Are Family Firms Better Performers During Financial Crisis?

Abstract

Despite extensive researches on efficiency of family firms in normal or good economic times, we know rather little about whether family firms are superior performers in recession times. Using a dataset covering firms from S&P 500 (US), FTE100 (UK), DAX 30 (Germany), CAC 40 (France) and FTSE MIB 40 (Italy) during the period 2006-2010, I give empirical evidences examining the performance of family firms vis-à-vis non-family firms during the current financial crisis. I find that broadly defined family firms, comprising 35 percent of the sample, do not outperform non-family firms during the crisis whether I use market performance measure (Tobin's Q) or accounting performance measure (Operating Return on Assets (OROA)). However, family firms with founder presence (as CEO, a board member or a significant blockholder) outperform by 18 percent relative to non-family firms in OROA. Tobin's Q of founder firms, by contrast, does not exhibit difference significantly. I interpret the attenuation of founder firms' market value premium as the result of high volatility of stock prices and investors' overreaction during the crisis (Veronesi, 1999; Glode et al., 2010). Further testing shows that in the crisis, compared with non-family firms, founder firms have less administrative costs incurred. Moreover, they invest significantly less and have better access to credit market. All these findings contribute to superior accounting performance of founder firms during the crisis. My results suggest that in the financial crisis, founder firms bear the least agency cost and Tobin's Q is not a good measure of corporate performance.

Corporate governance and family firm performance during the Global Financial Crisis

“…This is a richer definition than the family control literature (e.g. see the performance–GFC–family control papers by Lins et al ., ; and Zhou et al ., ) that focuses on block holdings as the measure of family connection to the firm. We capture family firm control in our analysis with a dummy family firm variable, FF , which equals 1 for family‐controlled firms and 0 otherwise.…”

“…Zhou et al . () and Wang and Shailer () find family firms do not significantly outperform non‐family firms during the crisis in terms of accounting performance (ROA) and market performance (Tobin's Q ) except where the founder was actively involved as CEO, a board member or a significant blockholder. Where the founder is still involved, the firm shows significantly higher accounting performance, but market performance is not significantly different to non‐family firms.…”

“…The implication of Zhou et al . 's () evidence is that accounting performance is less value relevant for family firms during the GFC. This effect may not be uniform for all family firms.…”

“…() and Zhou et al . () only consider the control aspect of governance and do not consider other aspects of the family firm's governance environment, in particular audit oversight, that may mitigate the propensity to consume private benefits during the GFC. We know from the governance literature that adopting better corporate governance practices, such as an enhanced audit committee, quality external auditors, and board independence, improves monitoring of management and reduces information asymmetry problems (Aldamen et al ., ; Aldamen and Duncan, ).…”

Global financial crisis, ownership structure and firm financial performance

“…Even though some recent studies have focused on investigating the effects of ownership structure on firms' performance during economic downturns (Chaston, 2012;Holderness and Sheehan, 1988;Leung and Hortwitz, 2010;Zhou, 2011), none of these existing studies has focused on the impact of the 2008 GFC on firms' financial performance in the Australian context. These earlier studies are motivated to determine why some businesses could overcome market competition during downturn periods and survive for many decades or centuries, while others could fail and go bankrupt.…”