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II - OWNERSHIP,ENTREPRENEURSHIP

AND INTERNATIONALISATION

07 Cucculelli_147_178 3-06-2009 12:47 Pagina 147

Owner Identity and Firm Performance:Evidence from European Companies

Marco Cucculelli*Università Politecnica delle Marche, Ancona

Empirical evidence of the distribution of firms by owneridentity for a set of European countries reveals substantialdifferences. Using the sensitivity of a firm’s sales to demand shocksas a measure of risk-taking behavior, the paper explores if owneridentity affects the willingness of the firms to seize marketopportunities. Consistent with a hypothesis of risk-avoidancebehavior, family-owned companies appear to underreact to changesin market demand. Conversely, industrial and nonconcentratedfamily-owned firms appear more prone to deal with venturing risk,especially in the case of fast-growing companies or demand changesin nondomestic markets. [JEL Classification: G32, L25]

Key words: owner identity, SMEs, risk aroidance, family firms

1. - Introduction

Increasing sales is usually what most people think to be a signof a successful strategy for a company. The specialized press oftenreports examples of companies that indicate sales as their majortargets and use it as a motto for promoting the company. “Ourcompany has grown twenty fold in the past twenty years”,1 said

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* <[email protected]>, Faculty of Economics “G. Fuà”. The Author wishesto thank Giuliano Conti, Guido Corbetta, Michele Fratianni, FrancescoMarchionne, Giacinto Micucci, Gustavo Piga and participants at the 2006 ETSGConference (Vienna) and ISAE – Monitoring Italy 2007 (Rome). The usualdisclaimer applies.

1 Indesit Annual Report, 2001.


the President of Indesit Company, Vittorio Merloni, the largestItalian producers of household appliances and among the fivelargest world producers. High growth rates of sales are not soinfrequent to find, especially in early company life, when a talentedentrepreneur invents a new product and sells it to the market. Buta long-lasting growth is far less frequent. It requires a constantupgrading of the firm resource set, in order to seize opportunitiesin a rapidly changing environment. It needs a large amount ofability and risk taking; therefore, despite its importance, manycompanies may not succeed in achieving it. When asked to explainthe source of his enduring success, President Merloni replied:“Every year, we renew more than 50% of our products, with respectto their design and technical features”2.

Revenue-oriented strategies are inherently risky and require aparticular risk attitude in the decision makers (entrepreneurs). Thereason is not simply casual. Whereas defining actions targeted toreduce inefficiency and costs (i.e. cost restructuring) is primarilya matter of managerial skills, revenue generation requiresentrepreneurship. The skill required to improve the revenue sideof a firm’s operations (sales) are very different from the managerialability, but is not different from those needed to start a newbusiness: firm must reinvent products and find new markets inwhich they can be sold. Discovering an area of a firm’scomparative advantage calls for much more innovation andinvolves much greater uncertainty than eliminating inefficiencies,especially when the firm faces new environments in highlycompetitive export markets (Frydman et al., 1998, Grosfeld andRoland, 1996). This is more likely to occur in a period of rapiddemand changes, when a firm’s sales, far from being predictableon the basis of an exogenously given demand curve, depend onits ability to accommodate the largely unpredictable decisions ofpotential customers and consumers.

Seizing market opportunities typically involves taking risk.Organizations may take risk hoping to improve their currentsituation by searching alternative routines and opportunities

RIVISTA DI POLITICA ECONOMICA MARCH-APRIL 2008

150

2 Il Sole 24 Ore, 10 July 2007.


that change the status quo (venturing risk: Gomez Mejia et al.,2007). Agency theory stresses that the extent of involvement inrisky activities is likely to be influenced by the ownership ofthe firm (Fama, 1980, George et al., 2005, Brunninge et al.,2007). The standard assumption in economics and strategicmanagement is that owner wants the company to maximizeeconomic profits or shareholder value. However, when marketsare incomplete, even profit-maximizing owners may disagreeabout corporate strategy, because of different preferencesregarding risk and the time profile of expected cash flow(Thomsen and Pedersen, 2000).

Risk attitude and time horizon play a key role in strategy for-mulation in family firms. Despite the fact that long-term per-spective could make them more prone, or inherently able, to sus-tain risk (Zellweger, 2007), the existence of growth opportunitiesthat expire after the founder’s tenure may favor a “risk-avoidancebehaviour” (Almeida and John, 2001). Therefore, family firms willbe expected to reduce, or even to avoid totally, venturing risk intheir business decisions. A general motivation to preserve com-pany control may further encourage ‘risk-avoidance behavior’ inthese companies. As a large proportion of the owner’s wealth isinvested in the business, small and medium-sized family firms canbe expected to be risk-adverse (Demsetz and Lehn, 1985), to payless attention to growth-oriented strategies (Upton et al., 2003,Kotey, 2005), and to avoid risky business decisions that may en-danger firm survival (Gomez Mejia, 2007). Similarly, the willing-ness to engage in strategic change activities — such as corporatediversification, product innovation, and entering new internation-al markets — reduces as ownership and control increases (Brun-ninge et al., 2007). Therefore, family firms are usually more con-servative, resistant to change, blockaded by internal conflict, andby defensive attitude toward survival. Also, due to the founder’spersonal involvement, there is an unwillingness to change strate-gy: “over time, owners may become insulated from environmen-tal and performance changes and may fail to perceive and reactto critical environmental and organizational changes” (Goodsteinand Boeker, 1991). Aging may also accentuate strategic inertia and

