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Family firms, family generation and performance: evidence from an emerging economy
Mohammad Badrul Muttakin Arifur Khan Nava Subramaniam
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To cite this document:
Mohammad Badrul Muttakin Arifur Khan Nava Subramaniam , (2014)," Family firms, family generation and
performance: evidence from an emerging economy ", Journal of Accounting in Emerging Economies, Vol. 4
Iss 2 pp. 197 - 219
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Family firms,
Family firms, family generation family generation
and performance: evidence from and performance
an emerging economy
Mohammad Badrul Muttakin, Arifur Khan and 197
Nava Subramaniam
School of Accounting, Economics and Finance, Deakin University,
Burwood, Australia
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Abstract
Purpose The purpose of this paper is to examine the impact of family ownership on firm
performance. In particular the authors investigate whether family firms outperform non-family firms
and whether first generation family firms perform better than second generation family firms in an
emerging economy using Bangladesh as a case.
Design/methodology/approach This study uses a data set of 141 listed Bangladeshi non-financial
companies for the period 2005-2009. The methodology is based on multivariate regression analysis.
Findings The result shows that family firms perform better than their non-family counterparts.
The authors also find that family ownership has a positive impact on firm performance. The analysis
further reveals intergenerational differences where family firms and performance are associated
positively only when founder members act as CEOs or chairmen. However, when descendents serve as
CEOs or chairmen family firms are associated with poorer firm performance.
Originality/value The authors extend the findings of previous studies that investigate the family
ownership and firm performance relationship in developed economy settings, but neglected emerging
economies. The study also informs the literature about the intergenerational impact of family firms on
performance in an emerging market.
Keywords Bangladesh, Firm performance, Family firms
Paper type Research paper
1. Introduction
We investigate whether family firms outperform non-family firms and inter-generational
effect on family firm performance using data from listed non-financial companies in
Bangladesh. During the last decade different matters relating to family business and
ownership have been well researched (e.g. Anderson et al., 2003; Chrisman et al., 2004,
2007, 2009; Schulze et al., 2003a, b; Dyer, 2006; Sharma, 2004). The issue of family
ownership and performance is one of the most prominent areas of such research. The
findings[1] of the studies under this area of research suggest mixed evidence.
Family firms play an important role in the economic activities of Asian countries
(Chang, 2003; Joh, 2003). A significant proportion of public-listed firms in South-East
Asian countries are family-owned, thus, the performance of such family firms has
direct relevance for financial market efficiency. Recent studies suggest that the
proportion of listed firms owned by families are as high as 68 per cent in Indonesia,
and around 57 per cent in Thailand and Malaysia (Claessens et al., 2000; Chau and
Leung, 2006). However, limited research focusing on the link between family ownership Journal of Accounting in Emerging
and performance has been addressed in studies of developing economies (see e.g. Economies
Vol. 4 No. 2, 2014
Filatotchev et al., 2005; Yammeesri and Lodh, 2004; Gursoy and Aydogan, 2002; pp. 197-219
r Emerald Group Publishing Limited
Nam, 2002; Miller et al., 2009; Piesse et al., 2007; Chu, 2011; Kula and Tatoglu, 2006). 2042-1168
All these studies investigated the effect of family ownership on family firm DOI 10.1108/JAEE-02-2012-0010
JAEE performance but ignored the important issues such as generational impact on firm
4,2 performance.
Furthermore although in South Asia family owned businesses dominate the
corporate landscape (Sarkar and Sarkar, 2009) only a few studies explore the issue of
family ownership and performance of countries in this region (Javid and Iqbal, 2008;
Abdullah et al., 2011; Pandey et al., 2011). Bangladesh as a South Asian country is
198 clearly different from other countries in terms of national economic environment in the
region while it shares similar culture, social, political, legal, business ownership and
institutional structure with India and Pakistan (Ali and Ahmed, 2007). A single model
of corporate governance for these countries is unlikely and to what extent it varies
across individual countries is unclear. Therefore, our study aims to add to this research
strand by investigating whether family firms are better performers than non-family
firms and whether first generation family businesses outperform the second
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that suggest the benefits of family firms. Demsetz and Lehn (1985) argue that family
members with large equity ownership might have substantial economic incentives
to diminish agency conflict and increase firm performance. James (1999) note that
families have longer investment horizons, resulting in greater investment efficiency.
