

The results of the impact of family ownership on performance in 393 financial firms (SICs

6000 through 6999) are shown separately in Table 8.13 The coefficient for family control is

positive in both the Tobins q and ROA specifications, although statistically insignificant.

Table 7

Firm performance and family control controlling for endogeneity

Family firm Family firm

(1) (2)

Panel A. First-stage regressions

Constant 0.751 (1.59) 0.777 (1.63)

Log of equity 0.123*** (5.54) 0.107*** (4.99)

STDa 0.033*** (2.61) 0.029** (2.28)

STDa dummy 0.244 (0.87) 0.276 (1.00)

Tobins q 0.182*** (3.19)

ROA 0.009 (1.64)

Antidirector rights 0.117*** (4.14) 0.119*** (4.16)

Control variables Included Included

Two-digit SIC code dummies Included Included

Panel B. Treatment regressions

Dependent variable: Tobins q ROA

Constant 0.210 (0.53) 13.025*** (3.34)

Family_all 1.798*** (6.48) 17.707*** (6.14)

Widely held firms (no controlling shareholder) 0.248*** (3.67) 1.423** (2.06)

Ownership 0.013*** (5.78) 0.025*** (13.43)

Control minus ownership 0.011*** (3.44) 0.067** (2.51)

Multiple blockholders dummy 0.196*** (3.17) 0.371*** (4.89)

Antidirector rights 0.057*** (2.68) 1.130*** (5.26)

Capital expenditures/ sales 0.000 (0.07) 0.003 (0.64)

Firm size (log of assets) 0.053*** (3.19) 1.197*** (7.51)

Sales growth (3 years) 0.006*** (5.29) 0.063*** (5.37)

Total debt/total capital 0.010*** (5.82) 0.143*** (8.25)

Two-digit SIC code dummies Included Included

Heckmans k 1.016*** 10.075***

Wald v2 735.16*** 586.61***


The table presents Heckmans treatment regressions for 1672 non-financial Western European firms. The variables

are: Family_all, a dummy variable that equals one if the controlling shareholder is a family or an unlisted firm and

zero otherwise; Ownership, the fraction of cash-flow rights held by the largest shareholder; Control minus

ownership, the difference between control and cash-flow rights held by the largest shareholder; Multiple

blockholders dummy, equals 1 if the there are other blockholders with at least 10% of votes and zero otherwise;

Widely held, a dummy variable that equals one if the firm has no shareholder with at least 10% of the votes, andzero otherwise; Sales growth (3 years); Capital expenditures / sales; Total debt / total capital; firm size (log of total

assets in USD); and dummy variables for two-digit sic codes. The instruments for the family firm dummy are: Log

of equity, the logarithm of market value of equity (USD); STDa, the standard deviation of the 5-year net income/

total assets (or available years); STDadummy variable equal to 1 if data were missing to compute the risk measure;

the relevant performance variable (Tobins q or ROA); and all other control variables that enter the second stage,

excluding industry dummies that perfectly predict family firms. t-values are in parentheses.

13 Families or unlisted firms control 45% of the financial firms.



18/21

Overall, the impact of family ownership seems to be more pronounced in non-financial

firms than in financial firms.

To check whether the impact family ownership on firm performance is driven by the

market performance of technology firms, I re-estimate the regression models in Table 4

excluding technology firms (SICs 35, 36, 38, and 73). The results are displayed in Table 8,

Table 8

Regression results on the relationship between firm performance and family control using alternative

specifications

Withouttechnology

firms

Withouttechnology

firms

Financial firms Financial firms

Tobins q Tobins q Tobins q ROA

(1) (2) (3) (4)

Constant 1.113 (1.68) 1.111 (1.68) 2.277*** (10.06) 8.724*** (2.83)

Family_all 0.103** (2.28) 0.064 (1.37) 0.174 (0.27)

Family_management 0.110* (1.90)

Family_identified

(less management)

0.128* (1.87)

Family_unlisted 0.092* (1.83)

Widely held firms(no controlling

shareholder)

0.142** (2.05) 0.143** (2.06) 0.013 (0.17)

0.042 (

0.04)

Ownership 0.002** (2.21) 0.002** (2.17) 0.000 (0.30) 0.019 (1.35)

Control minus ownership 0.006** (2.46) 0.006** (2.49) 0.006** (2.42) 0.006 (0.18)


dummy

0.022 (0.56) 0.021 (0.53) 0.141*** (2.96) 0.439 (0.68)

Firm size (log of

assets in USD)

0.005 (0.41) 0.004 (0.36) 0.032*** (2.77) 0.0003 (0.00)


sales

0.001 (0.58) 0.001 (0.58) 0.002* (1.87) 0.037*** (2.73)

Sales growth (3 years) 0.006*** (7.12) 0.006*** (7.09) 0.001* (1.77) 0.036*** (3.97)

Total debt/total capital 0.007*** (5.79) 0.007*** (5.77) 0.000 (0.28) 0.005 (0.33)

