Family-controlled Businesses Perform Better Than Nonfamily Publicly Traded Businesses

1. Introduction

Family unit firms are the most important and common type of company around the world (Burkart et al., 2003; Jong & Ho, 2019), a fact that has generated growing research interest in how their governance systems affect such things as firm value (Anderson & Reeb, 2003; Andres, 2008; Poutziouris et al., 2015; Villalonga & Amit, 2006), performance (Debicki et al., 2009; Mazzi, 2011; Miralles-Marcelo et al., 2014), investment and dividend decisions (Belenzon & Berkovitz, 2010; Block, 2012; Bozec & Di Vito, 2019; Fahlenbrach, 2009; Male monarch & Santor, 2008), financing strategies, or corporate diversification (Croci et al., 2011; Gómez-Mejía et al., 2010; Miller et al., 2009; Muñoz-Bullón & Sánchez-Bueno, 2012).

The empirical evidence shows that the governance structures of family firms differ from those of nonfamily firms and that such disparities generate differences in operation (Bartholomeusz & Tanewski, 2006; Setia-Atmaja et al., 2009). However, the evidence is inconclusive about whether family firms exhibit higher returns and business firm value than nonfamily firms (Miller et al., 2007). On the one paw, observed differences in returns and business firm value might arise because family firms have heterogeneous goals, different corporate governance systems, and resources, which affects their strategy and behaviour (De Massis et al., 2019; Kotlar & Chrisman, 2019). On the other paw, most of the observed disparities ascend because researchers utilize a nonstandard definition of family firm or founding-family control and practise not consider the effect of intergenerational succession in control and management (González Ferrero et al., 2011). This trouble calls into question the validity of the results. As suggested by Brun de Pontet et al. (2007), the operational definition of family firm used in empirical studies has been especially influential in the diversity of the findings when such a definition is only focused on ownership aspects.

As a theoretical thing, O'Boyle et al. (2012) integrate evolutionary psychology and agency theory to depict how alien predictions can be made regarding the relation betwixt family unit interest and firm performance. For example, evolutionary psychology highlights multiple benefits of family unit ownership of businesses, such as buying identity, strategic inheritance, and intergenerational transmission, which eventually increase overall firm value. However, Nicholson (2008) survey shows that evolutionary psychology also predicts a possible negative outcome of family buying on business firm value equally result of such factors as conservatism, free riding, self-approbation, and diversion of resources. Regarding bureau theory, researchers typically emphasise that agency problems are negligible in family firms considering the agent and principal are usually the same party, which supports firm value, ceteris paribus (Eisenhardt, 1989). Thus, some researchers believe that family ownership reduces the principal-agent problem and, consequently, family firms exhibit better financial performance (Anderson & Reeb, 2003; Isakov & Weisskopf, 2014; Poutziouris et al., 2015; San Martín-Reyna & Durán-Encalada, 2012; Villalonga & Amit, 2006). Still, agency conflicts may still be prevalent in family businesses as a event of role duality and wealth expropriation, which decrease house value (O'Boyle et al., 2012). Regarding institutional variables, San Martín-Reyna and Durán-Encalada (2012) argue that the findings in ane economic context are not necessarily applicable to other contexts. Similarly, Villalonga and Amit (2006) suggest that family-owned firms perform amend in regulated markets. Indeed, O'Boyle et al. (2012) meta-analysis of 90-five samples finds that family involvement is not significantly related to firm functioning. All this attests to the fact that the empirical literature is inconclusive regarding the relationship betwixt family involvement and firm performance.

Concerning the buying structure of companies, in emerging economies, such every bit in Latin America, because the law gives relatively weak protection to minority investors, agency problems are addressed by highly full-bodied buying structures. For this reason, the Chilean corporate sector is characterised by firms that have highly concentrated ownership structures (Céspedes et al., 2010; Jara et al., 2015; Saona & San Martín, 2016) and are controlled by family business groups (Saona et al., 2018).

Family ownership in the Chilean corporate sector could be mitigating the master-amanuensis problem; notwithstanding, the expropriation risk caused by the high ownership concentration, combined with the weak legal protection of minority investors, allows the families that control family firms to extract minority shareholders' wealth. This state of affairs leads to a novel manifestation of the principal-agent problem in Chile, i non widely explored in the empirical literature.

Although the nonlinear relationship between family unit buying and firm performance has been widely studied in various contexts, it has non been considered in the Chilean context. For instance, Miralles-Marcelo et al. (2014) and Bonilla et al. (2010) notice that family firms perform better than nonfamily firms, but they showroom a lack of consideration of institutional context or the possibility of a nonlinear relationship. Additionally, they do non take into consideration the role of the founder or members of the founding family unit in decision-making positions, nor practise they consider the effect of generational succession within family firms. Empirical evidence shows that the human relationship between family ownership and firm performance is moderated by the presence of family members in determination-making positions (Miralles-Marcelo et al., 2014; Villalonga & Amit, 2006) and by which generation controls or manages the visitor (González Ferrero et al., 2011).

Given this lack of depth of the studies in the Chilean arena, we aim to assess the impact of founding-family control and intergenerational succession on firm value. We thus intend to fill up the gap in the empirical literature past expanding evidence on three major aspects of family-owned businesses: (a) the relationship between family ownership and firm value, (b) the relationship between business firm value and the presence of the founding family in senior positions, and (c) the impact of intergenerational family unit succession on firm value. Additionally, information about house value enables us to make up one's mind whether family interest generates bureau problems (Saito, 2008). We use different measures of business firm value associated with Tobin'due south Q to test our hypotheses, which allows us to identify the impact of the founding family unit's presence in the ownership, management, or control on business firm value.

