Family Firms and Investments

46 Pages Posted: 11 Dec 2009

See all articles by Magda Bianco

Magda Bianco

Bank of Italy

Roberto Golinelli

University of Bologna - Department of Economics

Giuseppe Parigi

Bank of Italy

Date Written: November 1, 2009

Abstract

Family firms are a widespread control structure in most countries, especially among smaller firms. A vast literature addresses the question of whether they are performing better or worse than comparable non family firms, with not entirely conclusive results. Here we take a different, indirect approach and test whether investment decisions in family firms are more sensitive to uncertainty than in other firms. By using a novel dataset that includes both a better definition of family firms than commonly used (through self evaluation) and a very good proxy of the uncertainty on future demand that firms face, we are able to verify that – as compared to other firms – family firms are significantly more sensitive to uncertainty: this might contribute to explain why in some situations they perform better, whereas in others they do worse. We find evidence that this greater sensitivity to uncertainty in family firms is basically due to the effects of risk aversion and capital irreversibility, where the latter appear to be associated to a greater opaqueness of family firms rather than to the degree of sunkness of fixed capital. Finally, we propose some evidence that the prevalence of family firms in Italy might be associated to long standing institutional factors, such as an inefficient law enforcement system and a low social capital.

Keywords: Family firms, investments, uncertainty, risk aversion, capital irreversibility

JEL Classification: G32, G38

Suggested Citation

Bianco, Magda and Golinelli, Roberto and Parigi, Giuseppe, Family Firms and Investments (November 1, 2009). ECGI - Finance Working Paper No. 269/2009. Available at SSRN: https://ssrn.com/abstract=1521023 or http://dx.doi.org/10.2139/ssrn.1521023

Magda Bianco (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Roberto Golinelli

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 209 2638 (Phone)
+39 051 209 2664 (Fax)

Giuseppe Parigi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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