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...by Shanker and Astrachan (1996). While many family businesses are small, they also make up about 35% of companies listed in the Standard & Poor is 500 or Fortune 500 Indexes (Anderson and Reeb, 2003).
Despite the vital role that family businesses play in the economy, little is known about how family ownership or management affects firm behavior and performance. A growing body of literature has begun to identify the unique characteristics of family firms vis-a-vis corporations with diverse ownership, including trust, altruism, and commitment, all of which in principle can enhance firm performance (e.g., Davis, 1983; Chami, 1999). However, the empirical significance of these characteristics remains largely unknown. The present paper seeks to help fill this gap.
To shed light on a key dimension of family firms, namely operational efficiency, we test for the hypothesis that family ownership and management yield greater efficiency and productivity. If family business owners also participate actively in management, they command greater loyalty within the firm, further enhancing employee productivity. Our empirical study compares a sample of relatively large family firms in the U.S. with their industry peers.
Background Literature
A family business can loosely be classified as one in which the family, broadly defined, has either significant ownership or management control. In the U.S., most family firms are small, and the majority faces the challenge of succession from one generation to the next. Less than 30% of family businesses survive to the second generation (Astrachen and Allen, 2003). Hence, the merits of family ownership versus ownership by diverse shareholders as an organizational structure remain controversial.
The modern form of business organization typically features a separation of ownership from control, and professional managers rather than shareholders control key business decisions. One major drawback of this type of corporate governance is commonly known as the principal-agent problem, where shareholders (principals) and managers (agents) have different interests. In addition, ownership by diverse shareholders may create difficulty in monitoring managers' performance. This agency, or contractual, problem, which involves the costs of writing and enforcing contracts, is the key issue for most existing studies on the relationship between firm ownership and performance, as discussed.
* Competitive Advantages
The competitiveness of family firms versus their non-family counterparts can be viewed from two perspectives: ownership and management. From the perspective of ownership, the uniqueness of family firms is that family members hold a substantial stake of firm assets. From the management perspective, one common characteristic of family firms is that family members serve as the firm's CEO or fill other top management positions.
In contrast to conventional wisdom, many family businesses are public corporations. But unlike the majority of public corporations that are owned by numerous shareholders, ownership and control of family firms is typically concentrated. Demsetz and Lehn (1985) argue that the concentrated equity position and control of management, including the founding family's historical presence, give the family an advantageous position for monitoring the firm. These large, concentrated investors have more incentives than diverse shareholders to avoid conflicts between owners and managers and to maximize firm performance. Since the family's welfare is closely tied to firm performance, family members have strong incentives to monitor professional managers. As a result, the free-rider problem associated with non-family firms with diverse shareholders can be minimized. Because of their concentrated ownership, family members also have more power than other shareholders to achieve their goals. Anderson and Reeb (2003), and Burkart, Panunzi, and Shleifer (2002) observe that firms with move active involvement by family members tend to perform better.
The long-term presence of founding families also has some potentially competitive advantages. First, the family's tenure can extend the firm's learning curve in management and...
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