Owner Identity and Firm Performance, etc.M. CUCCULELLI

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reduce the ability of the founder to sustain the original competi-tive advantage of the company (Cucculelli and Micucci, 2006). Incontrast to family firms, industrial and financial-owned compa-nies are more likely to follow a strict profit-maximizing behavior.These companies usually benefit from skilled professional man-agers who are more likely to undertake ambitious investment pro-grams to exploit economies of scale and less likely to pursue nichestrategies related to flexibility or product differentiation. Thus, riskavoidance should not be a major concern for these companies andtheir ability to seize market opportunities is expected to be large(Thomsen and Pedersen, 2000).

Empirical evidence of the distribution of firm based on owneridentity for a set of European countries reveals substantial dif-ferences (Table 7 in the Appendix). Half of the listed companiesin the UK are owned by financial owners, whereas the situationis totally reverse in Spain, Germany, and Italy, where more thanhalf of the listed companies are owned by individual investors andindustrial firms. With regards to these last two groups, the shareof industrial companies is very large in Germany (45.6%) andmoderate in Italy (29.7%) and Spain (23.1%). Conversely, indi-vidual investors prevail in Italy (26.6%) and Spain (26.0%), where-as their share is the lowest in the UK (1.9%). A similar large dis-persion is observed for public owners, whose share varies fromnull in the UK to 13.4 in Italy, and foreign investors, whose sharerange from 14.4% in Italy to 34.4% in the UK.

As organizations may take risk by searching alternativeroutines and opportunities that change the status quo, differentultimate owners may impact a firm’s strategy according to theirattitude to face risk. Following an agency approach, the paper usesthe sensitivity of a firm’s sales to industry shocks to test if theidentity of the owner affects the company’s ability to seize marketopportunities, i.e. to face venturing risk. Sales sensitivity todemand shocks is used to measure how much does the owners’attitude toward risk and growth affects the company’s willingnessto take actions aimed to change the status quo. A low (high)sensitivity to demand shocks should therefore signal thepreference to take decisions that are more (less) conservative than


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needed in a particular market environment, thus implying a risk-avoiding behavior by the company in its strategic choices.

The empirical results show that owner identity does affect theability of the company to react to demand shocks. Consistent witha hypothesis of risk-avoidance behavior, small and medium-sizedfamily-owned companies appear to under react to changes inmarket demand, notably when ownership is highly concentratedand growth opportunities are significant. However, these companiesconfirm their status of good performers when pure profitabilitymeasures are used. Conversely, industrial and nonconcentratedfamily-owned firms appear more prone to deal with venturing risk,especially when the intensity of risk in a firm’s decision is large, asin the case of fast-growing companies or when there are changesin demand coming from nondomestic markets.

If the under reaction to demand shocks is consistent with arisk-avoidance behavior, sectors may be expected to be less keento tolerate risk, thus failing to achieve sustained growth, as theshare of their ‘risk-avoiding’ companies increases. Therefore, theowner identity comes out as key issue also for understandingsectoral and country competitiveness.

The paper is structured as follows. Section 2 presents theempirical methodology, whereas estimated results are shown inSection 3. Section 4 discusses some implications for sectoralcompetitiveness and Section 5 gives some conclusions.

2. - The Empirical Model

The empirical model tests the responsiveness of a company’ssales to changes in market demand by groups of ultimate owners.The empirical approach is derived from Bertrand, Mehta andMullainathan (2002) and Sraer and Thesmar (2007). Bertrand etal. (2002) use variation in mean industry performance as a sourceof profit shocks in the single company, in order to trace thepropagation of shocks through a business group. Sraer andThesmar estimate a fixed-effect model where single firm’s


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sensitivity is identified by the correlation between changes in logsales and in log employment. In both the models, industry shocksare an ideal candidate to measure a firms’ sensitivity since theyaffect individual firms but are — to a large extent — beyond thecontrol of individual firms. Regression (1) is estimated by usinga firm’s annual sales as the dependent variable. Independentvariables are the Eurostat Annual Turnover Index (ATI), whichproxies for sectoral industry demand, and its interaction with thefirm’s ultimate owner:

(1)

where sales is the turnover of firm i, sector k and time t, controlsis a set of control variables (see next paragraph), and time aretime dummies. Firms’ sales are indexed as 2000 = 100. Fij = (Fi1,Fi2, Fi3, Fi4) is the owner status variable (index j indicates theindividual owner), with Fi1, Fi2, Fi3, Fi4 indicating one of the fourfirm’s ultimate owners selected: family, industrial company,financial company, and state (See the Appendix for the Amadeusdefinition of ultimate owner).3 The coefficient b measures thegeneral sensitivity of firms’ sales to industry turnover, whereas thecoefficient cj (from the interaction term Fij*ATI) captures thesensitivity of each group of owners. A positive (negative)coefficient of this interaction variable signals a greater sensitivityto industry shocks (Bertrand et al., 2002).

