The performance of Dutch family firms between 2006
and 2010 and the influence of the economic crisis
University of Amsterdam Faculty of Economics and Business Master thesis Organization Economics
Supervisor: Chihmao Hsieh Constant Kaanen
5870798 December 2013
Abstract
This research concludes that Dutch stock listed family firms do perform better than non-family listed companies. The economic crisis did not influence the performance differences between both. The research has been based on a database that consist 109 Dutch listed companies between 2006 to 2010. The evidence that family firms perform better compared to non-family firms is measured in terms of the ROA which is 3.69% higher in the univariate and 3.09% higher in the multivariate analysis for family firms.
Index
1 Introduction ... 4
2 Family firms... 5
2.1 Advantages and disadvantages of family firms in relation to performances. ... 5
2.1.1 Negative effects of family ownership ... 6
2.1.2 Positive effects of family ownership ... 7
2.2 Family firms in relation to crisis ... 8
3 Research method ... 11
3.1 Sample and data ... 11
3.2 Identification of family versus non-family firms ... 11
3.3 Measurement of variables ... 12
3.3.1 Dependent variable ... 12
3.3.2 The independent variables ... 13
3.4 Analytical methods ... 15 4 Results ... 16 4.1. Summary statistics ... 16 4.2. Univariate analysis ... 18 4.3 Multivariate analysis ... 21 5 Discussion ... 24 6 Concluding remarks ... 28 References ... 29 Appendix ... 33 3
1 Introduction
Family enterprises make up a large part of national economies in the world (Porta, Lopez-De-Silanes, 1999). From all registered Dutch companies 69% are family firms and together they are responsible for 53% of the GDP and does represents 4,3 million citizens that are on the payroll (Berent-Braun et all., 2011).
Dutch family firms seem to perform well, despite the financial and economic crises (ING, 2013; NUzakelijk, 2013; stichting voor het familiebedrijf, 2013). Although they do have a major public role, no study in the Netherlands has been done that compares family and non-family firms in their profitability. So the relative performance of Dutch family firms is unknown, while those studies have been done in other country contexts (Anderson and Reeb, 2003; Villalong and Amit, 2006, Zhou, 2012). Dutch family firms could perform different due to cultural, legalization or business reasons. Furthermore earlier empirical studies in foreign countries do contradict each other regarding the performances of family and non-family companies. Besides this only a few studies focus on the difference in performances between family and non-family in times of crisis. The differences between the two forms, Kets de Vries (1993), may mean that conventional economic rules are not applicable during recession times, which do strengthen the need for research on this topic (Zhou, 2012). Therefore this paper aims to examine whether family firms do perform better compared to the regular organisation that do not dispose of those characteristics.
Family firms often have fewer obligations to publish important financial- and ownership information in public, which is a reason why there isn’t a database that distinguishes family from non-family firms and why there isn’t a comparative study between family and non-family firms in the Netherlands so far (Floren, 2002A). In studies on other countries the lack of family firm data is solved by examining listed companies. According to Burkart, Panunzi and Shleifer (2003) most listed companies in the world, including the Western Europe one, are family controlled.
The central question in this paper therefore is: To what extent do Dutch listed family firms perform differently than non-family firms and what is the influence of the recent economic crisis? In order to measure the developments of the recent economic crisis the dataset contains Dutch (non)-family listed companies between 2006 and 2010.
This thesis is structured as follows: Section 2 presents a theoretical background. Section 3 describes the method and data. In section 4 the empirical findings are presented and these are analysed in section 5. Finally, section 6 describes the conclusions.
2 Family firms
Family enterprises have been the subject of extensive study for two main reasons. First of all, family companies take a large proportion in national economies all over the world (Porta, Lopez-De-Silanes, 1999 in 27 wealthy countries; Klein, 2000 in Germany; Claessens et al., 2000 in Eastern Asia; Sraer and Thasmar, 2007 in France; Anderson and Reeb 2003 the United States). In the Netherlands, family firms make a large contribution to GDP, employing 49% of the working population (Berent-Braun et all., 2011). Second, family firms are an interesting subject to study for their ownership concentration and structure which makes it possible to test and study economic, management and finance theories (Schulze et al., 2001; Carney, 2005; Mustakallio, Autio, and Zahra, 2002).
2.1 Advantages and disadvantages of family firms in relation to performances. Extended research has been done on the strengths and weaknesses of family firms. Ownership concentration is an important topic when studying family firms. In 1932 Berle and Means (1932) suggested that ownership concentration had a positive effect on firm value because it relieves the conflict of interest between owners and managers. Jensen and Meckling (1976) explained this later as a reduction of the agency problem. On the other hand Demsetz (1983) says that ownership concentration is an endogenous result of profit-maximizing behaviour by current and potential shareholders such that ownership concentration should have no effect on firm value.
Previous studies show contradicting conclusions regarding performances of family firms compared with non-family firms. Holderness and Sheehan (1988) find that family firms have a lower Tobin’s q than non-family firms among large U.S. corporations, while Anderson and Reeb (2003) find the contrary. In other studies, of which some are done in other countries, there is not always evidence for different performances of family firms and often results are mixed (Morck et al., 2000; Cronqvist and Nilsson, 2003; Sraer and Thasmar, 2007).
There are several advantages and disadvantages that could create a possible higher or lower firm value for family firms relative to non-family firms. Kets de Vries (1993) conducted 100 in-depth interviews with executives associated to family firms and describes that there are negative and positive effects when it comes to working for the family firm.
2.1.1 Negative effects of family ownership
Negative associations between founding family ownership and firm performance have been supported by empirical research of among others Claessens et al. (2002); Holderness and Sheehan (1988); Lauterbach and Vanisky (1999) and Thomsen and Pedersen (2000). There are agency reasons, non-agency reasons and there is institutional overlap that gives explanations of worse family firm performances.
Yammeesri and Lodh (2004) come with agency reasons. They mention that the substantial ownership of cash flow rights gives founding families incentives and power to take actions that benefit themselves at the cost of firm performance. Excessive compensation and paying out special dividends are ways in which families are capable to extract wealth from the firm. Following DeAngelo and DeAngelo(2000) this can impact business capital expansion plans resulting in poor accounting and market performances. Many actions of families in family firms that try to maximise their personal utility often leads to suboptimal policies, leading to poorer performances relative to non-family firms. For example Burkart, Gromb and Panunzi (1997) observe that families acting on their own interest often negatively influence employee effort and productivity.
