The Life Cycle of Family Ownership: International Evidence

Abstract

This is the unspecified version of the paper.This version of the publication may differ from the final published version. Permanent repository link: ABSTRACTWe show that in countries with strong investor protection, developed financial markets, and active markets for corporate control, family firms evolve into widely held companies as they age.In countries with weak investor protection, less developed financial markets, and inactive markets for corporate control, family control is very persistent over time. While family control in high investor protection countries is concentrated in industries that have low investment opportunities and low merger and acquisition (M&A) activity, the same is not so in countries that have low investor protection, where the presence of family control in an industry is unrelated to investment opportunities and M&A activity. (JEL G32, G34) 3 Parallel with the growth in the size of the industrial unit has come a dispersion in its ownership such that an important part of the wealth of individuals consists of interests in great enterprises of which no one individual owns a major part. A rapidly increasing proportion of wealth appears to be taking this form and there is much to indicate that the increase will continue. Adolf A. Berle and Gardiner Means, The Modern Corporation and Private PropertyThere is a common view, which can be traced back to Berle and Means (1932) andChandler (1977), that firms evolve over time from closely held, family-owned enterprises into managerially controlled, widely held corporations. In accordance with this "life cycle" view, family control should be negatively correlated with firm age.There is some evidence to support this view. Helwege, Pirinsky, and Stulz (2007) find that shareholder concentration declines over time in U.S. firms following their initial public offerings (IPOs) and stocks that are more liquid tend to become widely held more quickly.Franks, Mayer, and Rossi (2009) show that in UK firms, shareholder concentration is diluted over time as a result of merger and acquisition (M&A) activity. In a comprehensive study of IPO firms in thirty-four countries, Foley and Greenwood (2010) find that shareholder concentration decreases faster in firms within countries in which there is stronger investor protection than in countries with weaker investor protection. 4We contribute to this literature by analyzing the evolution, over time and across countries, of family control in listed and private firms. 1 Our focus is therefore on family control, rather than shareholder concentration, in private as well as public firms. Family control is important because it dominates many financial markets around the world. Focusing on private, as well as public, firms is important because the decision to go public is endogenous; hence, looking only at listed firms may give a biased measure of the evolution of family ownership in a country.Our analysis is based on two separate datasets of nonfinancial European firms-one detailed panel drawn from the four largest econo...

Controlling shareholders, board structure, and firm performance: Evidence from India

“…If the presence of family members or founders on boards is detrimental to minority shareholders, it is plausible that active control may facilitate even more expropriation by families or founders. This is consistent with Singell (1997) who finds that family managed firms are less profitable and make suboptimal investments and also with Gomez-Mejia et al (2001) who finds that family CEOs are potentially less accountable to shareholders and directors. Schulze et al (1999) also discuss that appointments of family members and founders as CEOs can lead to resentment on the part of senior non-family or non-founder executives.…”

“…Pindado et al (2011) report that family owned firms in the euro zone exhibit lower sensitivity of investment to cash flow, suggesting less susceptibility to capital market imperfections. In line with these arguments, Franks et al (2012) demonstrate that, for a sample of European firms, family firms tend to evolve into widely held companies where investor protections are strong and capital markets well-developed. Conversely, the family structure is quite persistent where protections are weak and capital markets underdeveloped.…”

“…If family members manage the firm, selections to top positions are made from a limited pool of family members and this may not be optimal for minority shareholders. 3 Gomez-Mejia et al (2001) find that family CEOs are potentially less accountable to shareholders and directors. Schulze et al (1999) also note that appointments of family members and founders as CEOs can lead to resentment on the part of senior non-family or non-founder executives.…”

“…Subsequently, several studies show that even among the largest U.S. firms, there is modest equity ownership concentration (Anderson and Reeb, 2003;Demsetz and Lehn, 1985;Holderness and Sheehan, 1988;Morck et al, 1988;Shleifer and Vishny, 1986). Studies of other developed economies document an even more significant concentration of ownership (Faccio and Lang, 2002;Franks and Mayer, 1994;Gorton and Schmid, 1996). In contrast, ownership in developing economies is highly concentrated (Claessens et al, 2000;La Porta et al, 1998.…”

Executive compensation in family firms: The effect of multiple family members

“…or stock flotation (Promotion = 0), 16 and firm age (FirmAge) as the instruments. Cheng et al (2013) suggest that if a firm is established by the promotion method it is more likely to be sponsored and run by shareholders who have strong relationships with each other, whereas family firms are more likely to evolve into widely held companies as they age (Franks et al, 2012). We thus predict that Promotion has a positive effect on the ownership of other family members and FirmAge has a negative effect on other family members' ownership.…”