The variable ATI proxies for the industry demand conditionsand is given by two different measures: i) the Eurostat AnnualTurnover Index (ATI) for EU15 in nominal terms and ii) theaggregate turnover by industry (3 digit NACE Rev. 1) for thecompanies included in the sample, computed by aggregating salesfor firms within the same sector and by subtracting firm i turnover(Bertrand et al., 2002; Sraer and Thesmar, 2007).4

sales a b ATI c F ATI d controlikt kt j ij kt= + + +( ) ( . ) ( ss timekt ikt) + + ε


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3 Regression estimates are based on four selected groups. The remaining ownertypes are: employees-managers, foundations, insurance companies, mutual andpension funds, and self-owned/cooperative.

4 The second measure, reported under ii), of industry demand conditions


The Annual Turnover Index is a business cycle indicatorshowing the evolution of the market of goods and services in theindustrial sector. It records the evolution of turnover over longerperiods of time. It is therefore the objective of this indicator tomeasure the market activity in the industrial sector in value. Theclassification follows the NACE Rev. 1 (Statistical classification ofeconomic activities in the European Community, Eurostat, 1996).The turnover of industry index is not deflated. The version usedhere is the index 2000 = 100. The Index breakdown by industryprovides a very close connection between the demand at theEuropean level and the trend of single company sales. Theindustry breakdown is for 101 sectors by NACE 3 digits.

The choice to select a highly disaggregated index of industrysales (101 sectors) originates from the drawback signaled by Sraerand Thesmar (2007, page 732) on aggregate industry data. If theindustry classification is too crude to account for the relevant mar-ket of the firm, the estimated sensitivity parameters may have asubstantial downward bias, much akin to a measurement error(i.e. a 13-industry classification may show a very modest ex-planatory power). This weakness has been tackled by using a de-tailed 3-digit 101-industry classification. By estimating equation(1) in double log, the model provides an empirical measure of theresponsiveness of a firm’s turnover to industry demand.5

2.1 Control Variables

The literature on family firms shows that the concentrationof the ownership can affect firm’s performance (Demsetz andVillalonga, 2001). In order to isolate the pure effect of family


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closely resembles the dynamics observed in sectoral ATI. Because of the largersignificance of the Eurostat ATI in describing the evolution of markets at theEuropean level, the following empirical analysis reports only estimates from thislast variable.

5 On the basis of a Breush - Pagan LM test, which is decisive that thereare individual effects, and the Hausman test, which suggests that these effectsare uncorrelated with other variables in the model, a random effect model hasbeen chosen, also due to the specific interest in time-invariant regressors(identity).


ownership and to remove performance effects due to ownershipconcentration, the share of the first and largest owner, as well asthe concentration ratio (CR3) of the first three shareholders ineach company, has been included in each regression as controls.

Also, the number of market segments — in terms of ISICcodes — in which a single company operates has been controlledfor, which is done to exclude the impact of a firm’s “external”growth on performance. As the company data are aggregatedacross ISIC codes, it is likely that the actual sales growth rate canbe higher, the larger the number of market segments in which thefirm operates. Controlling for this diversification effect allows foravoiding the underestimation of the sensitivity of a company’ssales to demand in largely diversified companies.

In the empirical literature on family business, there exist somediscrepancies with respect to the influence that different genera-tions exert on a firm’s growth behavior. Zahra (2005) and Oko-roafo (1999) found that as new generations bring fresh knowledgeand strategic renewal, older family-owned companies will realizehigher growth rates of sales compared with their younger coun-terparts. Maury (2007) also shows that an active family control isbeneficial to performance in older companies. Vice-versa, the issueof lifecycle, together with the family orientation of newer gen-erations, supports the hypothesis of a lower growth in older com-panies compared with younger ones (Cucculelli and Micucci,2006). Finally, a very large literature (see Bertrand and Shoar,2006) shows that the institutional framework and social norms atcountry level affect a firm’s performance. Therefore, controls forage and country dummies have been included.

2.2 Data

Data are available for the decade 1995-2004. The sectoral breakincludes 101 Nace 3-digit manufacturing industries. Firm-level dataare from the Amadeus (Analyse MAjor Database from EuropeanSources) database, collected by Bureau Van Dijk (BvD). Thecompany accounting statements are harmonized by BvD, making


156


the cross-country comparison reliable. Data are given for unlistedfirms. Due to national legislations, the coverage of financial variablesvaries across countries. This limits the number of countries includedin the analysis. Given that the firms included in the Amadeus Top1 million companies have at least 10 employees, this inclusioncriterion makes the source biased against the smallest companies.The paper then sets a criterion of having a number on employeesin the 20-1,000 range. Thus, the sample provides an excellentpossibility to analyze the behavior of small and medium-sized firms.Firms in the sample are selected from 26 European countries. Thetotal number of companies is 9,688, with a high prevalence ofWestern European countries (13 countries with 7,856 companies).6

3. - Empirical Results

3.1 Descriptive Statistics

The distribution of the owner identity across industries is notuniform. Table 1 shows that family-owned firms are prevalent inlow-technology sectors, such as footwear, clothing, light mechan-ical apparel, plastic, and rubber. They complement almost per-fectly with industrial-owned firms, which are prevalent in scale-and technology-intensive sectors (industrial ownership is preval-ent in 17 two-digit sectors out of 21). State-owned companies areconcentrated in the mechanical sector and in motor vehicle andtobacco industries. Financial ownership is present in motorvehicle industry, electrical machinery, wood product industry, andchemical industry. These differences suggest that it is extremelyimportant to take into account industry variations in demand.