Fama and Jensen (1985) show that large concentrated shareholders can use a different investment decision policy relative to diversified shareholders. Diversified shareholders use market value rules that maximize the value of the firm's residual cash flows and on the other hand larger concentrated shareholders may derive greater benefits from other objectives such as firm survival, to the expense of shareholder value. Moreover, family firm owners are more concerned about non-profit objectives, whereas minority shareholders and institutional investors are more concerned about the increase of shareholders’ value (Thomsen and Pedersen, 2000). Other potential cost is caused by the family’s role in selecting managers and directors which can hinder third parties getting control over a firm. Barclay and Holderness (1989) explain that large ownership in firms in this way reduces the probability of bidding by other parties, which results in lower firm value relative to non-family firms. Shleifer and Vishny (1997) say that the presence of incompetent or unqualified large shareholders in management is one of the greatest costs of concentrated ownership. Finally, as non-agency reasons for worse performance of family firms Kets de Vries (1993) mentions less access to capital markets; a messy structure and no clear division of tasks which lead to a confusing organization; and paternalistic/ autocratic rule what manifests itself in resistance to change, secrecy and attraction of dependent personalities.
Lansberg (1983) contributed with his research on a different category of negative effects of family ownership called institutional overlap. Institutional overlap has to do with the existence
of two different institutions, the family and the business, that have a big influence on each other and influence the corporate governance and managerial imperatives in family firms. The efficient operation of family businesses is constrained because the intentions of the family institution and business institutions are contradictory. The family institution as organizational design and allocation of resources should reflect personal trust and social ties to assure care of members of the family. However, this sometimes results in problems at the expense of effectiveness and efficiency. Kets de Vries (1993) mentions some of these problems which can be nepotism, incapable successors or family disputes. Nepotism often plays a role in family firms through tolerance of inept family members as managers and inequitable reward systems. On the other hand there is the business institution that should follow the economic rational aim of effectiveness and efficiency. The presence of the two mentioned institutions makes the governance of family firms complicated, which influences the market value and profitability of family business.
2.1.2 Positive effects of family ownership
Although the literature above suggests that family ownership leads to bad performances, family influence also can have advantages. Positive association between founding family ownership and firm performance have been supported by empirical research of among others Anderson and Reeb (2003); Burkart et al. (2003); Chu (2009); Martinez, Stohr, Quiroga (2007); McConaughy et al. (1998) and Villalong and Amit (2006). Broadly speaking, family businesses advantages can be classified into four categories: combination of ownership and control; information advantages; sustained presence of the family in the business and finally investment efficiency.
Demetz and Lehn (1985) examine the combination of ownership and control and mention that concentrated shareholders have strong incentives to minimize the agency problem and maximize firm value. Because firm welfare and families’ wealth are closely linked in family firms there are strong incentives to monitor the managers. Kets de Vries (1993) adds to this that there is greater independence of action in family firms through less or no pressure form stock markets and less or no turnover risk compared to non-family firms. Besides this he says that the way families in family firms control their business is less bureaucratic and less impersonal, which makes a family firm more flexible and quicker in decision making.
The second category is about information advantages of family members that are part of the firm management. Normally information for shareholders is not cost-free. But when
member shareholders are as well in the board of directors of the company, important information is known to them, giving these family firm shareholders a comparative advantage compared to diversified shareholders of non-family firms (Eisenhardt, 1989). Another information advantage for family firms is that family members have superior information and better knowledge associated with their company, because they have been in contact with their company since childhood (Kets de Vries, 1993; Smith and Amoako-Adu, 1999).
Another category of family firm advantages lies in the good reputation with regard to the family’s sustained presence in businesses, which has positive effects on other stakeholders. The long-term horizon suggests that other parties such as providers of capital, suppliers or costumers are more likely to do business with the same organization for longer periods, favouring family firms over non-family firms (Poza, 2007). A long term orientation of families in their business can be seen as a part of family-firm cultures that often serve as source of pride. These family cultures lead to stability, string identification, commitment, motivation and continuity in leadership which benefit family firms (Kets de Vries, 1993).
Investment efficiency can be seen as the last classification of family firm advantages. Founding families often keep a long term presence in their family firm creating an investment benefit. Founding families have longer horizons than other shareholders of the firm making them more interested in investing in long-term projects compared to normal shareholders. Stein (1988) show evidence for this by concluding that shareholders with longer investment horizons are less likely to give up good investments to make higher current earnings possible. The long-term horizon appears to be of high importance to family firms and the intention is to pass the firm into succeeding generations (Floren, Uhlaner and Berent-Braun, 2010; James 1999). James’s research follows-up on previous research and determines that the long-term investing creates more efficiency for family firms than non-family firms in terms of Net Present Value.
Overall, this subsection shows that large concentrated shareholders and family firms have substantial economic incentives to maximize firm performance and have the characteristics, influence and power to make it happen. If the competitive advantages of family firms are expected to be stronger that the disadvantages, better firm performances in family firms than in non-family firms should be observed.
2.2 Family firms in relation to crisis
In times of recession, conventional economic rules are not applicable meaning that theories and research about why performances of family firms relative to that of non-family firms can differ during times of recession (Zhou, 2012). Following Lins, Volpin and Wagner (2011) benefits and costs for concentrated shareholders change during times of crisis and affect firm value. Without telling if it is positive or negative, they argue that the relation between concentrated shareholders and firm value is stronger in bad economic times. This different relationship in times of recession can be reason to assume that the relative performances of family firms are different then compared with economic normal times.
There are several reasons why family firms can perform better than non-family firms during times of crisis. First of all, McConaugby, Natthews and Fialko (2001) find that family firms carry less debt than other firms which means that family firms are less fragile during bad economic times. Second, Kets de Vries mentions that in economically difficult times family firms are more willing to plow back profits making them more resilient in hard times. Third, Zhou (2012) shows that during the recent financial crisis founder family firms had significantly less credit constraints compared to family firms resulting in lower interest costs than for non-family firms. Croci, Doukas and Gonenc (2011) agree with this point. Furthermore Zhou (2012) shows that founder family firms invested less during the financial crisis what resulted in significantly better performances in terms of Operating Return on Assets (OROA).