Founding families showroom several characteristics that differentiate them from other controlling parties. Burkart et al. (2003) indicate that founding families maintain control of firms to get nonfinancial benefits from control, to protect their reputation, and to excerpt wealth from other shareholders. Additionally, founding-family firms accept highly concentrated ownership, which allows families to actively participate in direction (specifically, peak management) and control (board of directors) (Nguyen, 2011; Saito, 2008). Our research helps to assess the bear on on market performance of the presence of founders or their descendants in positions of management or control. In line with Villalonga and Amit (2010), we postulate that founding-family firms whose senior positions (CEO and chairman of the lath) are filled past their founders accept different market place value from those led by the founders' descendants.

Another contribution of this study is that, unlike previous studies of Republic of chile, such equally Silva and Majluf (2008), we consider not just families' buying and interest on the board of directors and in management, merely also intergenerational succession and its touch on on direction and control. Nosotros construct the nigh important variables of the written report using a pioneering, hand-nerveless data ready. The information on the ownership structure of founding families were obtained from chief sources such as companies' charts (available at the Documentary Middle of the Commission for the Fiscal Market ^ane ), their bylaws, notes on their almanac reports, and the minutes of the full general and extraordinary shareholders' meetings, among other sources, which allows us to contribute to the literature on the Chilean context.

We find that after controlling for firm-specific and buying characteristics, founding-family-controlled firms accept higher marketplace value than other firms practise, though the relationship is inverse U-shaped. Additionally, when the founder holds a senior position—CEO or chairman of the board of directors—this increases house value. Even so, firm value falls when the firm is managed and controlled past a descendant of the founder.

Section 2 reviews the literature and considers various hypotheses. Section 3 presents our data, variables, and methodology. Nosotros discuss our results in department 4 and conclude in section v.

2. Literature review and research hypotheses

2.1. Founding-family command and firm value

Bureau-theory-based studies suggest that firm value increases when the residual claimants and the deciding agents are the same (Chrisman et al., 2004; Fama & Jensen, 1983; Jensen & Meckling, 1976). Corbetta and Salvato (2004) emphasise that when the objectives of a family unit business are exclusively financial, the family volition exist motivated by 2d-society needs and exogenous factors which generate the weather for agency conflicts. However, when the corporate goals are not fiscal, the family will be motivated by college-order needs and intrinsic factors, which bring the objectives of the principal and the amanuensis into alignment.

This bureau-theoretic approach is consequent with the theory of resource and capabilities, in that family businesses have intrinsic characteristics that permit them to develop a competitive advantage that enhances firm value (Penrose, 1959; Wernerfelt, 1984). Habbershon and Williams (1999) refer to the unique set of resources and capabilities that characterise family unit businesses equally familiness. These resources are the result of the interaction between the family unit, the individuals that constitute information technology, and the company itself, and they can be a source of competitive advantage.

Despite all the studies that advise a linear and positive human relationship between family buying and firm value, several studies support a nonlinear (inverse U-shaped) relation as a effect of the conjunction of the alignment-of-interest and expropriation hypotheses (Anderson & Reeb, 2003; De Massis et al., 2013; Isakov & Weisskopf, 2014; Mazzola et al., 2013; Miller et al., 2007; Poutziouris et al., 2015). For a sample of companies on the S&P 500 alphabetize, Anderson and Reeb (2003) suggest that the family unit is a source of value when its ownership stake does not exceed approximately i-3rd of the outstanding shares and that beyond that critical point, firm value is destroyed. Similar results are plant by Poutziouris et al. (2015) in a sample of companies listed on the London Stock Exchange. Moreover, Maury (2006), using a sample of Western European family firms, and Isakov and Weisskopf (2014), for Swiss companies, indicate that family ownership reduces the agency disharmonize between shareholders and managers because the families have incentives to exert control. However, they add that when families' ownership is excessively concentrated and when minority investors' rights are unprotected, families act opportunistically by engaging in inside trading and using privileged information to extract wealth from not-family-member shareholders. Information technology is widely documented that family shareholders in public firms excerpt private rents through special dividends, excessive compensation schemes, and related-party transactions (DeAngelo et al., 2000).

In emerging economies, several studies take identified the touch on of family ownership on financial performance. For case, San Martín-Reyna and Durán-Encalada (2012) study United mexican states and find that family ownership reduces top direction'due south discretion and increases firm performance. Similarly, Ciftci et al. (2019), Muttakin et al. (2015), and Chu (2011) find a positive relationship between family ownership and functioning for a sample of firms from Turkey, People's republic of bangladesh, and Taiwan, respectively. Also, in a meta-assay of emerging economies, Wang and Shailer (2017) discover that family ownership is positively related to firm performance. And Poletti-Hughes and Williams (2019) find that family buying decreases principal-agent issues for a sample of Mexican firms, which in turn increases firm value. All the same, the authors add that when family unit ownership reaches twoscore to 50 percent, the effect becomes negative because of entrenchment effects.

Family unit ownership and its impact on returns accept also been studied in Chile. Martínez et al. (2007) and Bonilla et al. (2010) discover that capital markets make family firms accountable to the rest of the shareholders, implying that the benefits of family unit ownership are more meaning than the costs. Similarly, Duran and Ortiz (2020) discover that firms controlled by multiple unrelated families have higher returns than those owned past unmarried families because the former have various nonfinancial objectives that encourage efficient oversight of the firm's management.