Table 2 provides descriptive statistics for the sample brokendown by owner identity. Data in the last column of Table 2 referto all firms in the sample, i.e. they include also data from 1,444firms whose ultimate owners are different from the four explicitlyindicated in the top columns of Table 2. Residual owners are:


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6 Because of the lack of most data needed to perform the analysis, Central andEast-European companies have been excluded from regressions.



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Foundations, Employees/Managers, Insurance companies, Mutualand pension funds, and self-Owned and other unnamedshareholders. Family firms account for 27.4% of the total samplefirms and reach up to 32.3% in the smaller sub-sample of the fouridentities presented in Table 2; they are younger and show a highergrowth rate of sales than the nonfamily firms. However, salesgrowth is heavily affected by sectoral demand: when the industry-adjusted growth rate is considered, the over-performance of familyfirms does not appear to be substantial.

Profitability does not differ significantly between owners: theratio of the operating income on sales and on total assets is closeto the sample average for family firms, whereas it is slightly lowerfor industrial companies and higher for financial companies. Asfor the sales growth, state-owned firms are low performers alsoin terms of pure profitability.

On average, family firms are moderately smaller (in assets,sales, and employees) than other firms and exhibit significantlyhigher growth and superior profitability. These characteristics mayraise a concern that, in addition to an industry effect, the superiorperformance is driven by the predominance among them of earlystage, high-growth firms (Villalonga and Amit, 2006). A recentempirical literature on family firms shows that the superiorperformance promptly disappears when family members areinvolved in running the company (Miller et al. 2007): second-generation families are mainly responsible for poor performance(Villalonga and Amit, 2006, Cucculelli and Micucci, 2008), as wellas for the inadequate adoption of managerial practices that drivespoor performance (Bloom Van Reenen, 2007).

Table 2 also shows significant differences between family andnonfamily firms for variables related to control. The share of thefirst shareholder is lower in family firms (74.05%), as well as theUltimate Owner (UO) ownership share in total (68.48%). Familyand nonfamily firms also differ significantly in their diversificationprofile. By counting the number of 4-digit SIC sectors in whicheach company operates, in addition to the core sector, the formerappears more prone to being diversified (2.44) than do industrial(2.16) and financial companies (1.95). A similar result also


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emerges from the diversification dummy, which is set equal to oneif the company operates in two or more 4-digit SIC. This patternappears to be consistent with the need for family firms’ ownersto diversify their firm instead of their own portfolio. Finally, ageneral higher risk aversion of family firms does not appear to besupported by both the gearing ratio and the ratio of intangibleassets on total assets, which do not differ significantly betweenultimate owners.

Growth rates are significantly higher in companies whoselargest owner is another company (industrial ownership) or a fam-ily. The discrepancy between profitability and growth seems to beconsistent with the interpretation that for a given ownership share,financial owners induce companies to increase shareholder value,whereas industrial and family owners are more concerned aboutgrowth and survival (Thomsen and Pedersen, 2000, page 701).

3.2 Profitability and Firm Growth by Groups of Ultimate Owners

A first question to be answered is about the characteristics ofthe sectors in which firms operate: are family firms in high- orlow-growth sectors? By regressing the industry turnover index ATI(Aggregate Turnover Index) on four dummies indicating ultimateowners, we get a measure of the sectoral intensity of growth ofeach group of owners. Column 1 of Table 3 shows that familyfirms are in sectors that have experienced a growth of totalturnover higher than baseline in the period 1995-2004. Theestimated coefficient is 0.06 and is statistically significant at a 1%level. Contrarily, industrial and financial companies (andespecially state-owned companies) are in moderate-growth sectors.The results change slightly if we break up the total sample basedon country: Italian family firms appear to be concentrated in low-growth sectors, whereas French, German, and Spanish firms inhigh-growth sectors (Table 3). Finally, family-owned companiesare prevalent in sectors which perform well in domestic markets,whereas industrial and financial companies prevail in sectors thatperform well in nondomestic markets.


161



162

TA

BL

E3

SE

CT

OR

AL

PE

RF

OR

MA

NC

E A

ND

OW

NE

R I

DE

NT

ITY

Dep

ende

nt

vari

able

: A

TI

= I

ndu

stry

tu

rnov

er I

nde

x fo

r E

U15

- 2

000=

100

Ind

epen

den

t va

riab

les

AT

ID

omes

tic

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-Dom

esti

cA

TIa)

AT

Ia)

Ital

yG

erm

any

Fra

nce

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ain

Fam

ily

.061

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053*

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al c

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st t

wo

colu

mn

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Tab

le 3

are

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omes

tic

AT

I =

in

du

stry

Dom

esti

c Tu

rnov

er I

nd

ex f

orE

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- 2

000=

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and

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dom

esti

c A

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= i

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ry N

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tic

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tor,

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tive

ly.