Then there are lower agency costs. Anderson and Reeb (2003) say that in family businesses there is a better alignment of interest between shareholders and managers, which can be an extra advantage when a crisis comes following Zhou (2012). Interest conflicts between long-term focused owners and short-term focused managers can be at high cost in bad economic times. When a firm is performing badly, managers have incentives to take excessive risk because they get a part of the gain of risk and they lose nothing when the risk turns outs to be a failure. This is less likely to happen in family firms where managers are often part of the family.
Finally, a source for better performance of family firms during a crisis is related to the reputational long-term commitment of owners of family firms. Chen et al. (2010) shows that family businesses are less aggressive compared to non-family. Banks and financial institutions prefer to deal with entities with reputational concern like family firms (Anderson and Reeb, 2003). This results in easier access to capital for family firms than non-family firms (Croci, Doukas and Gonenc, 2011). In this way established relationships with banks and financial institutions benefits the operating performances of family firms, that do not renounce good investments because of financing problems that often appear in times of crisis.
On the other hand a crisis could result in underperformance of family firms. Lins, Volpin and Wagner (2011) say that concentrated shareholders face in recession times a stronger tradeoff between using firm funds for private benefits and using firm funds for productive investments what could also be the case for family firms. Underperformance also can be created by asset expropriation of minority shareholders, by powerful family shareholders that might be more severe during economic bad times. Baek et al. (2004) show that this was the case with chaebol firms during the Korean financial crisis of 1997. Furthermore, family firms which have family members in the board of directors might be under-qualified and entrenched (Sleifer and Vishny, 1997). During times of crisis when market conditions are harsh under-qualified managers can bring more costs to a firm (Zhou, 2012). Lemmon and Lins (2003) show in a research on eight East-Asian countries significantly lower firm value of firms with entrenched managers relative to other firms during the Eastern Asian financial crisis.
Overall, whether family firms perform better than non-family firms in times of economic crisis is still an open question. Table 1 summarizes the effects of family ownership on firm performance in general and in times of crisis.
Table 1: The effects of family ownership on firm performance summarized
Effects of family firm ownership
Category Negative effects Category Positeve effects
Overall
Agency reasons
● Founding families have incentives and power to take actions that benefit themselves at the cost
of firm performance Ownership and control
● Family firms ownership creates strong incentives to minimize the agency problem and maximize firm value
Non-Agency reasons
● Different investment decision policy: family firm owners are more concerned about non-profit objectives. Minority shareholders and institutional investors are more concerned about the increase of shareholders’ value
● Greater independence of action in family firms ● Family are firm more flexible and quicker in decision making
Information advantages
● Family firm owners have a comparative advantage through cost free information when family members are in the executive board
● Lower firm value through a reduced
probability of bidding by other parties ● Superior information and better knowledge of family firm owners created by being involved in the company since childhood
● The presence of incompetent or unqualified large shareholders in family firm management
Sustained presence of the
family in the business
● Cooperating parties of firms are more likely to do business with firms with a long term horizon ● Less access to capital markets
● A messy structure and no clear division of
tasks ● A long term horizon lead to stability, string identification, commitment, motivation and continuity in leadership which benefit family firms ● Paternalistic/ autocratic rule
Institutional overlap
● Efficiency in family businesses is constrained because the intentions of the family institution and business institutions are contradictory
Investment
efficiency ● More long term investment in family firms which create more efficiency in terms of Net Present Value
Specific in times of crises
● Stronger tradeoff between using firm funds for private benefits or for productive investments for concentrated shareholders
● Family firms are less fragile because they carry less debt ● More resilient through greater willingness to plow back profits ● Asset expropriation of minority shareholders, by powerful
family shareholders might be stronger during economic bad times
● Less credit constraints result in less interest costs ● Family firms invest less during times of crisis ● During times of crisis under-qualified and entrenched managers
in family firms can bring more costs to the firm ● Better alignment of interest between shareholders and managers reduce agency costs more during crises
● Good investment opportunities are not renounced during crises due to established long term relationships
3 Research method
3.1 Sample and data
For this study firms listed on the Amsterdam stock exchange (AEX, AMX, AscX and Local index) on the 4th of June 2013 are used. The sample consists of a panel of 535 firm-year
observations, representing 109 firms between 2006 to 2010. Even though some of the firms may not be on the index list in a particular year, because they entered the stock exchange later, they are included in the database. It is also the case that some firms left the Amsterdam stock exchange between 2006 and 2013. Although these firms were on the stock market during some years of the period that is investigated, these firms are not taken into account due to a lack of data. This possibly creates a survival bias, but it will be discussed later.
The data collection process contained three steps. In the first step shareholders with more than 5% of the outstanding shares of the consulted firms investigated in this research are identified. Sources for this are COMPUSTAT and the Dutch authority of financial markets (AFM). In the Netherlands shareholders that own 5% or more of the outstanding shares of a firm listed on the stock market are obliged to announce this to the AFM.
In the second step information about the founding history of firms, employees and management of firms is collected from company official websites and web searches on the firm- and shareholders history. This step identifies the family firms.
In the last step information from step one and step two are combined and additional accounting- and firm data is added. Sources for this data are COMPUSTAT and Datastream.
3.2 Identification of family versus non-family firms
In this research family firms are defined as firms where the founder(s) or their family has 5% or more ownership in the firm. According to Handler (1989), Floren (2000b) and Bennedsen et al. (2010) there is no universal definition for a family firm and that is why the definition of a family firm varies in researches from restrictive like Lyman (1991) to very inclusive Dyer (1986). However, researchers that focus on performances of family firms on stock markets use criteria for family firms that are close to each other. Most of them refer to Anderson and Reeb (2003). They do research on the performances of listed family firms and say a family firm is a firm where the founder, his family or one or more members of the founder’s family have ownership in the
firm or are members of the board of directors/advisors. This is a clear definition that is used in many similar researches and well applicable in many countries and therefor this research uses a definition close to that of Anderson and Reeb (2003)1.
