Family Involvement in Business and Financial Performance: A Panel Data Analysis

Abstract

Executive SummaryThe economic backdrop of most nations remains dominated by family businesses. Family control is common in publicly traded Indian companies. Such controlling families often hold large shareholdings and for the most part have representation at the top management level as well as on the board. Consequently, an overarching question that emerges is whether and how family ownership, management, and governance affect corporate performance.This article attempts to discern the relationship between family involvement in business (FIB) and financial performance (FP) of companies included in the S&P BSE 500 Index during the period 2006–2010. In addition, an attempt has been made to examine the difference in accounting and market measures of FP for family companies (FCs) vis-à-vis non-family companies (NFCs). A two-way fixed-effects panel model was used to examine the FIB–FP relationship with fixed effects being dummy variables for each year of the sample and dummy variables for each two-digit National Industrial Classification (NIC) code. Finally, to test for the ‘reverse causation’ between FIB and FP, the instrumental-variable—two-stage least-squares (IV-2SLS) regression was applied.The results confirm that FCs are a predominant form over a number of industries in a large sample, S&P BSE 500 Index. In addition, founding families are often involved in the actual management of the companies. Controlling for company-specific, industry affiliation, and corporate governance variables, the cross-sectional longitudinal analyses show that FIB is associated with superior FP. Furthermore, FP is higher for FCs vis-à-vis NFCs. Based on the market performance measure, FC appear to be better performers with higher outside board representations. On further analysis of the profile of independent directors, it was observed that they had a diverse background and expertise. The impact of firm size and unaffiliated blockholdings on FP was found to be significantly negative. Finally, the estimates from the IV-2SLS were found to be consistent with the preliminary results that FIB is associated with better FP.This article joins the evolving concurrence on the diversity and heterogeneity of family businesses by differentiating between family-owned, family-managed, and family-governed companies. It distinguishes itself from previous studies on the subject, as it uses different typologies based on the extent of FIB as well as presents multiple theoretical perspectives rather than a mono-theoretical view to empirical findings in the present study. Keeping this distinction in perspective is imperative for family business researchers, practitioners, and policymakers.

Family Business in India: Performance, Challenges and Improvement Measures

“…For this study, we have taken the definition of a family firm as used by Anderson and Reeb (2003) and Gill and Kaur (2015) in their study on Indian family firms. We identify a family firm to be the one where at least 10 per cent of the outstanding shares of the company are held by the founder and their descendent family members either directly or indirectly, through another family firm or fund which the family controls or owns and; the CEO or the Chairman of the company is a founder or his descendant.…”

“…Market performance is measured by TQ which is calculated as the market value of the firm scaled by total assets. These measures have been largely applied in similar studies, for example, by Anderson and Reeb (2003), Gill and Kaur (2015), Khanna and Palepu (2000), McConaughy et al (1998), etc.…”

“…Subekti and Sumargo (2015) in a sample of Indonesian firms stated that family management negatively impacts a firm’s performance as a lot of family firms are managed by family members who are opportunistic and inefficient. Gill and Kaur (2015) in their sample of Indian family firms documented that family involvement in management is associated with higher financial performance. On the other hand, Bhatt and Bhattacharya (2017) on his sample of India firms stated that family management is irrelevant to the firm value and performance.…”

Family in Top Management Team and Firm Value: Do Gender and Education of Family Manager Matter?

“…One of the sources has come from family-based human assets (Verbeke &Kano, 2012, Michiels andMolly, 2017;Chua et al, 2012). The differences in human resources arisen from the family's involvement in management is the primary cause of heterogeneity and can also lead to a wide variety of outcomes (Astrachan et al, 2008;Klein et al, 2005;Gill & Kaur, 2015).…”

Familiarisme et performance en contexte de petites et moyennes entreprises familiales : Une étude exploratoire

“…La plupart d'études postérieures (Sherif et Tahir, 2016 ;Diéguez-Soto et al, 2017), se réfèrent le plus souvent à la dimension pouvoir (Arshed et Danson, 2016) pour étudier les effets de l'implication des membres familiaux. Rares sont les travaux (Chong et al, 2013 ;Gill et Kaur, 2015) qui valorisent l'ensemble des dimensions définies précédemmentpar le F-PEC.…”