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ign

ific

ant

at 1

% l

evel

. *

Sig

nif

ican

t at

10%

lev

el.


3.3 Growth-Oriented or Cost-Reducing Strategy

Seizing market opportunities is a risky activity. For a companyto keep the pace of a rapidly changing or of an increasing demandis a very difficult task: it involves the ability (or willingness) tosustain risky decisions that may endanger the control of thecompany or even its survival. In the next section, we will provideevidence on this point.

By using firm’s sales as the dependent variable (eq. (1)), we cantest the sensitivity of company sales to shock affecting industry ag-gregate turnover. In order to eliminate the sectoral effect due to thedifference in growth rates between industries, we include the termATI among regressors and estimate equation (1). Column 1 in Table4 reports estimated results from equation (1) in which the type ofowner is interacted with the industry sale variable ATI. Firm salesreact to changes in demand approximately by half the industryshocks (0.47 – 0.54). Therefore, for family firms the change in de-mand leads to a 0.40 smaller increase than that for other com-panies, or only to a 0.10 – 0.12 increase in net sales. The respon-siveness is higher for industrial companies and financial compa-nies: even if some differences in estimated values are observed (0.18– 0.16 for industrial company and 0.12 – 0.11 for financial com-pany), empirical findings show that the industrial and financialownership has a positive effect on a firm’s ability to seize marketopportunities. Contrarily, family ownership shows negative and stat-istically significant coefficient, thus confirming difficulty in facingthe business risk involved in following the market demand.

Controls for company size, age, and diversification may avoidambiguity in the effect of owner identity if systematic differencesin size and other controls affect a firm’s responsiveness to shocks.Direct effect indicates that firm’s age, size, and diversification doaffect the responsiveness to shocks (Columns 3 and 4 in Table 4).Both age and size have a positive impact on the ability of the com-pany to follow market demand, whereas diversification reducesfirm’s responsiveness. As the coefficient estimates for interactionvariables remain rather stable despite controls (Columns 5 and 6),in the following we will focus only on the interaction effects.


163



164

TA

BL

E4

FIR

M’S

SA

LE

S S

EN

SIT

IVIT

Y T

O I

ND

US

TR

Y D

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AN

D B

Y O

WN

ER

ID

EN

TIT

YD

epen

den

t va

riab

le:

Fir

m’s

sal

e (l

og)

- 20

00 =

100

Ind

epen

den

t va

riab

les

Fir

m’s

sale

(1)

(2)

(3)

(4)

(5)

(6)

AT

I.4

7**

.54*

*.5

2*.6

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0*4.

50*

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I *

Fam

ily

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40**

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I *

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ust

rial

com

pan

y.1

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7**

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cial

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tion

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ear

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ean

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onco

nce

ntr

ated

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ship

. T

his

du

mm

y is

set

equ

al t

o on

e w

hen

non

e of

th

e kn

own

sh

areh

old

ers

of t

he

com

pan

yh

as m

ore

than

25%

of

tota

l or

dir

ect

own

ersh

ip a

nd

in

div

idu

als

(or

fam

ilie

s) a

re t

he

maj

orit

y am

ong

all

reco

rded

sh

areh

old

ers,

thu

s in

dic

atin

g a

non

con

cen

trat

ed o

wn

ersh

ip.

Kn

own

sh

areh

old

ers

can

var

y fr

om 1

to

6 or

mor

e. T

he

grou

p o

f N

C f

amil

yco

mp

lem

ents

th

e F

amil

y gr

oup

. **

Sig

nif

ican

t at

1%

lev

el.

* S

ign

ific

ant

at 1

0% l

evel

.


How to reconcile this lower responsiveness to shock affectingindustry aggregate turnover with the evidence of good performancein terms of profitability measures? This result may be consistentwith a hypothesis of risk-avoidance behavior by family firms asthey are unwilling to assume a high business risk, i.e. continuouslychanging existing routines, in order to remain top performers.However, as they do not underperform other type of owners whenpure profitability measures are used, they appear to succeed infollowing a cost-reducing or efficiency-seeking strategy. Whereasthe decision to increase sales is inherently risky, and thus may beavoided, the decision to increase efficiency level may involve alower degree of risk, thus providing a viable solution to maintainprofitability in family firms.7 This result agrees with the result inrecent literature, showing that family members make it a priorityto ensure the survival of the family firms for the next generationat the cost to forgo growth opportunities (Bertrand and Shoar,2006).