Multiple studies of specific industries have also been conducted. For instance, Pacheco (2019) finds that family ability (family equity plus family presence on the board) improves accounting operation for a sample of Portuguese wine firms. Masset et al. (2019) investigate the hospitality manufacture in sixteen Western European countries and find that family food-and-beverage firms perform amend than nonfamily food-and-beverage firms. Similarly, Rienda et al. (2020) and Cucculelli and Storai (2015) find that family ownership improves house performance in Spanish hotel firms and Italian manufacturing firms, respectively. Erbetta et al. (2013) observe that family ownership has a nonlinear—inverted U-shaped—human relationship with operational efficiency. Like results are found past Gallucci and D'Amato (2013) for a sample of Italian vino firms.

The Chilean corporate sector generally consists of concern groups run by family unit-controlled companies (Farías, 2014; Saona et al., 2018). Therefore, convergence of interests is plausible in the Chilean corporate sector, simply so are value-destroying activities when founding families' ownership exceeds the level needed to practice efficient control. These arguments lead to our first hypothesis:

Hypothesis one: Ownership in the hands of the founding family has a nonlinear—changed U-shaped—human relationship with firm value, ceteris paribus.

ii.2. Founding-family management, intergenerational succession, and firm value

Regarding the participation of the founding family unit in companies' management, the bear witness is inconclusive. On the one hand, some authors find a negative human relationship betwixt family unit buying and firm value as a upshot of nepotism (appointing family members to controlling positions). On the other hand, some authors support the idea that family participation in management aligns the interest of managers and shareholders (Poutziouris et al., 2015). Andres (2008), Adams et al. (2009), Fahlenbrach (2009), and Villalonga and Amit (2006) find empirical evidence of a positive impact on firm value when the founder of the family unit business works as CEO every bit a result of alignment of interests betwixt the master and the agent. Using proxy information on all Fortune 500 firms, Villalonga and Amit (2006) find the same positive impact on firm value when the founder is board chairman and has hired a professional CEO. Similarly, in studying S&P 1500 firms, Baek and Kim (2015) indicate that when a family business is founded by more than than one individual and one of them holds a senior position, their discretionary controlling power is constrained past the cofounders, which increases house value.

By using a representative sample of companies from the Portuguese and Castilian stock markets, Miralles-Marcelo et al. (2014), nevertheless, notice that when a visitor is managed past the founder, it does not necessarily increase firm value. They argue that founders lack dynamism in managing companies. Moreover, though Andres (2008), Isakov and Weisskopf (2014), and Poutziouris et al. (2015) find that ownership past the founding family increases bookkeeping performance, they fail to discover a pregnant impact on value measures such equally Tobin's Q. Kim and Kiymaz (2021) bespeak that the presence of the founder as CEO harms firm value because of the entrenchment effect. The authors observe the negative impact in various sectors, such as materials and consumer-goods industries.

Equally emphasised past Chua et al. (1999), families' vision and intention to promote intergenerational sustainability are among the most important characteristics distinguishing family unit from nonfamily firms. Intergenerational succession in senior management roles in a family unit business firm is normal (Chua et al., 2003). ² Sharma et al. (2001, p. 21) define succession as 'the actions and events that pb to the transition of leadership from one family member to some other in family firms. The two family unit members may be part of the nuclear or extended family, and may or may not belong to the same generation'.

Mazzola et al. (2013) and Schulze et al. (2003) indicate that when a family has a high caste of ownership, house functioning suffers considering of the appearance of nepotism, which may imply intergenerational succession of unqualified people in senior direction roles. Schulze et al. (2001) hash out how favouritism towards heirs and siblings tin can atomic number 82 to family perquisites such as favoured employment and promotions, which leads to resentment by nonfamily managers. This finding is also supported by Burkart et al. (2003), who argue that family management, especially direction by founders' descendants, is associated with poor decision making. Further empirical research supports the intuition that firm value suffers when the position of CEO is held past a descendant of the founding family (Li & Srinivasan, 2011; Miralles-Marcelo et al., 2014; Villalonga & Amit, 2006). Poutziouris et al. (2015) emphasise that this could be because the subsequent generations lack delivery to the concern, which fosters nepotism.

In the aforementioned vein, van Essen et al. (2015) indicate that when family businesses are managed by their founders, agency conflicts are limited. However, as control and management are transferred to the following generations, the capacity to mitigate agency conflicts is diminished. As Block (2012) indicates, family members normally do not experience involved in the family business and lack knowledge of the visitor's operations; consequently they run across the company but as a source of personal-income generation. Along the same lines, Bennedsen et al. (2007) and Cucculelli and Micucci (2008) indicate that the intergenerational transfer harms the performance of family businesses. Andres (2008) and Poutziouris et al. (2015) detect that when a descendant of the founder is CEO or holds some other senior position, the accounting record improves, which is why they perform amend than the CEOs of nonfamily companies. However, the significance of this finding disappears when the operation is measured by Tobin'south Q, indicating that the marketplace sees the CEO's descendants in the same fashion as the CEOs of nonfamily companies.

Hence, consistent with the previous arguments on the effect of the family unit management and firm value, we advise the following ii hypotheses for the Chilean corporate sector:

Hypothesis 2: The presence of the founder in a senior position of a family firm improves the value of the company, ceteris paribus.

Hypothesis iii: The presence of a descendant of the founder in a senior position of a family house diminishes the value of the company, ceteris paribus.

3. Methodology design

The goal of this study is to appraise the touch on of founding-family ownership, control, and intergenerational succession on firm value. The first function of the empirical assay describes the sample and variables, and the 2nd part is a multivariate assay.

