Does Mother Know Best? - Family Ownership and Firm Performance

Do markets often get nervous about family firms? And if so, does such thinking have much impact either on investor behaviour or on company performance? INSEAD's Marcel Corstjens, Katrina Maxwell and Ludo Van der Heyden measure, over a nine-year period, the stock market performances of nearly 250 companies listed on the Paris Bourse to see who performs best - family or non-family firms. Their findings may not be what you expected.

by Marcel Corstjens, Ludo Van der Heyden and Katrina Maxwell
Last Updated: 23 Jul 2013

In the harsh light of corporate take-overs, cutting-edge visions and billion-dollar profits, the anonymous, purely profit-driven global company is widely perceived as the ultimate winning business machine. Gobbling down competitors by the mouthful and bringing in all the management 'stars' that millions in stock options can buy, such a model is somewhat accepted as the norm and investors are eager to get a piece of that kind of action.

What then of equivalently sized yet family-owned firms? That is perhaps a different story. Businesses passed down over the generations with interference from 'unqualified' children or grandchildren; decisionary power in the hands of majority family shareholders, and of course, everyone in the family with their fingers firmly stuck in the money pot, getting what they can. Such are some of the negative connotations linked to family firms.

These descriptions are somewhat exaggerated, but INSEAD's Unilever Chaired Professor of Marcel Corstjens, Senior Research Fellow Katrina Maxwell, and Solvay Chaired Professor of Technological Innovation Ludo Van der Heyden have produced a working paper: The Performance of Family-Owned Firms in the French Stock Market 1993-2002, that seems to indicate that such views could be closer to investor thinking than we often care to admit. And that investor money in the pocket is being missed out on because of it.

In an ambitious study, the INSEAD team looks to determine whether it was beneficial, neutral or detrimental for investors to buy shares, over a longer-term period, in French family firms as opposed to non-family firms. Of the 248 listed firms studied since 1993, 120 were family and 128 non-family. France is a particularly interesting country, for family firms have been present there for an unusually long time - but the French are also often regarded as relatively very conservative managers. Similar results have been evidenced for large family firms in the US - but not with the methodology used by Corstjens et al.

Initially, various investment strategies were formulated:

<em>Buy and hold</em> - investment of an equal amount of money in two equally weighted portfolios at the end of 1993 (one family-held and one non-family held) and holding onto this investment until end 2002;

<em>Annual buy and sell</em> - investment of an equal amount of money in two equally-weighted portfolios at the end of December 1993 (one family-held and one non-family held) with the investment sold off at the end of every year, and again reinvested in the remaining stocks of each portfolio and in equal parts; A number of statistical parameters were also set to allow further in-depth analysis.

Following the measurement of data over the nine-year period and a thorough analysis of results, it became apparent, contrary to conventional wisdom; that listed family firms consistently outperformed non-family firms over the study's life. The results also imply that investors may not have considered family ownership when investing and indeed may have even been biased against the family firms. Should investors have been made aware of the empirical and verifiable truths of the family firms' performance, it should have been quickly corrected in an efficient market, which was not the case.

Logically, such inefficiency in the French market, as highlighted by this working paper, should disappear as soon as investors become aware of the more positive aspects of family firms' stock performance.

Now all that needs to happen is that the good news is shared with investors, and soon the phenomenon will disappear. Alternatively, the result may also be a proof that investors regard family firms as inherently more risky (because of family issues, such as succession that are often harder to control) - and then the result may fall within the traditional finance result: higher risk, higher return! What the data analysis has then shown is that the investment community has indeed demanded a higher return from family firms - and that these firms have delivered such returns.

As one can see, this paper makes a strong point, but the "final word "is still to be determined, and you can expect further research from INSEAD on this topic!


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