3.4 Financing and Growth Behavior

In order to test for the presence of risk-avoidance behavior inthe presence of growth opportunities (Almeida and John, 2001),taking into account the owner preference for self-financing, we usethe well-known concepts of “internally financed growth rate” (IG)and “sustainable growth rate” (SG), (Demirguc-Kunt and Maksi-movic, 1998). In contrast to most of the empirical literature thatuses the growth rate of sales or assets as a measure of growth op-tion, we use these measures because of the linkage they posit be-tween the financing and growth behaviors. IG is the maximumgrowth rate that can be financed if a firm relies only on internalresources and maintains its dividend. SG is the maximum sus-tainable growth rate, which expresses the maximum growth rate


165

7 Reliance on family members rather then professional managers may also leadto inefficiencies in decision making that will, on average, slow a firm’s growth.However, BLOOM N. - VAN REENEN J. (2007) show that the lower adoption ofmanagement practice in family firms is not systematic and is largely dependenton the effect of primogeniture in the selection of CEO of the company.


that can be financed without resorting to external equity financeor to altering the present financial structure. Useful informationon how financing decisions are taken in order to sustain growthcan be derived by the comparison of the actual growth rate (G)with the internal growth rate (IG) and the sustainable growth rate(SG). A company growing at a rate below or equal to the IG isable to fund its growth by relying on internally generated finan-cial means. For these companies, the growth behavior should notbe constrained by the availability of financial resources. If growthis higher than SG, then the management uses external resourcesin a way that alters the current debt/equity ratio but that is pro-portional to the internally generated resources.8 In this last case,the availability of financial resources (and the ability of the man-agement to obtain them) plays a crucial role in defining the pat-tern of growth. Limitation of growth in this panel of companiesmay denote a will to maintain the company control by limitingthe amount of external funds in order to lower the risk of com-pany distress.

Estimates of the impact of different owner identity arereported in Table 5. The sample has been split into two differentgroups: firms with an actual growth lower than IG (G < IG) andfirms with an actual growth higher than SG (G > SG). Thecomparison of regression estimates in columns 1-2 and 3-4 showsthat the negative effect of family ownership is larger for firms withG>SG than for firms with G < IG.9 Family ownership hurtscompany performance more heavily in fast-growing companiesthan in low-growing firms. Contrarily, the positive effect ofindustrial ownership is higher in high-growth companies than inlow-growth ones. Finally, for the group of family firms withnonconcentrated ownership (NC), the estimated results confirmthe prevalent empirical literature which shows that a negativefamily effect is usually traced out when family ownership


166

8 If the realized growth is in between IG and SG, the firm will need additionalexternal finance, such as debt, but the low proportion of debt financing makes thedebt/equity ratio to fall.

9 The ratio of Intangible Assets on Total Fixed Assets, used as a measure ofgrowth option, yields a similar result.



167

TA

BL

E5

FIR

M’S

SA

LE

S S

EN

SIT

IVIT

Y T

O I

ND

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Y D

EM

AN

D.

FIN

AN

CIN

G A

ND

GR

OW

TH

BE

HA

VIO

R

BY

OW

NE

R I

DE

NT

ITY

Dep

ende

nt

vari

able

: F

irm

’s s

ale

(log

) -

2000

=10

0

Ind

epen

den

t va

riab

les

Fir

m’s

sale

G <

IG

G >

SG

Inta

ngi

ble

s on

F

ixed

Ass

etsa)

(1)

(2)

(3)

(4)

(5)

(6)

AT

I.5

9*.5

8*.4

2**

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y-.

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anci

al c

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any

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te–

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ily

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ncl

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in t

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trib

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al a

sset

s, t

hat

is,

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firm

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ith

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ific

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inve

stm

ent

in I

nta

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his

du

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y is

set

equ

alto

on

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e of

th

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own

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areh

old

ers

of t

he

com

pan

y h

as m

ore

that

25%

of

tota

l or

dir

ect

own

ersh

ip a

nd

in

div

idu

als

(or

fam

ilie

s)

are

the

maj

orit

y am

ong

all

reco

rded

sh

areh

old

ers,

th

us

ind

icat

ing

a n

onco

nce

ntr

ated

ow

ner

ship

. K

now

nsh

areh

old

ers

can

var

y fr

om 1

to

6 or

mor

e. T

he

grou

p o

f N

C f

amil

y is

not

a s

ub

set

of t

he

Fam

ily

grou

p.

** S

ign

ific

ant

at 1

% l

evel

. *

Sig

nif

ican

t at

10%

lev

el.


concentration is large and family shareholders cannot benefit froma diversified position in the company equity.

3.5 The Impact of Domestic and Nondomestic Markets

If following the market demand is a risky activity, seizingopportunities in international markets could be even riskier.Internationalization requires changes in the organization of thecompany and the assumption of increasing risk. It may involve aforced decentralization of power in order to cope with distantmarkets, thus endangering the company control within the family.Complexity could grow excessively and international opening maybe perceived as an option entailing too much risk. Therefore, weshould expect that the sensitivity to market demand could be lowerin international markets than in domestic ones if family ownershipis detrimental for risk acceptance. In order to test this hypothesis,we estimate equation (2) by separating domestic industry shocksfrom nondomestic ones for each of 15 countries in the sample:

(2)

where sales is the turnover of firm i, sector k, time t and countryc, controls is a set of control variables, and time are time dummies.Similar to previous Eq. (1), the index of industry demand is theEurostat Annul Turnover Index (ATI) at country level for thedomestic and nondomestic market. Index m indicates, respectively,total, domestic, and nondomestic demand. Therefore, eachcompany’s sales are related to the sectoral Turnover index of itsown country, both for domestic and nondomestic market (e.g. thesales of an Italian company are regressed on the Italian Turnoverindex of domestic market and the Italian turnover index for salesin nondomestic market). All other symbols are the same as in Eq.(1). Also in this case, the industry breakdown is for 101 sectorsby NACE 3 digits.

