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: http://openaccess.city.ac.uk/3277/ Link to published version: http://dx. ABSTRACT We 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 Property There is a common view, which can be traced back to Berle and Means (1932) and Chandler (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. 4 We 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 no...

Beyond the Firm: Business Families as Entrepreneurs

“…Franks et al (2011) maintain that ''in countries with weak investor protection, less developed financial markets, and inactive markets for corporate control, family control is very persistent over time'' (see also Belloc & Pagano, 2009). …”

Young family firms: Financing decisions and the willingness to dilute control

“…Franks et al (2012), when studying the existence of an ownership life cycle in family firms, state that the control in the business varies among different types of family firms. When the firm is owned by the first generation, founders are generally unwilling or reluctant to dilute their control in the business (Gedajlovic et al, 2004).…”

“…The first dummy variable, family firm dummy, is coded 1 for a family firm. For this, the firm should satisfy three requirements: (i) "family shareholdings" to be those of a family or, in the case of multiple stakes held by individuals, aggregated across individuals within the same family (Cronqvist and Nilsson, 2003;Franks et al, 2012); (ii) these shareholdings to be larger than 15%; and (iii) the family shareholding to be the largest stake in the firm. The second dummy variable, young family firm dummy, is coded 1 for a young family firm.…”

Family firms, risk-taking and financial distress

“…Moreover, these results are of particular interest, because our sample operates in a country where families are particularly slow in performing control (Franks et al, 2009). Therefore, families are particularly concerned about maintaining their control and influence on the business and the firms they own should be more at risk of performance hazard (Gomez-Meja et al, 2007).…”

“…We address this need by analyzing family firms' financial distress probability, focusing on a sample of 1,137 Italian private firms for the period 2004-2013. This context is of interest because Italy has a bank-based economy and families are particularly committed to maintaining control of the firm: empirical studies (Franks et al, 2009) report that, for family businesses starting from a 100 percent stake, diluting ownership below 25 percent of voting rights would take 20 years on average in the UK, 30 years in Germany, 35 in France and more than 90 years in Italy.…”