Family Ownership, Multiple Blockholders and Firm Performance

Abstract

Recent research has documented that family-controlled firms are very common around the world. This paper provides new evidence on the accounting and market performance of this type of companies. The empirical investigation is conducted on a market in which family firms are well-established and represent the most widespread form of ownership, namely Switzerland. Using panel data for the period 2003 to 2007 on companies listed on the Swiss exchange, we find evidence that family firms have a 1.19 higher Tobin’s Q and a 3% higher return on assets than non-family firms. A finer analysis reveals that the outperformance depends on the characteristics of the family business. First, we find evidence that family firms in which a second blockholder is present are even more profitable with a 5% higher return on assets and a 1.27 higher Tobin’s Q than non-family firms. In this case not only agency costs between management and shareholders are reduced but also between majority and minority shareholders by limiting private benefit extraction. Second, family firms in which a family is only an investor do not perform better than non-family firms. Only if family members are actively involved in management, as either CEO, Chairman or both do they add value and thus perform significantly better than outsiders. This indicates that family members have superior knowledge on their companies that is lost when they solely hold a financial participation in the firm. Finally, our results also show that these skills are not confined to the founder but are also present in heir-managed family firms. In particular we find that firms with descendant-CEO or founders acting as Chairman have better accounting and market performances.

Keywords: family firms, ownership structure, corporate governance

JEL Classification: G3, G32