Does Family Control Matter? International Evidence from the 2008-2009 Financial Crisis

Abstract

This is the unspecified version of the paper.This version of the publication may differ from the final published version. We study whether and how family control affects valuation and corporate decisions during the 2008-2009 financial crisis using a sample of more than 8,500 firms from 35 countries. We find that family-controlled firms underperform significantly, they cut investment more relative to other firms, and these investment cuts are associated with greater underperformance. Further, we find that within family groups liquidity shocks are passed on through investment cuts across the group. Our evidence is consistent with families taking actions to increase the likelihood that the firms under their control and their control benefits survive the crisis, at the expense of outside shareholders. (JEL G01, G14, G32) * We study whether and how family control affects valuation and corporate decisions during the 2008-2009 financial crisis using a sample of more than 8,500 firms from 35 countries. We find that family-controlled firms underperform significantly, they cut investment more relative to other firms, and these investment cuts are associated with greater underperformance. Further, we find that within family groups liquidity shocks are passed on through investment cuts across the group. Our evidence is consistent with families taking actions to increase the likelihood that the firms under their control and their control benefits survive the crisis, at the expense of outside shareholders. (JEL G01, G14, G32) 3 Whether family control is beneficial for all shareholders or serves the family's best interest at the expense of outside shareholders is still unclear, despite much research on this issue. Permanent repository link:1 In this paper, we shed new light on this topic by studying, around the world, whether and how family control affects valuation and corporate decisions during the 2008-2009 financial crisis.We argue that the unexpected liquidity shock from the financial crisis moves firms out of equilibrium in a way that magnifies both the benefits and costs of family control. With liquidity scarce, a family could add value by providing greater access to finance via other firms under its control. However, a family's private benefits of control also can be affected by the crisis. A controlling family tends to be undiversified with its wealth tied up in the firm(s) it controls, and a liquidity shock can threaten the survival of the family empire. Relative to firms controlled by more diversified shareholders, family-controlled firms may be biased toward survival-oriented actions that help preserve the family's control benefits at the expense of outside shareholders.We use a sample of more than 8,500 nonfinancial firms from thirty-five countries to test whether outside shareholders update their expectations regarding the benefit or cost of family control during a financial shock. Our results show that across countries family-controlled firms underperform relative to other firms during the 2008-2009 global fin...

The Global Financial Crisis, Family Control, and Dividend Policy

“…This conclusion is consistent with the Faccio, Lang, and Young (2001) observation that "crony capitalism" in East Asian economies is politically, rather than institutionally, determined. More broadly, our evidence contributes to the literature on the relation between family control and dividend policy in a cross-country sample, thereby adding to the debate on the extent to which family control serves the family's interests to the detriment of outside shareholders, as well as to the growing line of research that examines the corporate effects of the 2008-2009 financial crisis (e.g., Campello, Graham, and Harvey, 2010;Duchin, Ozbas, and Sensoy, 2010;Lins et al, 2013).…”

“…In an additional test to distinguish the agency and signaling/bonding explanations, we examine the extent to which an unexpected liquidity shock-the 2008-2009 financial crisis-affects the dividend policy of family firms. Lins et al (2013) argue that a liquidity shock can lead familycontrolled firms, compared to other firms, to engage in actions that aim to preserve the family's benefits of control at the expense of outside shareholders. The recent financial crisis can thus be used as a natural experiment that helps alleviate endogeneity concerns.…”

“…Following Boubakri et al (2010) and Lins et al (2013), we proxy for family control using FAMILY, a dummy variable equal to 1 if the ultimate owner is a family, and 0 otherwise. Carney and Child (2013) identify ultimate owners at the 10% and 20% thresholds.…”

“…This evidence also suggests that the governance regression with AGENCY and its interaction with FAMILY, and 3) estimate the regression on the full sample. Our splitsample design, which closely follows Chen et al (2011) and Lins et al (2013), helps avoid multicollinearity stemming from high correlations between the test variables (here, FAMILY and AGENCY) and their interaction term, especially when the interaction comprises a dummy variable (e.g., Lang, Lins, and Miller, 2004;Guedhami, Pittman, and Saffar, 2009). In our case, the correlations between the interaction term and FAMILY and AGENCY are 0.42 and 0.61, respectively.…”

Investor Protection and the Role of Firm-Level Financial Transparency in Attracting Foreign Investment

“…Bureau van Dijk lists the following information sources, which are used to compile the ownership data in OSIRIS: company annual reports, information from official registers/regulatory bodies and associated information providers, private correspondence between Bureau van Dijk and the respective companies, and information from stock exchanges and company Web sites. The firm-level ownership data from OSIRIS (and its European counterpart Amadeus, which is also a product of Bureau van Dijk Electronic Publishing) have recently been used by Li, Moshirian, Pham and Zein (2006), John, Litov and Yeung (2008), Faccio, Marchica andMura (2011), andLins, Volpin andWagner (2013), among others.…”