The definition used in this research differs in two ways from Anderson and Reeb (2003). The first difference is that the founder or the founder’s family should have at least 5% ownership in the firm. The reasons behind this are first of all because it is very difficult to detect shareholders with less than 5% in the Netherlands. Therefore, discussed literature often refers to ownership concentration theory because family ownership is highly correlated with ownership concentration. This study assumes that concentrated ownership can only be the case at a 5% or more ownership level in a firm2. The second difference is that in this research a firm is not a
family firm if a founder, or a member of the founder’s family, takes part of the board of directors/advisors without that the family having ownership. It is not always possible to detect if board of director members are part of the founding family. Besides this, based on preliminary investigation it is even in question if among the 109 consulted firms there are founders or family members of the founding family in the firm’s board of directors without having ownership.
This research does not distinguish different type of family firms such as founder firms, heir firms and leader/owner firms like several other studies do (Anderson and Reeb, 2003; Sraer and Thasmar, 2007; Vilalonga and Amit, 2006; Zhou, 2012) . The used sample in this study is to small to take this into account. Because the family firm performance in time of crisis relative to that of non-family firms has never been investigated in the Netherlands, looking at family firms in general is the main purpose of this study. All together there are 19 family firms in the database. Appendix 1 shows a list of all investigated firms.
3.3 Measurement of variables
3.3.1 Dependent variable
1 Other used definitions in researches on family firms on stock markets are given by for example Vilalonga and Amit (2006) who define a family business as a business where the founder or a member of the founder’s family a manager or director is. Sraer and Thasmar (2007) use a definition close to that of Vilalonga and Amit (2006), but they impose the additional condition that the family member in the company represents more than 20% of the voting rights. However, these definitions are less applicable to the data used in this study.
2When ownership percentages of Dutch listed firms are considered, 5% ownership of one group, company or person makes this owner a substantial shareholder which makes them often belong to the largest owners of a company.
12
Firm performance is the dependent variable and is measured by the Return On Assets (ROA), Return On Equity (ROE) and Tobin’s Q (TOBINSQ) in this study. Like in most prior studies on family firm performances, this research uses both accounting and market performance ratios. Two of the profitability ratios that assess the accounting performance are Return On Assets (ROA) and Return On Equity (ROE). These two ratios are easy to calculate, enable to compare results among firms and have been widely employed to examine accounting performance of family firms, which make them good variables to measure profit.
Tobin’s Q is a ratio of the firm’s market value to the replacement costs of its assets. Although Zhou (2012) says that when investors tend to be irrational and stock price volatility is high Tobin’s Q may not be the most appropriate measure of corporate performance, Tobin’s Q is widely used and still seems to be the best measure of value creation or market performances.
3.3.2 The independent variables
The independent variables of interest are Family firm (FAMILYFIRM) and Family firm in times of crisis (FAMFIRMCRISIS). The variable Family firm, already partly discussed in section 3.2, is a dummy variable that is 1 when a firm is a family firm following the given definition and 0 when it is not a family firm. Together, the variables Family firms and crisis (CRISIS) create the interaction dummy variable Family firm in times of crisis (FAMFIRMCRISIS). The value of this is 1 if the concerned firm is a family firm in times of crisis and 0 if it is otherwise. The variable crisis (CRISIS), used as control variable, is as well a dummy variable that is 1 if the observations of firms are of the years 2008, 2009 or 2010 and 0 if the observations of firms are of the years 2006 or 2007. Signs of crisis were observed in 2008 with the bankruptcy of Lehman Brothers in September 2008. In October 2008 the Dutch government had to support several banks and nationalize the Fortis bank, one of the main banks in the Netherlands at that time. These events strongly influenced accounting and market performances of firms that year worldwide and therefore 2008 is considered as the beginning of the crisis. .
Furthermore six other control variables are used to control for economic sector and firm characteristics including the firm size, total debt as percentage of total capital, firm age, price volatility, the number of employees and economic group. Firm size reflects the existence of economies and diseconomies of scale and could be a barrier to enter a business which may have an effect on performances (Bain, 1968). Besides this the relationship between firm performances and family ownership can be influenced by firm size (Kole, 1995). For these reasons the variable
Firm size (SIZE) is taken into account and is measured as the total assets at the end of each year. To avoid problems with extreme values the natural logarithm is used.
The percentage of debt can influence the performances of firms. Following Demsetz and Lehn (1985) a firm’s ownership structure has influence on the percentage of debt that a firm has. The variable debt (DEBT) is measured as the percentage total debt of total capital.
The firm age has influence on the survival and growth of firms (Hannan and Freeman, 1993). Following Daily and Dollinger (1993) the age of family and non-family businesses may be different due to succession questions. Consistent with Chu (2009) the variable firm age (AGE) is measured here as the natural logarithm of the firms age since incorporation.
Firm risk has effect on firm performances, especially in times of crisis. Following literature non-family firms operate more risky than family firms and therefore it is taken into account like Zhou (2012) and Anderson and Reeb (2003) did. Firm risk (VOLATILITY) is a measure of a stock's average annual price movement to a high and low from a mean price for each year.
The variable employees (EMPLOYEES) is taken as the natural logarithm of the number of employees because Zhou (2012) thinks the number of it could have effect on the performances. This number of employees can differ between family and non-family firms.
Finally profitability differences created by the difference of economic groups are also controlled for. Most studies about firm performances use industry classifications to control for but these classifications have a lot of categories which are not applicable in small samples. For that reason this research uses economic groups as a control. There are ten economic groups and these are: Resourses (mining, oil and gas firms); Basic industries (chemical, constructing and building materials, forestry and paper; steel and other metal firms); General industries (aerospace & defence, diversified industrials, electronic & electrical equipment, engineering & machinery firms); Cyclical consumer goods (automobile & parts, household goods and textiles firms); Non-cyclical consumer goods (beverages, food producers & processors, health, packaging, personal care & household products, pharmaceuticals, tobacco firms); Cyclical services (beverages, food producers & processors firms); Non-cyclical services (food & drug retailers, telecommunication services firms); Utilities (electricity, gas & water distribution firms); Financials (Banks, insurance, life assurance, investment companies, real estate, speciality & other finance firms); Other (ICT, other firms).