3.1. Source of information

To test our hypotheses, we analysed a sample of 160 nonfinancial Chilean companies listed on the Santiago Stock Exchange between 2005 and 2019, for a total of 1,901 visitor-year observations. Since we observed individual firms over a long menstruation, nosotros employed cross-sectional and time-series information and analysed information technology through console-data techniques (Dang et al., 2015). We included a minimum of 4 continuous observations per visitor, as, according to Baltagi (2013), that is the sine qua non condition for running an efficient panel-data estimation; on boilerplate, there are 11.88 observations per company. Moreover, Arellano and Bond (1991) emphasise that all firms must be nowadays in a sample for at least iv consecutive periods for the panel-data assay to be efficient and to conduct a 2d-order autocorrelation examination. We used the generalised method of moments (GMM) organization reckoner, an estimator developed by Blundell and Bail (1998) that is an enhanced version of the estimator adult past Arellano and Bond (1991). As emphasised by Windmeijer (2005), GMM organization-computer models are designed to handle the potential trouble of individual firms' unobservable heterogeneity, the endogeneity problem regarding the explanatory variables, and the econometric problems raised by the omission of relevant firm-specific characteristics.

We used Thomson Reuters'south Refinitiv Eikon database for financial and accounting information. Given their regulated status and different fiscal reporting system, financial institutions were excluded from the sample. Information almost the CEO, chairman of the lath, and founder was obtained from various sources, such as the companies' bylaws, notes on their annual reports, minutes of the general and extraordinary shareholders' meetings, and the companies' websites. This is a unique, manus-collected data fix that allows us to conduct a much deeper analysis of the Chilean corporate sector than the existing empirical literature does (compare, for example, Martínez et al. (2007) and Bonilla et al. (2010)).

The information needed to allocate a firm equally a founding-family-house was paw nerveless from different sources. First, we used the articles of incorporation of the visitor, found at the Documentary Middle of the Commission for the Financial Market in Chile to identify the founder(due south) of each company. Afterwards, we advisedly reviewed the visitor's annual reports to place the controlling party, if any. Nosotros then manually matched the data to identify whether the founder continues to be the controlling party. For data on the founder's descendants and their function as CEO or chairman of the board, we searched the visitor'southward annual reports for the names of the founder'south sons. When this information was not available in the annual reports, nosotros obtained it from Republic of chile'southward Civil Registration and Identification Service ³ . Additionally, and in society to make our study comparable with other empirical studies, nosotros followed Saona et al. (2018) to identify whether a company belongs to a business concern group. Nosotros obtained that data from the Committee for the Financial Marketplace, which tracks the composition of business concern groups and has been publishing such data since 2002 continuously. Finally, we obtained information on pension funds from Refinitiv Eikon and from annual reports of the pension fund managers' regulator (Superintendencia de Pensiones), which provides detailed information on pension fund managers' ownership of publicly listed companies.

The sample covers 78 per centum of the market capitalisation of the Santiago Stock Commutation ^four and a similar percentage of the number of listed companies. ^five We consider the sample of family unit firms is representative of the Chilean corporate sector since it covers 28.75 percent of nonfinancial listed firms, as shown in Table 1. Table 1 as well indicates that family businesses are present in almost all industrial sectors and are particularly prevalent in the retail-trade and manufacturing sectors.

Founding-family unit-controlled firms, intergenerational succession, and house value

Published online:

06 October 2021

Table 1. Distribution of founding family unit and non-founding-family unit firms by industrial sector.

3.two. Model and definition of variables

Tabular array ii displays the definitions of the variables we used, which include alternative metrics of firm value, firm characteristics, and family-related variables.

Founding-family unit-controlled firms, intergenerational succession, and house value

Published online:

06 Oct 2021

Table 2. Variables' definitions.

The empirical literature typically uses Tobin'south Q $(\mathit{VALUE}\mathrm{ane}$ and $\mathit{VALUE}2)$ as the measure out of house value to explicate the impact of family buying on business firm value (Anderson & Reeb, 2003; Maury, 2006; Miller et al., 2007; Poutziouris et al., 2015; Villalonga & Amit, 2006). Notwithstanding, given that this metric's distribution is often asymmetrical, and in club to reduce the effect of outliers, we used the natural logarithm of Tobin's Q $(\mathit{VALUE}4$ and $\mathit{VALUE}\mathrm{v})$ to normalise the distribution (Gompers et al., 2010; Rapp & Trinchera, 2017). Additionally, every bit role of the robustness testing, we followed Gompers et al. (2010) and Jo and Harjoto (2012) in using the industry-adjusted Tobin's Q $(\mathit{VALUE}3)$ to control for the differential effect across industrial sectors.

Two variables are typically used to identify family unit-controlled firms. Some authors use a dummy variable to distinguish betwixt family unit and nonfamily businesses (Baek & Kim, 2015; Miller et al., 2007; Miralles-Marcelo et al., 2014; Poutziouris et al., 2015); others utilise the percentage of shares held past the founding family to measure its control (Anderson & Reeb, 2004; Andres, 2008; Chu, 2011; Miller et al., 2007; Villalonga & Amit, 2006). We follow Anderson and Reeb (2003), who define family firms by the presence of the founding family in the ownership structure or by ownership past any relatives of the founding family. This definition is consequent with Miralles-Marcelo et al. (2014), who take into consideration in their construct family control, such that a family business firm is a firm owned and controlled by a family. Hence, the definition of founding-family-controlled firm $(\mathit{FOUNDFAM})$ used in this written report includes all companies (a) that were founded by a family unit or an private with bulk control, (b) for which that family remained the major investor when the firm became public, and (c) for which the family was present on the board of directors, as CEO, or in another position that influences the CEO's decisions and the family's identity. ^{half dozen} Relative to the previous literature, this operational definition is superior since it includes considerations of buying, control, and family presence after the company transitioned from private to publicly listed. We took this approach considering in the case of Chilean companies, Silva and Majluf (2008) discover that firm performance depends on family unit ownership concentration, family control, and the institutional context.