Two-digit SIC codes Included Included Included Included

R2 0.26 0.26 0.16 0.17

Number of observations 1340 1340 393 393


The table presents results of country fixed-effects (within) regressions for a sample of 1340 non-financial (without

technology firms) and 393 financial Western European firms. The dependent variable is Tobins q in columns 13,

and return on assets in column 4. The independent variables are: Family_all, a dummy variable that equals one if the

controlling shareholder is a family or an unlisted firm and zero otherwise; Family_unlisted, a dummy variable that

equals one if the controlling shareholder is an unlisted firm, and zero otherwise; Family_identified, a dummy

variable that equals one if the controlling shareholder is an identified family without managerial or board

representation, and zero otherwise; Family_management, equal to one if a member of the identified controllingfamily is the CEO, Honorary Chairman, Chairman, or Vice Chairman, and zero otherwise; Ownership, the fraction

of cash-flow rights held by the largest shareholder; Control minus ownership, the difference between control and

cash-flow rights held by the largest shareholder; Multiple blockholders dummy, equals 1 if there are other

blockholders with at least 10% of votes and zero otherwise; Widely held, a dummy variable that equals one if the

firm has no shareholder with at least 10% of the votes, and zero otherwise; Sales growth (3 years); Capital

expenditures/ sales; firm size (log of total assets in USD); Total debt/ total capital; and dummy variables for two-

digit sic codes. t-values are in parentheses.



19/21

and show that the results are robust to the exclusion the 332 technology firms in the

sample. As another industry check, I excluded industries with 100% family or nonfamily

representation. The results on family control are robust to the exclusion of those 11

industries displayed in Table 3 that are fully represented by either family or nonfamily

firms.

5.3. Tests of multicollinearity

To make sure that multicollinearity is not a problem in the regression models, I

calculate variance inflation factors (VIF) for all variables in the models. The VIF values

are insignificant and thus do not indicate concerns with multicollinearity among the

independent variables in any model. In particular, including the family firm dummy,

ownership, and control minus ownership variables in the same model does not lead tomulticollinerity problems. However, in columns 1 and 4 of Table 5, there is rather high

correlation between the variables dControl minus ownershipT and family votes above 50

(although VIF values are insignificant). Omitting the dummy variable for family votes

above 50 makes the excess control variable significantly negatively related to value as in

Tables 4 and 6.

5.4. Additional robustness tests

I check the sensitivity of the results using ROA to the use of an alternative profitability

measure, namely return on equity (ROE). The results are similar although less significantthan those obtained by using return on assets. Finally, I discuss the impact of outliers on

the effect on family control. The results are qualitatively similar when Tobins q and ROA

are censored at the 1st and 99th percentiles, as well as to dropping firms with Tobins qs

above 6 and 10.

6. Conclusions

This paper shows that family control can increase performance in Western European

firms. Active family ownership, in which the family holds at least one of the top twoofficer positions, improves profitability, whereas active ownership does not change the

value premium of family firms. Passive family ownership does not affect the profitability

of family firms compared with nonfamily firms. At high control levels the benefits of

family control starts to taper off; the benefits of family control are most pronounced in

nonmajority firms. Family control improves valuation at lower control levels, while

profitability ratios start to increase at higher control levels.

The results also indicate that family ownership lowers the classical agency problem

between owners and managers. At high control levels, the potential for family opportunism

increases, and especially valuations start to decline. The dramatically improved profitability

that comes with active family control suggests that family management may significantly

increase the efficiency of the firms, although this improvement is not reflected in firm value

and thus may not accrue to minority shareholders.



20/21

The findings have implications for the debate on the performance of family-controlled

firms in different legal and cultural settings. Consistent with Faccio et al. (2001), family

control seem to affect firm performance differently depending on the level of transparency

and regulation in a region. For comparison, controlling families in Asia tend to participate

with lower proportions of cash-flow rights than family owners in Western Europe and thus

may have lower incentives (Faccio et al., 2001). Moreover, low transparency may also

reduce the desirability of family control from the perspective of minority shareholders. The

effects of family control in Western European firms as a whole resemble those found for

US firms where the market is well-regulated (e.g., Anderson and Reeb, 2003), although

families in Europe hold larger ownership stakes on average in their firms. Thus, family

ownership in well-regulated environments does not seem to harm minority shareholders

but instead benefit them, while powerful families may become notorious for putting their

personal interest first when they cannot be challenged. The results suggest the following policy implication: by improving minority shareholder protection, the efficiency gains

from active family control can be translated into higher firm valuation to the benefit of all

shareholders in a firm.

Acknowledgements

I am grateful to Tom Berglund, Bengt Holmstrom, Matti Keloharju, Anders Loflund,

and an anonymous referee for helpful comments. Financial support from the Finnish

Academy of Sciences, Stiftelsen for framjande av vardepappersmarknaden i Finland, andOKO Bank Research Foundation is gratefully acknowledged.

Appendix A. Data and methodology

A.1. Data

The data set is obtained by linking Faccio and Langs (2002) ownership database to

WorldScope financial data (2003 January edition).

A.2. Methodology

The regressions in Tables 4 through 6 and Table 8 are estimated using country-fixed

(within) effects, whereas regressions in Table 7 are estimated without country-fixed effects

but they include a variable for antidirector rights measuring effects between countries.

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