3.4 Analytical methods
This research tests two hypotheses.
1) The performances of family listed firms differ from those of non-family firms during the period 2006-2010.
2) The crisis does influence the performances of family firms differently compared to those of non-family listed companies.
Therefore three methods are employed in this research. Fist summary statistics will tell statistical facts about the used variables. Then there is a univariate comparison. Different performance indicators of the family firm and the non-family firm group are used to specify whether a significant performance difference exists between family and non-family firms, overall, and if this difference in types of firms differs before (and during) the crisis. Last, regression models are analyzed.
4 Results
4.1. Summary statistics
In this section first the full sample and correlation data is discussed where after the economic group distribution of family and non-family firms in the sample is presented.
Table 2 provides the summary statistics and correlation data and consists of panel A and B. Panel A gives mean (average), standard deviations and maximum and minimum values for the main variables of the full sample used in this research. After large outliers excluded, the database comprises 109 firms that are analyzed by 535 firm-year observations using clustered standard errors. The table shows that the database consists of firms with a broad range of employees, which are of all ages, that varies among size and debt and have different stock price
Table 2: Summery Statistics and Correlation Data Panel A: Summery Statistics for the Full Sample
Variable Mean Std. Dev. Min Max
FAMFIRM 0.17 0.38 0 1
ROA 5.31 14.46 -92.09 103.24
ROE 9.98 28.65 -126.68 152.16
TOBINSQ 1.52 1.01 0.18 10.02
SIZE (LN total assets)(€,000) 13.50 2.56 5.51 21.00
DEBT 33.20 24.55 0 124.19
AGE (firm age in years) 52.42 55.57 0 328
VOLATILITY 28.94 10.50 6.71 69.99
EMPLOYEES (number of employees) 23740.64 64519.98 0 583830
Panel B: Correlation Data
FAMFIRM ROA ROE TOBINSQ SIZE DEBT AGE TILITY VOLA- EMPLO- YEES
FAMFIRM -
ROA 0.146 -
ROE 0.101 0.902 -
TOBINSQ 0.103 0.249 0.277 -
SIZE (ln(total assets)) 0.058 0.049 0.188 -0.139 -
DEBT -0.066 -0.195 -0.113 -0.154 0.418 -
AGE (ln(firm age)) -0.159 0.114 0.129 -0.097 0.078 0.114 -
VOLATILITY 0.237 -0.151 -0.188 0.135 -0.220 -0.082 -0.409 -
EMPLOYEES (ln (employees)) 0.256 0.120 0.249 0.085 0.732 0.224 0.121 0.038 - Panel A provides summery statistics for the data employed in this analysis. Firms that are on the Dutch stock market but for which required data is not available are not converted in this sample. After large outliers are dropped out, the data set is comprised of 109 firms of the Dutch stock markets covering the years 2006-2010. These summery statistics are based on panel data of 535 firm-year observations.
Large outliers are dropped out if: ROA > 160 and if ROA<-160; ROE > 160 and if ROE < -160; TOBINSQ > 20; DEBT < 0. Panel B shows the correlations between the used variables of the full sample of 109 firms based on 535 firm-year observations.
volatility. Furthermore the table makes clear that there are good and bad performing firms in the database when it comes to the performance measures, but on average the firms show positive results.
Panel B presents a simple correlation matrix for the main variables of this analysis. Family firms appear to have a positive relation with the performance measures, ROA, ROE and TOBINSQ. Following this table it seems that family firms show better market and accounting results. Furthermore SIZE, VOLATILITY and EMPLOYEES have a positive correlation with family firms which would suggest that family firms in general are larger, more volatile and have more employees than non-family firms. DEBT and AGE is negatively correlated with family firm what would indicate that family firms are younger and have less debt than non-family firms. DEBT is negative correlated with all three performance measures as well which could explain the indication that family firm perform better than non-family firms and could be taken into account in later analyses. Finally, the independent variables have low correlations with the variable family firm, so based on this table no multicollinearity is expected. However, this table doesn’t show the significance of numbers and therefore in the next sections univariate and multivariate analyses are used.
Table 3: Number and percent of Family and Non-family firms by economic group Economic
group code Economic group discription Family firms
Non-family firms Percent Family Firms in Economic group 00 Resources 0 4 0.0 10 Basic industries 2 10 16.7 20 General industries 3 28 10.0
30 Cyclical consumer goods 1 10 9.1 40 Non-cyclical consumer goods 2 11 15.4
50 Cyclical services 3 15 16.7
60 Non-cyclical services 1 4 20.0
70 Utilities 0 0 0.0
80 Financials 4 19 17.4
90 Other (ICT) 5 4 55.6
Number and percent of firms by standard economic group classification code. Family (non-family) firms refer to firms with (without) at least 5% ownership in the founder's family. Some firms (32) have changed over time of economic group. Those firms are
counted double of which two are family firms and 30 are non-family firms.
Table 3 shows number and percent of family and non-family firms by economic group. The results suggest that in eight of the ten economic groups family firms are present and show
that family operate in a broad range of economic groups. 32 firms changed of economic group over time of which 2 were family firms and 30 were non-family firms. These firms are counted twice in the table. From this change of economic sector can be suggested that non-family firm switch more often of economic group and family firms stay longer in the same business. The economic group OTHER seems to have a large share of family firms compared with the group RESOURCES. 55.6% of the group OTHER is a family firm against 0% in the group RESOURCES firms in this group. This shows the importance of controlling for economic group, what will be done in the multivariate analysis by including dummy variables.
4.2. Univariate analysis
Methodologically speaking, results of univariate analysis are considered as inferior to results of multivariate analysis. However, when it comes to family firm performance studies almost all researches use univariate analyses. A univarate analysis can give a first insight and can control for multivariate analyses, therefore in this study a univariate analysis is used as well to analyze the performance measures of family and non-family firm.
First, in table 4 differences of mean tests over the period 2006-2010 are presented in order to check the hypothesis that family firms perform better than non-family firms overall. All key variables used in this research are tested. Second, in table 4 performances before and during the economic crisis of family and non-family firms are considered, to check the hypothesis that family firms perform more different than non-family firms during the crisis compared with before.
