Размещено на http://www.allbest.ru/

366

404

Family ownership and technical efficiency: evidence from the italian industry

Fraquelli G., Corbetta G., Erbetta F., Menozzi A.

Annotation

This paper analyzes global and input-specific efficiency of family versus non-family firms. Scholars seem to agree on a higher performance of family firms despite contrary theoretical arguments exist. So far, the economic literature has focused on differentials in profitability, market value and partial productivity disregarding any global efficiency examination. This paper combines profitability and efficiency considerations using Italian manufacturing industries data. The DEA methodology reveals that family firms are less efficient than non-family firms, especially in the use of capital. Nevertheless, family firms present a higher profitability, probably due to lower average wages, as intuited by Sraer and Thesmar (2006).

Introduction

Family business is a well-developed form of ownership all around the world [La Porta et al., 1999; Faccio, Lang, 2002; Bianchi et al., 2005]. As an example, in the United States, family firms included in the S&P 500 index account for around 35% of the total invested capital [Anderson, Reeb, 2003].

Despite the numerous contributions to the literature on family business, the reason why family firms would be so successful compared to non-family ones is still partially unexplored [Sharma, 2004]. Theoretically, there are reasons to expect that the concentration of property rights and control in the hands of a family provides better incentives and contributes to reducing the agency costs in publicly-held firms [Jensen, Meckling, 1976]. Gomez-Mejia et al. (2001) identify the advantage of family-owned firms in the existence of emotional motivations that might induce the owner-manager to pursue long-term strategies and, ultimately, to preserve the firm survival. Additionally, Sraer and Thesmar (2006) claim that family firms may entail a more stringent relationship between owners and employees who may accept lower salaries in exchange for a tacit promise of job stability. Consequently, family firms would benefit from lower cost of labor.

Although several studies at international level (see [Anderson, Reeb, 2003] for United States; [Barontini, Caprio, 2006] for Europe, among others) show that family firms are better than non-family ones in favoring a more effective control through reduced agency costs, evidence of a worse performance of family firms exists (see [Morck et al., 2000] for the Canadian case). Moreover, recent findings [Villalonga, Amit, 2006; Pйrez-Gonzales, 2001] concerning listed firms in the United States and Europe reveal a better performance of family firms only when the founder is the President or the CEO, whereas the presence of heirs would cause worse results. This paper focuses on the efficiency differentials between family and non-family firms by applying the non-parametric methodology Data Envelopment Analysis (DEA).

Governance and performance. The economic literature has traditionally analyzed the governance of family firms on the basis of the principal-agent theory generally concluding that agency costs are lower for these firms compared to others with more dispersed or not well-iden-tified ownership.

Despite the arguments in favor of family-owned firms, the superiority of family ownership is largely debated. There are indeed many reasons to believe that family ownership presents some drawbacks to efficiency although its potential in remediation of the agency costs of control.

As argued by Schulze et al. (2001), concentrated private ownership subtracts firms from the disciplining effect of external governance mechanisms, like market for corporate control, thus possibly preventing value-enhancing equity transactions and corporate takeovers [Jensen, 1993]. Anderson and Reeb (2003) and Villalonga and Amit (2006) show that in family firms, the beneficial effect of concentrated ownership starts decreasing when the proportion of family ownership becomes too large (more than 30%).

When the owner is in charge of managing the firm, her reluctance to dilute ownership may impose liquidity constraints to the firm and prevent raising the funds needed to undertake new investments or offer monetary incentives to the most talented employees [Morck, 1996]. Moreover, top managers of owner-managed firms are typically recruited from the restricted pool of relatives rather than from the labor market for managers. As a consequence, the management team is likely to present a lower quality and turnover, and then a higher entrenchment, in family-managed firms as compared to firms with non-family, dispersed ownership [Barth et al., 2005]. Maury (2006) observes that, while profitability is positively influenced by family ownership and an active role of family members in the firm management, firm's valuation (measured by Tobin's Q) is higher when the degree of control is low. The result remands to the protection of minority shareholders whose wealth is more easily expropriated by large owners in economies with low shareholder protection [Faccio et al., 2001].

As noted above, the parent-child relationship gives «family firms a history, language, and identity that make it special» [Schulze et al., 2001, p. 102] and the altruism underlying the kinship network affects the agency contract by mitigating the self-interest problem, or «owner-opportunism» against the outside shareholders [Schulze et al., 2001; 2003]. Nevertheless, altruism may harm firm performance when it implies CEO's lenience toward the relatives involved in the firm management. Such an indulgence in effectively control and discipline them, may encourage the family members to free-ride and reduce their efforts. Eventually, the CEO's misperception of her relatives' actual skills might cause any external managers to feel discriminated and threatened in their career prospects, then decreasing their motivation and commitment.