Contrary to the empirical studies that do not plant a minimum threshold for family ownership (Miralles-Marcelo et al., 2014), this report follows the approach of San Martín-Reyna and Durán-Encalada (2012), which recognises that cultural and legal contexts, which differ from country to state, bear upon family business and, consequently, that a minimum threshold of family buying is suitable for the Chilean corporate sector. FOUNDFAM is defined by a minimum threshold of family ownership, equally in Andres (2008), Bjuggren and Palmberg (2010), Cai et al. (2012), De Massis et al. (2013), and García-Ramos and García-Olalla (2011). Specifically, the status defining this variable's value is that the family unit holds at least 25 per centum of the outstanding shares with voting rights and has at least one fellow member in a senior management position or on the lath of directors. Co-ordinate to Republic of chile'south Stock Market Law, the controller of a house is the shareholder that holds at least 25 percent of the shares with voting rights. It takes a value of 1 if the company meets this condition and 0 otherwise. Additionally, we used the percentage of shares owned past the founding family unit to written report the relationship between family ownership and the value of the company $(\mathit{OWNFOUNDFAM}).$

Regarding the family variables used to investigate hypotheses 2 and 3, nosotros considered whether the position of CEO or chairman of the board was held past the founder $(\mathit{FOUND})$ or a descendant of the founding family unit $(\mathit{DESC}),$ which includes successors in the second, third, or fourth generation.

The control variables are firm size $(\mathit{SIZE}),$ leverage $(\mathit{LEV}),$ profitability $(\mathit{ROA}),$ asset tangibility $(\mathit{TANG}),$ business firm run a risk $(\mathit{Take\; chances}),$ capital expenditure $(\mathit{CAPEX}),$ ownership concentration $(\mathit{Own}),$ ownership by alimony fund managers $(\mathit{PFOWN}),$ the firm's reputation $(\mathit{REP}),$ and a metric of the board of directors' efficiency in promoting value-enhancing activities corresponding to the board'due south gender variety $(\mathit{BGD}).$ These variables accept been widely used in previous empirical studies (De Massis et al., 2013; Isakov & Weisskopf, 2014; Jara-Bertín & Sepúlveda, 2016; Lefort & Urzúa, 2008; Poutziouris et al., 2015; Saona & San Martín, 2018). $\mathit{SIZE}$ represents the natural-logarithmic transformation of the visitor'southward total avails; $\mathit{LEV}$ is full debt as a share of the volume value of total assets; $\mathit{ROA}$ is net income divided past total avails; $\mathit{TANG}$ is the internet value of property, plant, and equipment divided by the volume value of total assets. We used the Altman (1968) Z-score to calculate the firm'southward default risk $\left(\mathit{Take\; chances}\right).$ This variable is calculated as $1.2W\mathit{KTA}+\mathrm{i.iv}RE+3.3E\mathit{BITTA}+0.6K\mathit{KTTL}+\mathit{RTA},$ where $\mathit{WKTA}$ is working capital divided by full assets, $RE$ is retained earnings divided by total assets, $\mathit{EBITTA}$ is annual earnings before interest and taxes divided by full assets, $\mathit{MKTTL}$ is the firm's marketplace capitalisation divided by full liabilities, and $\mathit{RTA}$ is full revenues divided by full assets. $\mathit{CAPEX}$ is computed as the annual variation in gross value of holding, institute, and equipment divided by the stop-year book value of total assets. $\mathit{OWN}$ is defined as the ownership held by the majority shareholder. $\mathit{PFOWN}$ is a proxy for ownership past private investors. $\mathit{REP}$ is the natural-logarithmic transformation of years since the company was founded. Finally, the indexed measure of board gender diversification $(\mathit{BGD})$ was computed based on the Blau (1977) index as $1-{\sum }_{i=\mathrm{i}}^{\mathrm{due\; north}}{P}_i^2,$ where $P_i$ corresponds to the proportion of directors in each of two gender categories (male and female person members). $\mathit{BGD}$ ranges from 0, when there are only male person members or only female members on the board, to 0.5, when there is an equal number of male and female members.

Equation (1) beneath is used to measure the touch of the founding family's control on firm value. To mensurate the nonlinear relationship, OWNFOUNDFAM enters the model in quadratic and linear forms. $X_{it}$ is the vector of control variables (for case, firm size, leverage, profitability, asset tangibility, uppercase expenditure, hazard, ownership-structure features, reputation, and board gender diversity) that we expect affect the proxies for business firm value.

The regression estimates are also computed by separately including variables that designate whether the house belongs to a business group $(\mathit{BUSGROUP})$ and whether the house is a family firm $(\mathit{FAM}).$ ^seven We do then to isolate the effect of these two variables on firm value. In the instance of Chilean companies, most firms that belong to business groups are family-owned businesses. Hence, adding these control variables allows us to get more precise estimates of firm value, which ameliorates the misspecification trouble. (1) $$\mathit{VALUE}=\alpha +{\beta }_1{\mathit{OWNFOUNDFAM}}_{it}+{\beta }_{\mathrm{two}}{\mathrm{10}}_{it}+{\epsilon }_{it}$$ (1)

Hypotheses ii and 3 were tested by applying equation (ii) to decide whether management or supervision past the founder or by their successors impacts firm value. We used dummy variables for founder $\left(\mathit{FOUND}\right)$ and descendant $\left(\mathit{DESC}\right).$ These variables take the value of one when the CEO or chairman of the board is the founder or a descendant of the founding family, and 0 otherwise. (two) $$\mathit{VALUE}=\alpha +{\beta }_{\mathrm{ane}}F\mathit{OUND}/\mathit{DESC}+{\beta }_2{\mathrm{10}}_{it}+{\epsilon }_{it}$$ (2)