The second, third and fourth row are the most relevant in table 4, they give information about the accounting and market performance measures. These rows show that over the period 2006-2010 ROA is significant higher for family than for non-family firms when a significant level of 5% is considered. ROE only shows higher performances for family firms at a significance level of 10% and Tobin’s Q is not significant different for family than non-family firms at all. Based on this table accounting performances appear and market performances appear not to be different among family and non-family firms. Furthermore, what can be interpreted from this table is that family firms have significantly less debt, are younger, have more employees and have higher stock price volatility than non-family firms. This is in line with the first insights which were given by the correlation numbers in table 2 panel B. However, the last finding, higher stock price volatility of family firms, is the opposite of what can be expected. Higher stock price volatility is associated
with more risk and following literature not family but non-family firms are the ones that operate more risky.
Table 5 reports the performances before and during the crisis of family and non-family firms. On the left side of the table the three used performance measures with the results of respectively non-family and family firms. The difference in mean tests represented at the right of the table tell that family firms performed better than non-family firms before the crisis in terms of ROA and ROE at a significance level of 10%. When these accounting performances are considered in the period of crisis, the table shows that they do not differ between both types of firms. Tobin’s Q does not differ at all in both periods regarding the firm types. So based on this table it can’t be said that one of the firm types suffers harder from the crisis than the other. The crisis itself clearly does have an effect on the firm performances. Family as well non-family firms have a significant decline on all three performance measures. However, the decline between the two accounting performance measures is quite different, ROE seems to suffer much more than ROA. Finally, the difference-in-difference test shows that performances change during the two periods are not different between the firm types, what means that the family firms defined in this research do not consist of superior performers during the economic crisis.
When the univariate analysis is considered overall, ROA and ROE of family firms differs significant from non-family firms over the period 2006-2010 at a significance level of 5% and 10%. Tobin’s Q doesn’t show any significance at all, not for the entire period as for the period
Table 4: Difference of means tests over the period 2006-2010
Family
Firms Non-family Firms Difference t-statistic
1 Number of Firms 19.00 90.00
2 ROA 8.36 4.68 3.69 (2.184) **
3 ROE 14.87 8.97 5.90 (1.751) *
4 TOBINSQ 1.67 1.49 0.18 (1.484)
5 SIZE (LN total assets)(€,000) 13.59 13.48 0.10 (0.342)
6 DEBT 27.32 34.44 -7.12 (2.514) **
7 AGE (firm age in years) 37.20 55.54 -18.34 (2.855) ***
8 VOLATILITY 33.48 28.06 5.43 (4.171) ***
9 EMPLOYEES (number of employees) 58496.96 16373.33 42123.63 (5.639) *** This table reports the means of family and non-family firms of the key variables in this analysis after large outliers are excluded. Family (non-family) firms refer to firms with (without) at least 5% ownership in the founder's family. The sample comprises 109 companies from Dutch stock markets covering the years
2006-2010. These differences of means tests are based on 535 firm-year observations. ***, **, * Denotes significance at the 1%, 5% and 10% levels, respectively.
Table 5: Performance before and during the crisis of family and non-family firms
Non-family firms (I) familie firms (II) Difference in Mean firm-year
observations mean t-statistic std. Dev. observations firm-year mean t-statistic std. Dev.
(II)-(I) t-statistic
ROA (before crisis, 2006-2007) 167 7.25 15.12 34 12.46 7.74 5.21 (1.956)*
ROA (during crisis, 2008-2010) 255 2.99 13.49 54 5.78 17.68 2.79 (1.304)
Difference in ROA means (during - before) -4.26 (3.022)*** -6.68 (2.078)** -2.42 (0.708)
ROE (before crisis, 2006-2007) 166 16.07 29.86 34 25.10 12.80 9.03 (1.7286)*
ROE (during crisis, 2008-2010) 253 4.31 27.79 53 8.31 29.49 4.00 (0.9416)
Difference in ROE means (during - before) -11.76 (4.113)*** -16.80 (3.132)*** -5.04 (0.748)
Tobin's Q (before crisis, 2006-2007) 165 1.74 1.09 34 2.00 0.86 0.27 (1.3540)
Tobins's Q (during crisis, 2008-2010) 250 1.33 0.97 51 1.45 0.84 0.12 (0.8052)
Difference in Tobin's Q means (during - before) -0.41 (3.982)*** 0.56 (2.976)*** -0.15 (0.628)
This table reports the means, standard deviations and t-tests between means of performances before and during the economic crisis of family and non-family firms. The years considered as before the crisis are 2006 and 2007, the years considered as during the crisis are 2008-2010. Family (non-family) firms refer to firms with (without) at least 5% ownership in the founder's family. The sample comprises 109 companies from Dutch stock markets and consists of 535 firm-year observations. Based on variance comparison tests, mean comparison tests in this table are done with the
before and during the crisis. The difference-in-difference analysis tests the hypothesis that family firms perform more different than non-family firms during the crisis compared with before the crisis. But therefore no evidence on all three performance measures is found in this univariate analysis.
4.3 Multivariate analysis
The multiple regressions with clustered standard errors are summarized in table 6. When it comes to the results, the regressions that test the influence of the interaction variable FAMFIRMCRISIS reports all an insignificant influence on the three performance measures. This means that the change of performance before and after the crisis is not different for family firms relative to non-family firms. Therefore, the hypothesis that non-family firms perform more different than non-non-family firms in times of crisis is rejected. Furthermore table 6 tells that family firms performed better in the period 2006-2010 than non-family firms when ROA is considered. This supports the hypothesis that family firms are better performers overall and can be concluded from the significant higher ROA numbers in model 2 and 3 for family firms that are respectively 3.10% and 3.09%. For ROE and Tobin’s Q the table doesn’t show significant higher performances for family firms, not overall and not in times of crisis.
Furthermore, there are as well other variables that have a significant influence on performance measures. The economic crisis has a negative influence in performance measures in all models that include it. The first 2 models show the crisis cost a Dutch firm 3.66% and 3.18% of the ROA. ROE seems to suffer more from the crisis, its decline is almost 3 times higher. The Tobin’s Q of firms declines 0.37 and 0.38 due to the economic crisis.