Dataset and definition of family control. The empirical analysis is based on accounting data retrieved from the databases AIDA and Mediobanca for the period 2001-2004. The initial sample included the balance sheets of 1390 firms. The number went down for the exclusion of financial firms and holdings, firms with irregular time series in revenues, cost of labor, plant and equipment, total assets and headcount, firms with missing values in 2001-2004 and firms that disappeared during the sample period by effect of mergers and acquisitions, like for example those public utilities that went through an aggregation process at that time. Firms for which the information on governance, that is the distinction between family and non-family business, was not available were also excluded, thus reducing the sample dimension to 916 units. According to previous studies, a firm is said to be «family» when a proportion equal to or greater than 20% of the voting rights is concentrated on the hands of a single owner or a group of family members and no one holds a greater percentage. In order to obtain meaningful frontier estimates, firms are distinguished on the basis of the industrial sectors they belong to as identified by the 2-digit ISTAT ATECO code. Industries under-represented in the sample or populated by non-family firms only were also excluded. In order to obtain a large enough balanced data set including family and non-family firms in similar proportions, the sample was finally reduced to 320 firms (for a total of 1280 observations) among which 184 are family (736 observations) and 136 non-family (544 observations).

Estimation of any production frontier needs the identification of the input and output variables. Firms may provide different products or services so that a natural measure of output is the total operating revenues. As for the inputs, three variables, namely materials, labor and capital are considered here. Given that materials are highly heterogeneous an input for which the identification of a physical measure is not possible, we use the total soft costs associated with consumable materials and services as a cost measure. Labor is approximated by the number of employees and capital by the depreciation of tangible and intangible assets.

The analysis of the operating and efficiency performance of family-owned firms as compared to non-family ones brings new insights into the empirical literature on the subject. In Table 1 traditional and DEA performance measures, including return on asset (ROA), self-financing to revenues ratio, cost of labor per employee, DEA-based technical and scale efficiency, are presented by industry and by governance structure.

Table 1. Performance measures by industry and ownership structure

¹ Statistical differences between FAMILY and NON-FAMILY categories have been evaluated by means of the Kruskal - Wallis rank test: ^*** - statistically significant at 1%; ^** - statistically significant at 5%; ^* - statistically significant at 10%.

Overall, family firms appear more profitable than non-family ones: the differential in ROA is small (7,8% versus 6,2%) but statistically significant in some specific industries, such as «food & beverage» and «constructions». Similarly, the evidence on the self-financing capability highlights higher ratios for family firms (6,6% versus 5,7%), with many industries presenting significant differences. In this respect, the results are consistent with the international evidence of a higher financial performance of family firms.

As for efficiency, results are somehow different. In terms of technical efficiency, non-family firms significantly overcome family ones in many industries, even though the differential appears much more squeezed on average. On the contrary, family firms present higher scale efficiency. This result is particularly evident when considering the estimates by industry. Specifically, in all the cases wherein the difference is significant at 1% level, family firms present a higher scale performance. A gene-ral consideration, however, concerns the magnitude of the scale efficiency. In fact, average as well as by industry values are very close to 1, more than what technical efficiency measures are, thus suggesting that, contrary to the criticism concerning the small operational size of Italian firms, the main source of inefficiency is to be sought in poor managerial practices which do not allow firms to attain an adequate level of performance.

In order to understand the asymmetric results in terms of profitability and technical efficiency for family and non-family firms, it is useful to consider the level of the cost of labor per employee. In 2001-2004 family businesses show an average cost of labor per employee equal to around 42000 Euros which is somehow smaller than the value registered for non-family firms, equal to around 50000 Euros. In all the industrial segments, with the sole exception of the «food & beverage» industry, the employees' remunerations are substantially lower in family firms. The result is consistent with Sraer and Thesmar (2006) who point out that French listed family firms are on average more profitable by virtue of a lower cost of labor as compared to firms with dispersed ownership.

We might infer that in Italy, despite the negative results in terms of managerial efficiency and thanks to the lower workforce remuneration, family firms seem to be able to achieve a higher profitability than non-family firms. In this respect, it is worth noting that a lower cost of labor may be acknowledged as a successful factor if it is attributable to a lean hierarchical organization with a small number of executives, while it may be thought as a weakness if it is induced by the belongingness to a low value-added industry. In the Italian case both conditions seem to coexist. Indeed, most family firms operate in low-potential industries but the family model represents the chance for them to manage their resources within a short hierarchical organization.