Stein (1988) argue that firms with a longer investment horizons suffer less from
managerial myopia and will not sacrifice good investment in order to boost current
earnings. The long-term nature of family ownership helps to build family reputation
that might influence their relationship with customers and external suppliers
(Anderson et al., 2003).
Previous research finds that family firms outperform their non-family counterparts
(Anderson and Reeb, 2003; Lee, 2006; Villalonga and Amit, 2006; Chrisman et al., 2007
in USA, Kowalewski et al., 2010 in Poland; Mishra et al., 2001 in Norway, Yammeesri
and Lodh, 2004 in Thailand; Piesse et al., 2007; and Chu, 2011 in Taiwan). Collectively,
the findings of these studies suggest that family owners have motivations to perform
better monitoring which in turn results in better firm performance.
There can be several potential costs associated with family ownership. Some
managerial actions in family controlled firms may benefit themselves at the expense
of firm performance because of their substantial ownership of cash flow rights
(Anderson and Reeb, 2003). The combination of management and control might lead to
sub-optimal investment decisions since the interests of the family members may not
necessarily be in line with those of minority shareholders (Fama and Jensen, 1985).
They may get entrenched and their entrenchment in a firm may provide them
incentives to exchange profits for private rents, instead of maximising firm value
(Faccio et al., 2001). Sometimes their influence in selecting managers and directors
provide greater managerial entrenchment, which leads to poor performance since
external parties can hardly capture control over the firm. Moreover, families often tend
to favour family members in filling executive management positions and hence, restrict
the labour pool to a very small group from which to obtain qualified and capable talent,
which potentially leads to competitive disadvantages for family firms (Anderson
and Reeb, 2003).
Accordingly, previous studies also find that family ownership has a negative impact
on performance and family firms perform worse than their non-family counterparts
(Gursoy and Aydogan, 2002 in Turkey, Cronqvist and Nilsson, 2003 and Oreland, 2007
in Sweden). Collectively, the findings of these studies suggest that entrenched family
owners have lack of motivations to perform monitoring and thus expropriate minority
shareholders (Type 2 agency problem) which in turn results in poor firm performance.
Given that controlling families have strong motivations to undertake a long-term Family firms,
view and see their firms to succeed, family owners would be better able to utilise their family generation
power, networks and connections to advantage their family businesses economic
benefits and improve performance. It can also be argued that in the case of non-family and performance
firms, however, ownership tends to be more diverse and the risk of agency problems
related to the separation of owners and management (Type 1 agency problem) tend
to be higher. Consequently, relative to family firms, the personal connections and 201
motivations to safeguard the firm among non-family firm management would be
low with stronger focus on shorter-term goals and a higher risk of managerial
entrenchment. We therefore propose that:
It is argued that family succession may not guarantee firm success. Empirical
evidence as provided by Morck et al. (1988) and Perez-Gonzalez (2006) suggest that
family succession can have negative impacts on firm performance. In general,
founders as pioneers in the business bring innovation and entrepreneurial skills to
their firms (Morck et al., 1988). Villalonga and Amit (2006) find that family ownership
creates value for all shareholders only when the founder is active in the firm (either
as CEO or as Chairman with a hired CEO). Similarly, Anderson and Reeb (2003)
suggest that founders tend to have greater amount of emotional investment in
the business, resulting in long-term vision and investment horizons for the firm.
As such, founders have many incentives to increase their wealth by improving firm
performance.
