Academic journal article Quarterly Journal of Finance and Accounting

Family Ownership and Firm Performance: Evidence from India

Academic journal article Quarterly Journal of Finance and Accounting

Family Ownership and Firm Performance: Evidence from India

Article excerpt

Introduction

There is an abundance of theoretical and empirical literature highlighting the importance of ownership structure of firms. Researchers have argued that the economic performance of firms is influenced by the identity of owners and the extent of control in their hands (Shleifer and Vishny 1997). There is a growing interest in family firms, as this is a dominant form of ownership prevalent throughout the world. In western European countries, around 44% of firms are controlled by families (Faccio and Lang 2002). In East Asian countries, around two-thirds are controlled by families or individuals (Claessens, Djankov and Lang 2000), and around 30% are family controlled across the world (La Porta, Lopez-de-Silanes and Shleifer 1999). Thus, a large number of businesses are organised around families (Bertrand and Schoar 2006).

Empirical evidence on this issue is inconclusive. There are numerous studies which contend that family ownership enhances firm performance (Trevino and Alvararado-Rodriquez 2011; Bonilla, Sepulveda and Carvajal 2010; Sraer and Thesmar 2007; Maury 2006; Villalonga and Amit 2006 and Anderson and Reeb 2003). There are others claiming that family firms are not as profitable as non-family firms. Lauterbach and Vaninsky (1999) argue that family firms perform poorly relative to corporations with dispersed ownership that are run by non-owner managers. Morck, Stangeland and Yeung (2000) demonstrate that heir-controlled family firms are poor performers relative to other comparable Canadian firms. Barth, Gulbrandsen and Schone (2005) find family firms to be less productive than non-family firms, whereas there are others who fail to confirm that there is a positive impact of family ownership on firms' performance (Claessens et al. 2000 and Holderness and Sheehan 1988). Miller, Breton-Miller, Lester and Cannella (2007) argue that outperformance of a family firm depends on how family ownership is defined. They find that lone founder businesses exhibit better market performance, but family businesses that include relatives do not fare as well. Dyer (2006) provides an explanation for such contradictory evidence on the performance of family firms through a survey of the existing literature. He concludes that most of the research fails to clearly describe the effect of family control on organisational performance.

This study contributes to the existing literature that documents mixed findings on the effect of family ownership on firm performance by examining various aspects of family ownership in the Indian context. We compare the performance of family firms with non-family firms and analyze the linear and nonlinear relationship between family ownership and firm performance. We feel that there is a need to examine the role of non-family promoters in firms as they can effectively monitor the family promoters from expropriating corporate wealth. We thus include the same in our study and investigate the differences between performance of family firms that only have family promoters and performance of family firms that have non-family promoters as well. We also examine the effect of control of non-family promoters on firm performance.

We employ panel data Feasible Generalised Least Squares (FGLS) on a randomly drawn sample of 1,100 firms listed on BSE (formerly known as the Bombay Stock Exchange) from 2007 to 2014. BSE, which was set up in 1875 as the first stock exchange in Asia, is one of the two premier stock exchanges in India. It is the world's No. 1 stock exchange in terms of listed firms, which total around 5,500. One of the advantages of using panel data is that it eliminates unobservable heterogeneity, and drawing a random sample avoids any sampling bias.

Our study contributes to the corporate governance literature in several ways. First, we examine the role of family control on performance of a large number of listed firms for an emerging market like India. Cedajlovic, Carney, Chrisman and Kellermanns (2012) also emphasize that this issue should be further examined in emerging countries with undeveloped capital markets and weak corporate legal enforcements. …

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