The estimated results are summarized in Table 6. Familyownership has a negative and largely significant impact on

sales a b ATI c F ATI d coiktc ktc

mj ij ktc

m= + + +( ) ( . ) ( nntrols timet iktc) + + ε


168



169

TA

BL

E6

FIR

M’S

SA

LE

S S

EN

SIT

IVIT

Y T

O I

ND

US

TR

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EM

AN

D -

DO

ME

ST

IC A

ND

NO

N-D

OM

ES

TIC

MA

RK

ET

SD

epen

den

t va

riab

le:

Fir

m’s

sal

e (l

og)

- 20

00=

100

Ind

epen

den

t va

riab

les

Fir

m’s

sale

Tota

l A

TIa)

Dom

esti

c A

TIa)

Non

-Dom

esti

c A

TIa)

(1)

(2)

(3)

(4)

(5)

(6)

AT

I (A

ggre

gate

Tu

rnov

er i

nd

ex)a)

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4**

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I *

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ily

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ust

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pan

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tate

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I *

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te *

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4**

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r Y

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try

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mb

er o

f ob

s32

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ps

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4,21

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34,

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j R

-Squ

are

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he

Agg

rega

te T

urn

over

In

dex

(A

TI)

use

d a

s a

regr

esso

r is

th

e To

tal

Agg

rega

te T

urn

over

in

dex

in

col

um

ns

1 an

d 2

, th

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ggre

gate

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esti

c In

dex

in

col

um

ns

3 an

d 4

, an

d t

he

Agg

rega

te N

ond

omes

tic

ind

ex i

n c

olu

mn

s 5

and

6,

all

calc

ula

ted

at

cou

ntr

y le

vel;

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C m

ean

s n

onco

nce

ntr

ated

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ner

ship

. T

his

du

mm

y is

set

equ

al t

o on

e w

hen

non

e of

th

e kn

own

sh

areh

old

ers

of t

he

com

pan

y h

as m

ore

than

25%

of

tota

l or

dir

ect

own

ersh

ip a

nd

in

div

idu

als

(or

fam

ilie

s) a

re t

he

maj

orit

y am

ong

all

reco

rded

sh

areh

old

ers,

th

us

ind

icat

ing

a n

onco

nce

ntr

ated

ow

ner

ship

. K

now

n s

har

ehol

der

s ca

n v

ary

from

1 t

o 6

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company sales when industry shocks come from nondomesticmarkets, whereas the sensitivity is positive for the domesticmarket. Contrarily, industrial and financial ownership show analmost opposite result, with a limited impact on company saleswhen shocks are from domestic markets and a substantial positiveeffect for nondomestic markets.

In columns 2, 4, and 6, we allow for the effect of ownershiptype to differ based on firm’s age. This additional control does notsignificantly alter the estimated coefficients and tends to reduceslightly their numerical values (except for the state-owned firms),but leaves the sign of coefficients unchanged. The effect of the ageon the firm’s sensitivity to industry shock is positive, especially forfamily and industrial companies, thus confirming a role for theexperience in tackling market demand, especially in nondomesticmarkets. For financial-owned companies, the absence of a closerelationship between age and sensitivity may denote a largeravailability for these firms of a set of proprietary advantages andof specific tools that substitute experience in facing the market.

4. - Implications for Sectoral Competitiveness

Aghion et al. (2005), Bertrand and Shoar (2006), and Zell-weger (2007) argue that a negative relationship between the con-centration of family firm and GDP growth at country level shouldbe expected because of the lower incentives to growth associatedwith family owners. In discussing the role of banks in sustainingthe long-term growth of Japanese economy, Morck and Yeung(2006) suppose a similar conclusion by claiming how a governancemodel that prefers contractual claimants (debholders) to residualclaimant (shareholders) may affect the long-term prospect ofgrowth by decreasing the level of risk attitude of the business sec-tor. Aghion and Howitt (1992); Aghion, Howitt, and Mayer-Foulkes(2005); and Fogel, Morck, and Yeung (2005) argue that the in-vestment underlying ‘catch up’ growth and those required to ‘keepup’ are fundamentally different. Once the technological frontierhas been reached, “keeping up” growth requires sustained in-


170


novation. This, in turn, requires a tolerance to risk and instabili-ty. Therefore, a trade-off of growth against stability (risk) mayemerge as a macroeconomic effect of a micro-economic risk-avoid-ance behavior by prevalent owners (Morck and Yeung, 2006).

A similar trade-off may also emerge at the sectoral level if adifferent sensitivity to demand shocks, notably in nondomesticmarkets, arises as a result of a risk-avoidance behavior. Graph 1shows the relationship between the standard deviation of sectoralgrowth rates for 103 European manufacturing sectors and theshare of family firms in each sector. Using the standard deviationas a proxy for the degree of sectoral “instability” (or risk), thisevidence further supports the assumption of low tolerance for riskin family firms, which previous estimates have already signaled.Therefore, a sector may be expected to be less keen to tolerateinstability, thus failing to achieve sustained growth, if family firmsare pervasive. Even if rather illustrative, this data are in line withthe hypothesis that governance of corporation is not anunimportant issue in determining the sectoral competitiveness if


171

GRAPH 1

STANDARD DEVIATION OF SECTORAL ATI (1996-2004) AND SHAREOF FAMILY FIRMS OF THE TOTAL FIRMS

0

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different governance systems affect firms’ risk-taking behavior(Bianchi et al., 2005; Tucci et al., 2007).