By contrast, it is contended that descendants are often appointed on the board just
to continue inheritances, and thus may lack the requisite skills and motivations to
adequately manage the firms (Bennedsen et al., 2007). Another argument is that
descendent managers may lack the same values and aspirations as founder managers,
and thus managerial succession risks poorer firm performance with an increase in
work routine disruptions, unclear command protocols and employee insecurity
(Haveman and Khaire, 2004; Molly et al., 2010). Molly et al. (2010) using a sample of
small to medium sized US firms fail to find that family firm succession affects
firm profitability. However, Perez-Gonzalez (2006) investigates the impact of inherited
CEO positions on the performance of publically traded US firms and find that
firms that appoint family CEOs who did not attend selective undergraduate
institutions (e.g. those institutions which considered applicants who ranked in the top
50 per cent of their graduating class) show poorer performance compared to
succeeding family CEOs with such qualifications. They further assert that an
unrivalled family heir in the management tends to use a firms resources to serve
his/her own needs.
The findings from western economies provide evidence of the importance of
generational effect on family firm performance. However, no prior studies investigate
this issue in the context of a developing economy. This study therefore attempts to
investigate whether founding family firms in Bangladesh outperform second
generation family firms.
On the basis of above discussion we propose the following hypothesis:
H2. First generation family firms perform better than second generation family
firms.
JAEE 4. Research design
4,2 4.1 Sample
This study considers 141 non-financial companies listed with DSE in Bangladesh
from 2005 to 2009, producing a total sample of 705 firm-year observations. The DSE
was formed in 1954 and registered as a limited liability company. Due to missing
information, we then had to exclude 114 firm year observations, yielding a final sample
202 of 591 firm-year observations. The data for our analysis comes from multiple sources
of secondary data. Financial data is collected from the annual reports of the sample
companies listed on the stock exchange. Stock price data is obtained from the
DataStream database. The family ownership and corporate governance data were
hand collected from the corporate governance disclosures, shareholding information
and directors report contained in annual reports.
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The dependent variable measuring firm performance is return on assets (ROA) and
Tobins Q. ROA is measured as earnings before interest and taxes to book value of total
assets (Jackling and Johl, 2009), and it represents how profitable a company is relative
to its total assets. In general, ROA is directly related to the managements ability to
efficiently utilise corporate assets, which ultimately belong to shareholders. Tobins Q
is defined as the market value of equity plus the book value of total debt divided by
book value of total assets (Setia-Atmaja et al., 2009). Tobins Q is popularly adopted
as a measure of firm performance because it reflects the market expectations of
future earnings.
We control for a number of standard variables that may affect firm performance such
as board independence, firm size, firm age, risk, leverage, board ownership, growth.
Family Non-family % family firms in
Family firms,
Sector (firm-year) (firm-year) Total (firm-year) industry (firm-year) family generation
Cement 17 20 37 45.95 and performance
Ceramics 13 6 19 68.42
Engineering 52 40 92 56.52
Food 58 43 101 57.43
IT 11 17 28 39.29
Jute 9 5 14 64.29
203
Paper and
printing 10 0 10 100.00
Miscellaneous 22 30 52 42.31
Pharmaceuticals 52 29 81 64.20
Service and real
estate 12 14 26 46.15
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Tannery 9 16 25 36.00
Textile 94 12 106 88.68
Total 359 232 591
Year wise sample description
Number of firm Observed firm
Year in the sample years
2005 141 114
2006 141 113
2007 141 116
2008 141 126
2009 141 122 Table I.
Total Sample by family and
observations non-family firms
(Firm years) 705 591 in sectors
regression analyses performed in this study. Furthermore, we apply the firm clustering
technique for all the analyses because multiple observations from the same firm (but
from different years) are included in our data set.