Equations (ane) and (2) are analysed using a sample of companies with both cross-sectional $\left(i\right)$ and time-series $\left(t\right)$ data, which allows us to compound and unbalanced panel data. Given the nature of the data, we take to deal with ii major econometric problems: unobservable heterogeneity and endogeneity (Arellano, 2002). Unobservable heterogeneity refers to specific characteristics of each firm that practice not vary over fourth dimension, such as the business firm's managerial style, mental attitude towards run a risk, internal policies, and organisational design (Ali et al., 2018). Since these characteristics are unobservable, they go function of the random component of the estimates $\left({\epsilon }_{it}\right).$ The endogeneity problem occurs when changes in house value touch the right-hand-side variables and, consequently, causality is not unidirectional. This generates a simultaneity trouble, which may bias the estimated coefficients.

To address these econometric problems, we estimate the regressions using the two-phase GMM system estimator (GMM-SE), which allows us to accost at the same time the heterogeneity problem and the potential endogeneity bug past using every bit instruments lagged correct-hand-side variables, as in Jara et al. (2019). Since the independent variables are endogenous and correlated with the residuals, the OLS estimation is both biased and inconsistent (Chocolate-brown et al., 2011). The two-stage GMM-SE reduces the bias in the regressors and the inconsistency in the estimations, improving the asymptotic precision. ⁸ As stated above, one important characteristic of the GMM method is that it limits the endogeneity of all firm-level variables past introducing lagged right-hand-side variables as instruments. Specifically, we used as instruments $\mathit{SIZE},$ $\mathit{LEV},$ $\mathit{ROA},$ $\mathit{TANG},$ $\mathit{CAPEX},$ $\mathit{RISK},$ and OWN lagged from $t-\mathrm{one}$ to $t-3,$ similarly to Jara et al. (2019).

The consistency of the estimates depends critically on the absence of 2nd-order series autocorrelation and on the validity of the instruments. We use the AR(2) statistic to mensurate second-social club serial correlation and the Hansen (1982) test of overidentified restrictions to check whether the instruments are exogenously determined. Additionally, nosotros used the Wald test of the joint significance of all contained variables and tested for multicollinearity problems through the variance aggrandizement factor. We used the Lind and Mehlum (2010) exam to check the nonmonotonic relationships suggested in our first hypothesis when ownership past the founding family unit is used. This exam looks for the presence of a U-shaped (or inverse U-shaped) relationship between the outcome variable and the explanatory variable, which in our case is $\mathit{OWNFOUNDFAM}.$ This test takes by default the interval as divers by the information range of the explanatory variable. The major advantage of the Lind and Mehlum (2010) test is that it provides the necessary and sufficient weather condition to test for a U-shaped (or changed U-shaped) relationship in finite samples. We provide footnote x as an example of the ciphering of the farthermost point that is provided by this test.

4. Results

4.1. Descriptive statistics

Table 1 shows that approximately 29 percent of the companies in the sample are founding-family-controlled firms. This statistic is well below the boilerplate reported by Martínez et al. (2007) and Bonilla et al. (2010) in the case of Chilean firms. The reason for the difference is that these studies place as family businesses all companies controlled past a family, without taking into consideration whether it is the founding family. Indeed, the literature recognises that family involvement can be manifested in multiple ways and that the ambiguity in its definition makes it problematic to compare findings across studies (Chua et al., 1999; Sharma, 2004).

Table 3 exhibits a statistical summary of the variables used in the empirical analysis. And information technology reports the difference in ways between founding-family-owned and other companies. Founding-family-controlled firms, as defined in this study, have lower average value than other firms. Moreover, founding-family unit businesses typically have more debt than other businesses, a finding supported by Croci et al. (2011) and King and Santor (2008). The erstwhile study argues that this is because in family businesses, bureau conflicts arising from debt (principals versus bondholders) are less severe than agency conflicts arising from equity majuscule (principals versus minority shareholders). For the same reason, family businesses are averse to issuing equity capital because this would dilute the family's buying stake and diminish its control. Additionally, founding-family unit businesses have lower levels of profitability $\left(\mathit{ROA}\right),$ asset tangibility $\left(\mathit{TANG}\right),$ and capital expenditure $\left(\mathit{CAPEX}\right)$ than other businesses and higher default risk $\left(\mathit{RISK}\right).$ ⁹

Founding-family-controlled firms, intergenerational succession, and firm value

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Tabular array 3. Descriptive statistics.

The correlation matrix is presented in Table 4, which reports certain remarkable relationships. For example, the presence of the founding family as the company's controller is negatively and significantly related to business firm value (see the five firm-value measures).

Founding-family-controlled firms, intergenerational succession, and house value

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Table 4. Correlation matrix.

four.2. Multivariate analysis

The results in Tables 5 and 6 provide bear witness of the influence of founding-family ownership on business firm value. In all models, $\mathit{OWNFOUNDFAM}$ exhibits a nonlinear, inverse U-shaped relationship with all five measures of house value. Previous studies of different institutional contexts have constitute a monotonic relationship (run across, for case, Anderson and Reeb (2003), San Martín-Reyna and Durán-Encalada (2012), Klein et al. (2005), and Villalonga and Amit (2006)). This study, even so, finds a nonlinear relation. Indeed, in Tables five and 6, the coefficient of $\mathit{OWNFOUNDFAM}$ indicates that ownership in the hands of the founding family increases house value at get-go but decreases house value once ownership reaches a certain threshold designated every bit extreme point $\mathit{OWNFOUNDFAM}$ in the tables. This confirms hypothesis 1.