Input-specific technical inefficiency. Input-specific over-utilization measures are presented in Table 2. Differentials in input-specific technical efficiency are more pronounced than those concerning overall technical efficiency. The over-utilization for the three inputs, namely operating expenditures (consumable materials and services), labor and capital, is equal to 12, 17 and 29% respectively. family firm capital

The comparison between the over-utilization coefficients for family and non-family firms reveals similar patterns, being equal to 13,5% for family and to 10% for non-family firms for operating expenditures and to 17% for labor for both groups. The difference is more pronounced as far as capital is concerned: the excess capacity in terms of capital is equal to 36% for family firms and to 21% for non-family firms, thus suggesting that family firms might operate under a soft budget constraint regime [Gomez-Mejia et al., 2001]. This result may be a consequence of a lack of control by the controlling shareholders, which in turn may allow the extraction of private benefits by the managers, were they owners or not.

Table 2. Input-specific over-utilization coefficients by industry and ownership structure ¹⁾

¹⁾ Statistical differences between FAMILY and NON-FAMILY categories have been evaluated by means of the Kruskal - Wallis rank test: ^*** statistically significant at 1%; ^** statistically significant at 5%; ^* statistically significant at 10%.

Conclusions

The paper aims at investigating the performance differentials between family and non-family firms on the basis of a sample of Italian firms observed between 2001 and 2004 by computing a comprehensive efficiency measure obtained with the Data Envelopment Analysis (DEA) methodology. The comparison between family and non family firms in terms of financial performance and efficiency returns a mixed result. Family firms show higher profitability but lower efficiency, one possible reason being the lower cost of labor they may enjoy. The analysis of technical efficiency suggests that even if non-family firms outperform family-owned ones, the overall differential is small. A clear-cut discrimination arises from the disaggregation of efficiency by single factor because family firms turn out to use capital in much less efficient a way, thus suggesting that family firms may operate under a soft budget constraint regime.

References

1. Anderson R., Reeb D. Founding Family Ownership and Firm Performance: Evidence from the S&P 500 // Journal of Finance. 2003. P. 1308-1328.

2. Barontini R., Caprio L. The Effect of Family Control on Firm Value and Performance: Evidence from Continental Europe // European Financial Management. 2006. 12(5). P. 689-723.

3. Barth E., Gulbrandsen T., Schone P. Family Ownership and Productivity: The Role of Owner-management // Journal of Corporate Finance. 2005. 11. P. 107-127.

4. Bianchi M., Bianco M., Giacomelli S. et al. Proprietа e controllo delle imprese in Italia. Bologna: Il Mulino, 2005.

5. Faccio M., Lang L.H.P., Young L. Dividends and Expropriation // American Economic Review. 2001. 91. P. 54-78.

6. Faccio M., Lang L.H.P. The Ultimate Ownership of Western European Corporations // Journal of Financial Economics. 2002. 65(3). P. 365-395.

7. Gomez-Mejia L.R., Nuсez-Nickel M., Gutierrez I. The Role of Family Ties in Agency Contracts // The Academy of Management Journal. 2001. 44(1). P. 81-95.

8. Jensen M.C. The Modern Industrial Revolution, Exit and the Failure of Internal Control Systems // Journal of Finance. 1993. 48(3). P. 831-880.

9. Jensen M.C., Meckling W.H. Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure // Journal of Financial Economics. 1976. 3. P. 305-360.

10. La Porta R., Lopez-de-Silanes F., Shleifer A. Corporate Ownership Around the World // Journal of Finance. 1999. 54. P. 471-518.

11. Maury B. Family Ownership and Firm Performance: Empirical Evidence from Western European Corporations // Journal of Corporate Finance. 2006. 12. P. 321-341.

12. Morck R. On the Economics of Concentrated Ownership // Canadian Business Law Journal. 1996. 26. P. 63-85.

13. Morck R., Stangeland D.A., Yeung B. Inherited Wealth, Corporate Control, and Economic Growth: The Canadian Disease // R. Morck (ed.) Concentrated Corporate Ownership. National Bureau of Economic Research Conference Volume. Chicago: University of Chicago Press, 2000.

14. Pйrez-Gonzales F. Does Inherited Control Hurt Firms' Performance?: PhD dissertation. Harvard University, 2001.

15. Sharma P. An Overview of the Field of Family Business Studies: Current Status and Directions for the Future // Family Business Review. 2004. 17. P. 1-36.

16. Schulze W.S., Lubatkin M.H., Dino R.N. et al. Agency Relationship in Family Firms: Theory and Evidence // Organization Science. 2001. 12(2). P. 99-116.

17. Schulze W.S., Lubatkin M.H., Dino R.N. Exploring the Agency Consequences of Ownership Dispersion Among the Directors of Private Family Firms // Academy of Management Journal. 2003. 46. P. 179-194.

18. Sraer D., Thesmar D. Performance and Behaviour of Family Firms: Evidence from the French Stock Market: CEPR Discussion Paper № 4520. 2006.

19. Villalonga B., Amit R. How Do Family Ownership, Control, and Management Affect Firm Value? // Journal of Financial Economics. 2006. 80(2). Р. 385-417.

Размещено на Allbest.ru