5. Results
5.1 Descriptive statistics
Panel A of Table II shows that the average ROA and Tobins Q of our sample firms
are 0.080 and 1.589, respectively. With regards to ownership structure, board of
directors (excluding family directors) and family members hold an average of 9.00 and
28 per cent of shares, respectively. Further, the average growth of firms is 24 per cent
and average blockholder is about 65 per cent. The average firm age is nearly 23 years
and the average firm size is 8.70 (natural logarithm of total assets).
Panel B of Table II presents the difference of mean tests for key variables between
family and non-family firms. Family firms represent 60.74 per cent of the sample.
Family firms have a significantly lower proportion of independent directors (6.7 vs 7.77
per cent). On average, family firms exhibit better performance than non-family firms
(ROA: 0.088; Tobins Q: 1.682 vs ROA: 0.068; Tobins Q: 1.445). The average share
ownership of board of directors (excluding family members) also significantly differs
between family (3.3 per cent) and non-family firms (17.9 per cent). Non-family firms
have a significantly higher proportion of foreign and government ownership than
family firms. There are significant differences in growth and blockholder ownership
between family and non-family firms. The univariate analysis also shows that several
variables such as risk, firm age and firm size differ significantly between family and
non-family firms.
Table III provides a simple correlation matrix for the key variables in the analysis.
Family firm has a positive correlation with ROA and Tobins Q. In addition, consistent
with previous studies, this study finds that family firm is negatively correlated with
firm size; firm age and risk (see Anderson and Reeb, 2003). The proportion of
independent directors is positive and significantly correlated with ROA.
counterparts. This supports H1. This is consistent with the findings of Piesse
et al. (2007), Filatotchev et al. (2005) and Anderson and Reeb (2003) and suggests that
family firms in Bangladesh have motivation to perform more effective monitoring
functions which in turn results in better firm performance. With respect to the control
variables, we find that board independence, firm size and growth have significantly
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4,2
206
JAEE
Table III.
Correlation matrix
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
of control variables are consistent with the results of control variables reported
in model 1.
In model 3 we investigate the intergenerational impact of family firms on
performance. For this purpose we identify the generation of our family firms first
generation family firm when a founder occupies the position of CEO or chairman of the
board and second generation family firm when a descendent occupies the position of
CEO or chairman of the board. Thereafter we introduce two dummy variables in our
original model. The dummy variables are first (second) generation dummy variable
equals 1 if an observation is a first (second) generation family firm observation and 0
otherwise. We find a positive significant coefficient (b 0.019, po0.05) of first
generation dummy variable. This supports H2. It implies that first generation family
firms improve firm performance. This is also consistent with the findings of Morck et
al. (1988) and Villalonga and Amit (2006) who argue that founders bring more skills
and knowledge to the business which helps to improve performance. We also
document a negative insignificant coefficient of second generation family firms, which
suggests that second generation family firms deteriorate firm performance. These
results are also aligned with the argument by Perez-Gonzalez, (2006) who contends that
in family firms most of the time management and control is transferred to the
descendents to continue family inheritances regardless of skill, expertise and education
of family members. With respect to the control variables, we find that board
independence, firm size and growth have significantly positive impacts on
performance. However, risk, leverage and block (less family) dummy variables have
negative significant impacts on firm performance.
When we consider Tobins Q as a performance measure in panel B of Table IV we
find that in model 1 family firms outperform their non-family counterparts. In model 2
we find a positive significant relationship between family ownership and performance.
Once again in model 3, we find that first generation family firms perform better than
second generation family firms. Overall, these results are similar to our findings
in panel A.
6. Further analysis
6.1 Alternative definition of family firms
We use alternative definitions of family firms as a part of robustness of our results. The
results are presented in Table V. In panel A performance is measured by ROA. First, in
model 1 we define a firm as a family firm where family members hold at least 50 per cent
of a firms share (voting rights) (Ang et al., 2000; Van den Berghe and Carchon, 2002).