5. - Concluding Remarks

The large differences in the ownership structure by owneridentity may raise a concern about the different abilities ofindividual owners to shape the company strategy. As organizationsmay take risk by searching alternative routines and opportunitiesthat changes the status quo (venturing risk), differences in firmsensitivity to market demand may reflect owners’ attitude to takeventuring risk.

The paper uses the sensitivity of firm’s sales to industry shockas a measure of the owner’s attitude toward venturing risk andgrowth. Empirical evidence shows that owner identity does affectthe ability of the company to react to demand shocks. Consistentwith a hypothesis of risk-avoidance behavior, small and medium-sized family-owned companies appear to under react to changes inmarket demand, notably when ownership is highly concentratedand growth options are significant. However, they confirm their sta-tus of good performers when pure profitability measures are used.Conversely, industrial and nonconcentrated family-owned firms ap-pear more prone to deal with venturing risk, especially when theintensity of the risk is large, as in the case of fast-growing com-panies or when there are demand shocks in nondomestic markets.

This result raises the question if sectoral competitiveness maybe negatively affected by a large incidence of family-owned firmsat the sectoral level. If the under reaction of family firms todemand shocks is consistent with a general risk-avoidancebehavior, then a ‘family firm-intensive’ sector may be expected tobe less keen to tolerate instability, thus failing to achieve sustainedgrowth. Data from a large number of European sectors providedescriptive empirical support to this conclusion. As a result, thegovernance of corporation comes out to be a key issue indetermining the industry dynamics at the sectoral level if differentgovernance systems affect firms’ risk-taking behavior.


172



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IX


Amadeus BvDEP Information - Data From Ownership Data-Base

BvDEP Independence Indicator

To assist users in identifying independent companies, BvDEPhas created an Independence Indicator to characterize the degreeof independence of a company with regard to its shareholders.The BvDEP Independence Indicators are noted as A, B, C, D, andU.

Indicator A is attached to any company with known recordedshareholders, none of which having more than 25% of direct ortotal ownership. This indicator is further qualified as A+, A, or A-depending on the number of identified shareholders (6 or more,4-5 or 1-3). BvDEP also gives an A notation to a company that ismentioned by a source (Annual Report, Private Communication orInformation Provider) as being the Ultimate Owner of anothercompany, even when its shareholders are not mentioned. Acompanies are called “Independent companies”.

Indicator B is attached to any company with a knownrecorded shareholder, none of which with an ownershippercentage (direct, total or calculated total) over 50%, but havingone or more shareholders with an ownership percentage above25%. Also, this indicator is further qualified as B+, B, and B-according to the same criteria relating to the number of recordedshareholders as for indicator A.

Indicator C is attached to any company with a recordedshareholder with a total or a calculated total ownership over 50%.The qualification C+ is attributed to C companies in which thesummation of direct ownership percentage (all categories ofshareholders included) is 50.01% or higher. The C indicator is alsogiven to a company when a source indicates that the companyhas an ultimate owner, even though its percentage of ownershipis unknown.

Indicator D is allocated to any company with a recordedshareholder with a direct ownership of over 50%. Indicator U is


174


allocated to companies that do not fall into the previous classi-fication.

Ultimate Owner Identification

To define an Ultimate Owner, BvDEP analyzes the share-holding structure of a company having a BvDEP Independence In-dicator different from A+, A, or A- (which means that the com-pany is independent and consequently has no Ultimate Owner). Itlooks for the shareholder with the highest direct or total % ofownership. If this shareholder is independent, it is defined as theUltimate Owner of the subject company and a UO link is createdbetween the subject company. If the highest shareholder is not in-dependent, the same process is repeated until BvDEP finds an Ul-timate Owner. Each entity at both ends of a link — shareholderor subsidiary — is given a “type” according to the following clas-sification:

– Bank– Financial company– Insurance company– Industrial company– Mutual and pension fund– Foundation & Research institute– Public authorities, States, Governments– Individuals or families– Employees/managers/directors– Self ownership– Private equity– Public– Unnamed private shareholders– Other unnamed shareholders aggregatedThe last three categories (Public; Unnamed private share-

holders, aggregated; Other unnamed shareholders, aggregated) areconsidered as unable to exert, as such, control over a company.They are disregarded in the qualification of the degree of inde-pendence of a company and, as a consequence, in the process of


175


identification of the possible Ultimate Owner of a company. Theshareholder information is gathered from several possible sources,including Annual Reports or privately written communications ad-dressed by the company to BvDEP. Although BvDEP characterizeseach entry by a “type”, it scrupulously respects the wording andspelling given to each entry by the source.


176


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idence from Spanish Olive Market», Administrative Science Quarterly, no. 52,2007, pages 106-137.

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