The performance and the effects of family control in North African IPOs

Abstract

This paper examines the performance effects of family ownership and influence on board structure and its composition in firms that have recently undergone an initial public offering (IPO) in the North African region. Using a unique and comprehensive hand-collected sample of 63 locally listed IPO firm"s from across North Africa we find considerable evidence of a sizeable differential between family and non-family controlled firms. I find considerable evidence supporting increased participation of family members at board level while contrastingly the wider dispersion of family ownership facilitates monitoring and surveillance and mitigates underpricing. Equally in line with the extended network and relationships involved in family firms business angels provide the optimal form of governance in contrast to the more formal private equity and venture capital industry.

The impact of institutions, ownership structure, business angels, venture capital and lead managers on IPO firm underpricing across North Africa

“…The findings revealed separation of ownership from control was achieved through pyramidal schemes and further reinforced through extensive cross-shareholdings while softer managerial socialization measures were also apparent, such as shared directors and CEO/Chairpersons between firms. Similar evidence of extended business groups formed in this manner has since been found across both North Africa, in Hearn (2011Hearn ( , 2013, but also across the wider continent of Africa (Hearn, 2013a). (2000) and Khanna and Yafeh (2007) provides evidence that business groups are strategically advantageous in forming private equity and venture capital entities within the group, through being able to draw on superior resource capabilities of the group in business environments characterized by institutional deficiencies.…”

“…Consequently this method of separation of ownership from control is inherently different from that envisaged originally by Berle and Means in their work on US equity market and thus is relatively resistant to differences in state-level institutional quality. This view is also supported by anecdotal evidence that North African countries have always had some of the highest institutional quality of the entire continent of Africa with Tunisia and Morocco being comparable in quality to Western European countries such as Spain and Portugal all the while the economies were formed from extended family-controlled business groups (Hearn, 2011(Hearn, , 2013. Further support can be obtained from the Boulton study given their multi-country sample is almost wholly dominated by very large, developed markets of US, UK, Australia, France, Germany, Singapore and Japan with no African or Middle Eastern countries present.…”

“…The region's IPO markets have also been largely omitted from study in the literature with the exception of the inclusion of Egypt in a wider 49 country dataset of La Porta et al (1997) and Hearn (2011Hearn ( , 2013. The former La Porta study focuses on country-level institutions while the latter two studies by Hearn focus on the role and impact of extended family networks firstly on IPO firm underpricing and secondly on aggregate board salary, an agency-based incentive measure.…”

“…The former La Porta study focuses on country-level institutions while the latter two studies by Hearn focus on the role and impact of extended family networks firstly on IPO firm underpricing and secondly on aggregate board salary, an agency-based incentive measure. The region is also subject to an incongruous mix of French civil code law formal institutions, themselves shaped largely on original unreformed Napoleonic framework since their adoption during colonial rule, and deeper informal institutions making up the fabric of Maghreb society, based on classical Islamic shari'ya law (Hearn, 2011;Kuran, 2004). This incongruity alongside a pronounced role of state in development, eschewed through the Dirigiste tradition in Francophone countries and socialism in Egypt, has been attributed to economic and social structural rigidities that gave rise to the recent unprecedented period of political and social upheaval, popularly termed as the Arab Spring (BBC news, 2011).…”

“…However in Francophone capital markets, including those of North Africa, underwriters as market participants are less common, while the role of lead manager is enhanced, albeit with this being termed as Chef de File (Hearn, 2011). The smaller size of equity markets across the Maghreb region together with relatively infrequent IPO activity infers that the measures of reputation employed for underwriters in very large and active US market (see Megginson and Weiss (1991) and Carter and Manaster (1990)) are only marginally effective.…”