Founding-family unit-controlled firms, intergenerational succession, and firm value

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Tabular array 5. Family business firm and performance.

Founding-family-controlled firms, intergenerational succession, and house value

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Table 6. Family firm and operation.

Regarding the farthermost points, in the case of model 1 in Table 5, house value is maximised when $\mathit{OWNFOUNDFAM}$ is 39.31 pct. ^x The average value of OWNFOUNDFAM is 38.81 percentage in Tabular array v and 38.30 percent in Table half dozen, indicating that when the founding family owns more this amount of the company'south equity, expropriation problems ascend that counterbalance down house value. According to the Lind and Mehlum (2010) examination, shown at the bottom of the tables, the nonlinear relationships are statistically meaning.

The difference between Tables v and six is the presence of two key dummies in the latter table. First, we controlled for a dummy variable that takes the value of one if the firm belongs to a business group $(\mathit{BUSGROUP})$ and 0 otherwise. 2d, nosotros controlled for a dummy indicating whether the firm is owned by a family (founding family or otherwise) $\left(\mathit{FAM}\right).$ According to our results, a firm's affiliation with a business grouping reduces business firm value, although this issue could exist considered inconclusive because the variable is pregnant merely in two models. In a previous empirical study of Chilean firms, Farías (2014) finds that business groups tin can improve or reduce the performance of their affiliated firms by modifying their characteristics, such equally management concentration or degree of specialisation. Given the relevance of business groups in Chilean capital letter markets (Khanna & Palepu, 1999, 2000; Silva et al., 2006), they cannot be ignored when explaining firm value. As for family firms, the coefficient on $\mathit{FAM}$ is positive (Bonilla et al., 2010; Martínez et al., 2007) in three of the five models, every bit shown in Table 6.

The control variables bear witness the signs nosotros expected based on the literature. Leverage $\left(\mathit{LEV}\right),$ profitability $\left(\mathit{ROA}\right),$ capital investment $\left(\mathit{CAPEX}\right),$ ownership by pension fund managers $\left(\mathit{PFOWN}\right),$ and business firm reputation $\left(\mathit{REP}\right)$ have positive and statistically significant influence on the diverse measures of firm value. Long-term project financing is a mutual pattern in family unit businesses because of their long-term orientation (Croci et al., 2011; Le Breton-Miller & Miller, 2018). In fact, according to Croci et al. (2011), family firms are more probable to result debt than equity to avoid diluting or relinquishing command. Indeed, studying a sample of Australian companies, Setia-Atmaja et al. (2009) suggest that family-controlled firms use debt in mitigating the families' expropriation of minority shareholders' wealth. Additionally, we find that the better the credit-rating score $\left(\mathit{Take\; chances}\right),$ the higher the probability a business firm will issue equity, which implies a positive market perception of the firm. Our findings likewise reveal that a profitable company $\left(\mathit{high}\mathit{ROA}\right)$ is more probable to merchandise at a premium compared with less profitable ones. Companies that make larger capital investments (given the existence of greater growth opportunities, and equally measured by $\mathit{CAPEX}$ ) and companies with lower risk benefit the about in terms of market valuation. The estimated coefficients of $\mathit{Own}$ and ${\mathit{OWN}}^2$ (meet Tables 5 and 6) are negative and positive, respectively, indicating that ownership by the controlling shareholder has a nonlinear (U-shaped) influence on house value. This allows us to say that as ownership past the controlling shareholder decreases, the value of the company falls at first and and then begins to increase. This finding is valid in the Chilean context, in which legal protection of minority investors is relatively weak and must exist complemented past controlling shareholders. This result is comparable with the finding of Saona et al. (2020) concerning Latin American companies; namely, buying concentration is not efficient enough of a governance machinery to maximise the value for all shareholders. They argue that the market penalises companies with a subsequent loss of business firm value when their ownership concentration is depression. As predicted in the literature on Chilean capital markets, governance by pension fund investors $\left(\mathit{PFOWN}\right)$ mitigates agency take chances (Jara et al., 2019), which enhance firm value.

Table 7 shows the effect on house value when the CEO or chairman of the board is the founder or their descendant. The first iii models analyse the impact of the founder $(\mathit{Plant})$ as CEO or chairman on business firm value, while the last three models analyse the impact of descendants $(\mathit{DESC})$ on firm value. The three metrics of firm value used in this tabular array increase when the founder holds the position of CEO or chairman of the board. This is evidence that agency conflicts are mitigated when the founder holds a senior position. This finding is consistent with the international empirical evidence (Adams et al., 2009; Anderson & Reeb, 2003; Andres, 2008; Fahlenbrach, 2009; Villalonga & Amit, 2006). According to He (2008) and Poutziouris et al. (2015), conflicts of interest may be mitigated by the founder's delivery and loyalty to the business. This is noteworthy because the presence of the founder in a managerial role benefits the company as reflected in its market value. The evidence shows that the presence of the founder makes the organisation more coherent, which mitigates agency bug and triggers value cosmos. These results ostend hypothesis 2. Regarding the balance of the command variables, the results are in line with those previously described.

Founding-family-controlled firms, intergenerational succession, and house value

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Table 7. Touch of the founder's and descendant's presence on firm value.

The terminal 3 models of Table 7 test the impact of the presence of a descendant of the founder on the value of the firm (hypothesis 3). The dummy variable $\left(\mathit{DESC}\right)$ indicates whether any descendant holds the position of CEO or chairman of the board. Nosotros detect that when a descendant does concord such a position, information technology has a significantly negative affect on business firm value, as suggested past other authors (Li & Srinivasan, 2011; Miralles-Marcelo et al., 2014; Villalonga & Amit, 2006). These findings, together with those reported in Tables vi and 7, corroborate the idea that founders are a central element in family businesses. When a founder holds a controlling position, firm value rises; when they are no longer in such a position, the market stops rewarding the company and instead applies a discount.