The results show that firm size and firm age only affect Tobin’s Q significantly and no other performance measures. If total assets of a company increase with 1%, Tobin’s Q declines according to the used model with 0.14 or 0.15 and an increase of firm age with 1% makes Tobin’s Q decline with 0.07. So market performances appear to be influenced negatively by firm size and age. Debt and stock price volatility have a negative effect on ROA and ROE. This means the more volatile the stock prices of the firm is, the worse the accounting performances of the company are. If debt as percentage of total assets increases, ROA decreases and this negative effect is even stronger for ROE. The negative effect of stock price volatility is also stronger for ROE than for ROA. Finally, a 1% increase of the number of employees has a positive effect on the three performance measures, however, the significance of it is less for ROA.
Table 6: Regressions on performances of Dutch stock market listed firms
Variables Dependent: ROA Dependent: ROE Dependent: Tobin's Q Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9
Intercept 15.96 15.43 15.87 25.12 24.46 25.60 2.84 2.85 2.83 (1.81)* (1.81)* (1.95)* (1.4) (1.39) (1.51) (7.82)*** (7.88)*** (7.49)*** FAMFIRMCRISIS 3.13 4.31 -0.07 (0.99) (0.74) (0.45) FAMFIRM 1.16 3.10 3.09 -1.08 1.55 1.57 0.01 -0.03 -0.03 (0.57) (2.24)** (2.23)** (0.26) (0.52) (0.52) (0.1) (0.27) (0.33) CRISIS -3.66 -3.18 -10.24 -9.58 -0.37 -0.38 (2.92)*** (2.67)*** (3.6)*** (3.68)*** (5.21)*** (5.93)*** SIZE -1.01 -0.99 -0.95 -1.96 -1.94 -1.87 -0.14 -0.14 -0.15 (0.87) (0.85) (0.84) (0.93) (0.92) (0.9) (3.32)*** (3.34)*** (3.49)*** DEBT -0.16 -0.16 -0.16 -0.27 -0.27 -0.27 0.00 0.00 0.00 (4.46)*** (4.49)*** (4.44)*** (3.34)*** (3.34)*** (3.36)*** (1.12) (1.15) (0.84) AGE 0.92 0.93 0.94 1.85 1.85 1.89 -0.07 -0.07 -0.07 (1.15) (1.16) (1.17) (1.12) (1.13) (1.15) (2.77)*** (2.78)*** (2.97)*** VOLATILITY -0.20 -0.20 -0.20 -0.49 -0.49 -0.48 0.00 0.00 0.00 (2.74)*** (2.71)*** (2.59)*** (2.8)*** (2.78)*** (2.66)*** (0.75) (0.74) (0.62) EMPLOYEES 1.71 1.69 1.66 4.70 4.67 4.60 0.14 0.14 0.15 (1.77)* (1.77)* (1.76)* (2.59)*** (2.59)*** (2.59)*** (3.51)*** (3.53)*** (3.69)***
Control for economic group yes yes yes yes yes yes yes yes yes
Control for year no no yes no no yes no no yes
R² 0.19 0.19 0.2 0.24 0.24 0.24 0.31 0.31 0.33
F statistics 7.12 5.51 5.87 6.4 6.33 5.81 15.64 16.41 13.99
Number of obs. 433 433 433 431 431 431 433 433 433
This table reports results of the OLS multiple regression analysis with clustered standard error to investigate the performance of family and non-family firms before and during the economic crisis. The years considered as before the crisis are 2006 and 2007, the years considered as during the crisis are 2008-2010. Family (non-family) firms refer to firms with (without) at least 5% ownership in the founder's family.
The univariate findings are almost all confirmed in this multivariate analysis. Like in the univariate analysis ROA is higher for family than for non-family firms over the whole period and Tobins’Q is indifferent regarding the firm type. Besides this in as well the univariate as the multivariate analysis family firms are not superior performers during the crisis compared with before. The only difference between the two analyses is that in the univariate analysis ROE is better for family firms over the whole period at a 10% significance level, what is not the case in the multivariate analysis. This difference is not of great concern because a 10% level is only known as weakly significant. With regard to this the result of the multivariate analysis will be followed because it should be a more accurate estimator.
5 Discussion
Dutch family listed firms do perform significantly better compared to non-family listed companies. ROA is significant higher for family than for non-family firms in the univariate and the multivariate analysis. The statistical results imply thus that although family ownership has both potential benefits and costs, in family ownership the positive effects of it overrules the negative aspects when it comes to returns on assets. Based on univariate and multivariate analyses, family firms do not differ from non-family firms in their deviation of performances taking into account the effect of the crisis.
These findings are partly in line with Anderson and Reeb (2003), Chu (2009). Their studies show as well a positive influence of family ownership on ROA. However, Anderson and Reeb (2003) and Chu (2009) report positive influence of family ownership on Tobin’s Q as well and besides this these studies don’t investigate the influence of the crisis on firm performances. Therefore the results in this research have more in common with Zhou (2012). Zhou (2012) doesn’t find evidence for better family firms performances on Tobin’s Q and a different change in performance of before and after the crisis for family firms relative to non-family firms like in this research. Though, his study doesn’t take ROA but OROA (operating return on assets) as performance measure what is a close but different measurement. Furthermore he proved that founder-family firms do have a different change in performance among the crisis. However, none of the studies mentioned looked at the family firm performances of Dutch listed firms what is the main difference with this study.
The main question that arises after the evidence for better ROA performances for family-firms is if family ownership results in higher ROA or if this higher performance leads to the maintenance of family firms. A possible endogeneity problem may be involved here. It could be that firm performances stimulate maintenance of family ownership because of better information and insights that families have than markets. This could make families more readily ascertain future firm prospects what would make them to invest their wealth in only a business with favorable outlooks. In this way good firm performance could lead to maintenance of family firms. Although this isn’t tested in this research many other studies on family firm performances show there isn’t an endogeneity problem, what means that higher firm performance do not lead to maintenance of family firms (Anderson and Reeb, 2003; Sraer and Thesmar, 2007; Chu, 2009; Zhou, 2012). Besides this Flören, Uhlaner and Berent-Braun (2010) mention that for 91% of the Dutch family firms continuity the most important goal is and not profit. This fact doesn’t suggest that the height of ROA is the main reason to stay a family firm or not. Since this research doesn’t
test for endogeneity this study has to rely on previous study and when those are considered, the probability of endogeneity is small.