Model 1 Model 2 Model 2
Family firms,
Coefficient Prob. Coefficient Prob. Coefficient Prob. family generation
and performance
Panel A (ROA)
Intercept 0.028 0.605 0.040 0.463 0.042 0.457
Family firms 0.015 0.029
Family involvement 0.001 0.250 209
Lone founder 0.002 0.275
Firm size 0.014 0.010 0.013 0.015 0.013 0.015
Growth 0.001 0.007 0.001 0.037 0.001 0.032
Risk 1.228 0.000 1.296 0.000 1.294 0.000
Leverage 0.044 0.000 0.044 0.000 0.044 0.000
Firm age 0.002 0.777 0.006 0.973 0.003 0.970
Board independence 0.142 0.001 0.141 0.001 0.139 0.002
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performance.
In the next model (model 3) we examine whether family firms run by the lone
founder shows better performance (Miller et al., 2007). We use a dummy variable to
identify the family firms run by the lone founder and set equal to 1 and 0 otherwise.
We document a positive insignificant coefficient of lone founder variable. In other
words the lone founder does not have any significance in our data set. Our result is in
contrast to the findings of Miller et al. (2007).
When we consider Tobins Q as a performance measure in panel B of Table V we
find that in model 1 family firms outperform their non-family counterparts using first
alternative definition of family firms. In model 2 we fail to find a significant coefficient
using the second alternative definition of family firms. In model 3 we do not document
any significant impact of lone founder on firm performance. Overall these results are
similar to our findings in panel A.
6.4 Other
A series of tests were conducted to test the robustness of our results. While the results
are not tabulated to conserve space, they are available from the authors upon request.
First, the sample used in this study includes five years of observations. If the residuals
in our regressions are correlated, the coefficients on the test and control variables are
biased. To mitigate this concern, we adopt Fama-MacBeth regressions and alternative
JAEE Model 1 Model 2 Model 2
4,2 Coefficient Prob. Coefficient Prob. Coefficient Prob.
Panel A (ROA)
Intercept 0.017 0.762 0.035 0.527 0.037 0.504
Family firms(t1) 0.027 0.009
212 Family ownership(t1) 0.043 0.040
First generation(t1) 0.030 0.004
Second generation(t1) 0.015 0.179
Firm size(t1) 0.007 0.209 0.006 0.284 0.005 0.386
Growth(t1) 0.000 0.299 0.000 0.280 0.000 0.483
Risk(t1) 0.872 0.008 0.880 0.008 0.890 0.007
Leverage(t1) 0.027 0.003 0.027 0.003 0.026 0.005
Firm age(t1) 0.002 0.490 0.001 0.693 0.001 0.439
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7. Conclusions
We argue that ownership in Bangladesh is largely concentrated in the hands of a
few people and that top shareholders belong mostly to controlling families. Given the
potential costs and benefits of family control, the issue of family dominance and
its impact on performance is an empirical matter. Accordingly, we examine whether
family ownership has a positive impact on firm performance and whether family firms
perform better than non-family firms in an emerging economy setting taking
Bangladesh as a case. We also investigate whether family firm generations have a
different impact on performance. This paper contains several interesting results.
First, using both profitability-based and market-based measures of firm performance
(ROA and Tobins Q) this study finds that Bangladeshi family firms perform better
than non-family firms. We also find that family ownership has a positive significant
impact on firm performance. Given that family wealth is closely related to the welfare
of the family businesses, family members have incentives to ensure more effective
monitoring and increase their wealth by improving firm performance. Further, we also
reveal that the better performance in family firms stems from those firms when
founder members serve as CEOs or chairmen (first generation family firms). One
interpretation is that founders tend to pass the assets of their businesses on to their
descendents rather than consuming the wealth only for their generations. Therefore,
they have the motivation to improve performance.
JAEE The overall findings of our study suggests that the socio-political characteristics of
4,2 Bangladesh such as weak capital market, poor legal environment, and inadequate level
of knowledge possessed by the minority shareholders, offer incentives for families to
continue their historical dominance. Given that family ownership has positive impact
on firm performance it may be instrumental for allowing family dominance to prevail
in the context of a developing country like Bangladesh.