Although an explanation for the higher ROA of family firms cannot be concluded from the data, discussed theory gives possible explanations. Anderson and Reeb (2003) mention lower cost of debt financing as a cause for better relative performances of family firms, and because the analyzed family firms have significant less debt than non-family firms, this seems a plausible theory. In general, most explanations of family firm advantages of Kets de Vries (1993) could be possible and have an influence in this case. So a longer-term orientation, more stability and continuity in leadership or less bureaucracy can be at the base of the success. However, some points he mentions are less plausible. One of them is the explanation that family firms suffer less pressure from stock markets. Table 4 showed that stock price volatility is significant higher for family firms and it is often precise stock price volatility that is a source of pressure for firms. Furthermore, greater independence of action in family firms is probably less relevant here. These analyzed firms are listed and in almost all family firms there are as well other large shareholders which make these families still dependent of other groups. However, a reduction of agency costs by a combination of ownership and control (Demetz and Lehn, 1985), information advantages like Eisenhardt (1989) meant and investment efficiency as Stein (1988) and James (1999) found are also explanations from theory for the higher ROA found in this study. However, further research is needed to be more concrete.
Interesting is the significance of ROA whereas Tobin’s Q is insignificant. A possible explanation is that family firms have better managerial monitoring and characteristically benefits what leads family firms to make better investment decisions resulting in better accounting performances. On the other hand, following Martinez, Stohr and Quiroga (2007), investors on stock markets do not always believe that family firms will share these higher accounting performances fairly with other share- and stakeholders of the firm. A consequence could be that family firms’ shares are discounted by outside investors, although these firms have higher accounting performances. A more likely explanation is that family firms’ market capitalization is undervalued what makes Tobin’s Q to be lower than it should be. Stock prices could be discounted because of low market presence and liquidity of family firms due to high ownership concentrations in family firms.
Also ROA and ROE are differently affected by family firms. The multivariate analysis shows that family firms have a significant effect on ROA but not on ROE, while these two measurements are close to each other. The difference of means test of table 4 displays that the average ROE is 6.51% higher than ROA for family firms and 4.26% higher for non-family firms.
That the ROE is higher than ROA is almost inherent of its definition because equity is part of the total assets. But that the family ownership has significant influence on ROA but not on ROE should be caused by the interest component or the denominator of the formula. Family ownership could increase the total equity in the firm while the total assets are the same what is a possible explanation of the significant effect of a family firm on ROA performances and not on ROE performances. Another explanation could lay in the interest component which would mean that family firms have more interest revenues or less interest costs than non-family firms. But given the fact that family firms have significant less debt than non-family firms, the first of the two mentioned explanations seems the most logic.
One of the limitations of this research is the small amount of family companies as it is a great challenge to incorporate in the dataset an equivalent amount of listed family and non-family companies. Probably with a larger database significant results for ROE and Tobin’s Q can be found as well. Second, this research uses dummy variables for family firms while the proportion of family ownership could also have a non-linear relation with firm performances. The use of family ownership proportion would give more accurate results of the effect of family firms. Difficulty in this is how to deal with Dutch firms where a family owns less than 5% of the outstanding shares, these firms are hard to detect because they have not to report their participation to the authorities.
Another limitation of this study has to do with that it doesn’t consider changes in the Dutch stock exchanges since 2006. The used database contains the Dutch listed firms on 4 June 2013 and it may be the case that some bad performing firms left the Amsterdam stock exchange between 2006 and 2013. An upward survival bias could be the consequence what would affect the internal validity of this research. However, firm drop out could overcome as well to a family as to a non-family firm. Since this study looks at the difference in performances between family and non-family firms, this could be a less problematic constraint. Besides this Zhou (2012), who uses a sample that contains listed firms of 5 different countries, tests for a possible survival bias by using an adapted database with only firms that are consistently present in the considered stock markets. This test doesn’t find evidence for a survival bias what makes the results of his adapted database consistent with his full sample results. Although, it would always be good to test for a possible survival bias in future research on the performances of Dutch family firms.
Recommendations for further research on this subject are to take away the limitations of this study and to construct a larger database to do research on related topics as: the causes of higher family firm performances in the Netherlands; the influence of different Dutch family firm types on firm performances and the effect of the proportion of family ownership on firm
performances in the Netherlands. This study shows that family firms perform better than non-family firms and therefore does arise other questions. Did the number of non-family firms change last years? Does it result in more take-over pressure and what do families do to keep a business in their family?
This research furthermore reports a lack in the existing literature about family firm cultures among countries what leads to more recommendations. It would be interesting and valuable if research on this is done, in order to overcome the now weakly defended argument that family firms can differ among countries. This research could be used as a reference for further research on the performance of Dutch family firms in an international context (cross country). If families and the way of running a business is different in the Netherlands than elsewhere, is this in the advantage or disadvantage of Dutch family firms?
Normally number of employees goes hand in hand with firm size, but table 4 shows that although family firms are not significant larger than non-family firms in terms of total assets, they are larger in terms of number of employees. This is not a usual relation and asks for explanations. While family firms work with less assets per employee, ROA is still significant higher for family firms. These points demand for further research on forces behind this, it could explore the role of capital per employee in family firms.
Finally, how is it possible that a higher ROA for family firms is observed and does not directly lead to better market performances? Theoretical explanations are suggested in the analysis, but empirical results would tell more.
6 Concluding remarks
The fact that family firms have a huge role in Dutch economy and society makes it interesting to investigate their performance. To what extent do family firms listed on the Dutch stock markets perform differently than non-family firms listed and what is the influence of the recent economic crisis on the performances? In order to answer this question this paper constructed a database of 109 Dutch listed firms with firm data from 2006 to 2010. Based on univariate and multivariate analyses, this study doesn’t find evidence that family firms differ from non-family firms in change in performances due to the crisis. However, this research finds evidence that family firms perform different than family firms overall. ROA is 3.69% higher for family than for non-family firms in the univariate and 3.09% higher in the multivariate analysis. Dutch non-family firms on the stock markets are superior organizations between 2006-2010 when it comes to ROA.
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