214 Our study extends the findings of previous research that investigate the family
ownership and firm performance relationship in developing economy settings, but
neglected the issue of family generational impact. While our results are probably
dependent on Bangladeshs institutional environment, learning the extent to which the
results do generalise will help us better understand how institutional features matter
for family ownership and firm performance relationship. Thus, further studies in
different jurisdictions on the issues we raise in this study are warranted.
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One of major limitation of this study is that family firms are very difficult to identify
and define. Previous study adopted multiple research approaches to identify and
define family firms which may also affect the validity of studies of family business
(Mroczkowski and Tanewski, 2007). For example, Villalonga and Amit (2006)
document that the definition of family firms affects the findings of their study.
Furthermore, we have not controlled for the level of expertise of family members who
work as board members in general. Several prior studies suggest that educational
background of the board of directors is an important determinant of board expertise
which may impact on performance (Smith et al., 2006). However, we could not test the
impact of educational background of family members due to lack of availability of
such data. Finally, our sample includes the companies listed on the DSE. Due to
unavailability of annual reports we could not consider the companies listed with the
other stock exchange of the country, i.e. the CSE . Therefore we acknowledge that the
findings of this study are subject to the bias of sample selection.
Notes
1. For example Mishra et al. (2001), Anderson and Reeb (2003), Yammeesri and Lodh (2004),
Lee (2006), Maury (2006), Villalonga and Amit (2006), Barontini and Caprio (2006), Martinez
et al. (2007), Chrisman et al. (2007), Adams et al. (2009) and Kowalewski et al. (2010) document
a positive impact on performance. Cronqvist and Nilsson (2003) and Oreland (2007)
document a negative impact on performance. Filatotchev et al. (2005), Castillo and Wakefield
(2006) and Sciascia and Mazzola (2008) do not find any significant effect between family
ownership and firm performance.
2. In terms of GDP, Bangladesh is the 44th largest economy in the world (IMF, 2010).
3. Prior research suggests that the level of family ownership can be endogenous (Villalonga
and Amit, 2006). This is consistent, for example, that family owners may change their level
of ownership based on the performance of the firms. Accordingly, we perform the Hausman
test proposed by Davidson and Mackinnon (1993), to test whether family ownership is
endogenously determined. This is done by regressing family ownership on the explanatory
and control variables used to explain our dependent variable as well as instrumental
variables (natural log market value of equity and first lag of family ownership) that are
correlated with family ownership in our first OLS regression. Then using the residual from
this first regression, it is used as an additional regressor for the performance regression.
The results of the second regression suggest that residual obtained in the first regression
is not significantly different from zero. This suggests that family ownership is not
endogenously determined in our setting. Hence an OLS regression is an appropriate model
for our study.
4. There are a number of tests available to evaluate the specification of our model (see Greene, Family firms,
2003, pp. 283-333). Accordingly, we perform a test to evaluate the adequacy of our model
specification. Our simple pooled model will outperform the fixed effect model if the null family generation
hypothesis of homogeneity of individual effects, which can be tested with an F-test, is and performance
rejected.
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Further reading
Faccio, M. and Lang, L.H.P. (2002), The ultimate ownership of Western European corporations,
Journal of Financial Economics, Vol. 65 No. 3, pp. 365-395.
Glassop, L. and Waddell, D. (2005), Managing the Family Business, Heidelberg Press, Melbourne.
La Porta, R., Lopez-De-Silanes, F. and Shleifer, A. (1999), Corporate governance around the
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Corresponding author
Dr Mohammad Badrul Muttakin can be contacted at: m.muttakin@deakin.edu.au
1. Rushdi Md. Rezaur Razzaque, Muhammad Jahangir Ali, Paul R. Mather. 2015. Real earnings management
in family firms: Evidence from an emerging economy. Pacific-Basin Finance Journal . [CrossRef]
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