These results are related to agency theory, every bit they advise that the founder's successors do non accept the same business organisation vision as the founder. As a event, they could transfer wealth from the company into their individual portfolios, or nepotism in direction could ultimately reduce firm value.

Table 8 includes all variables related to founding-family business firm to show in aggregate form all the individual variables' impacts on firm value. The results are consistent with those in previous tables: (a) founding-family unit ownership has an inverse U-shaped relation with firm value; (b) the presence of the founder in a decision-making position has a positive and statistically significant affect on firm value; (c) the presence of the founder's descendant as the CEO or chairman of the board reduces the value of the firm, which suggests that the market place penalises the divergence of the founder. ¹¹

Founding-family unit-controlled firms, intergenerational succession, and firm value

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Table viii. Combined impact of the founding-family unit variables on house value.

5. Conclusions

In this study, we analysed the impact of founding-family unit command and intergenerational succession on the firm value of nonfinancial Chilean listed companies. This study delved into the definition of a family business organization and focused on founding-family unit control. The concentration of buying of Chilean firms and the dominant ability exercised by Chilean family unit firms through pyramidal structures motivated united states to written report how family ownership diminishes or exacerbates different agency problems. Thus, our work expands the literature on family businesses in Latin America. Nosotros reject other papers' finding of a linear relationship between founding-family unit buying and firm value (Bonilla et al., 2010; Martínez et al., 2007; San Martín-Reyna & Durán-Encalada, 2012) in favour of a quadratic human relationship.

The results evidence that the relationship between founding-family ownership and firm value is not linear but has an inverse U shape. The positive touch on of founding-family ownership on house value becomes negative afterwards a certain bespeak. This means that beyond that point, founding-family ownership gives the family unit the power and incentives to increase personal profits at the expense of the company or the rest of the shareholders. In emerging economies, when decision-making families' ownership stakes are concentrated, they utilise their participation in the management and control of the company to increase their own utility.

We besides respond to the call of Jara et al. (2021) and Torres et al. (2017) by investigating intergenerational succession'southward affect on firm value. Nosotros found that when the CEO or chairman of the board is the founder, firm value increases. This is because in founding-family-owned firms, the founder is aware that they volition hold the position for a prolonged catamenia and has the reputation and wealth of the family in their easily. Consequently, they work efficiently, which boosts firm value. In other words, the marketplace captures this information and awards a premium to the firm's market value. This is consequent with González et al. (2012) finding, regarding a sample of Colombian companies, that the founder, when acting as CEO, improves performance. We thus corroborate the thought that the founder is a key gene in determining the market perception of a company.

Our work has significant implications for regulators and managers of family firms. It is essential to consider that family ownership is non a control mechanism in all contexts. Our prove suggests that loftier ownership concentration destroys house value. Therefore, regulators must anticipate opportunistic behaviour past large controllers and must apply corporate-governance mechanisms. Although Chile has made meaning progress in corporate-governance matters (for example, enacting Law No. 19,705, Police No. 20,382, Dominion No. 341, and Rule No. 385), its legal system yet but weakly protects minority shareholders. Thus, current measures, such as the requirement to have at to the lowest degree one contained director in a large listed company or the requirement to make a public offering of shares when the controller reaches 2-thirds of the voting shares, seem insufficient to limit the power (and change the incentives) of big shareholders to extract wealth from the rest of the shareholders and minority claimants.

Our research also contributes to the work of fiscal managers. Equally mentioned above, the power that comes with a high degree of family ownership and the pursuit of financial and personal benefits diminishes a company'due south market valuation. Therefore, the want to pass on the family unit's source of income to the next generations is jeopardised. Additionally, the results provide an incentive to design more value-focused strategies of intergenerational succession. Specifically, nosotros propose that professional managers who are external to the family but accept the necessary tools and capabilities to pb the company should prevail over family members who see the company as but a wealth generator.

Our results are equally applicative to other emerging economies with similar characteristics. For instance, family firms are the almost common blazon of visitor also in Latin American countries (Poletti-Hughes & Williams, 2019). Additionally, near countries in Latin America exhibit high ownership concentration and weak investor protection (Chong & Lopez-De-Silanes, 2007). The nonlinear relationship of family interest and various financial aspects has already been tested for in emerging economies—for example, Poletti-Hughes and Williams (2019) for Mexico, Duran and Ortiz (2020) for Chile, and Hegde et al. (2020) for India.

The major limitations of this research are related to the inadequacy of information on, for example, specific attributes of intergenerational succession and its implications for the value of Chilean firms, such equally educational activity level of the descendant, whether they are a blood relative or an in-police, and the descendant's gender, age, and transactions with related parties. These aspects have not been explored yet for Chilean companies, which consequently presents a futurity research opportunity. Another unexplored field concerns family unit relations inside and between companies and how family ties extend to the lath of directors or direction. Our analysis assumes families are not engaging in empire edifice and that the families controlling different companies are not related. The assumption of independent founding families may not apply to Chile given the existence of family business organization groups and given their networking (Saona et al., 2018). Hence, further analysis might shed light on the power that families may take when their networks extend beyond immediate family members.

1 The Commission for the Financial Market is the main financial-marketplace regulator in Republic of chile (www.cmfchile.cl).

2 Daspit et al. (2016) supply a comprehensive and insightful literature review on management succession in family firms as supported by social-exchange theory. The authors primarily deal with intrafamily succession from parents to offspring, but they also deal with management succession involving other stakeholders in family firms.

3 This is a authorities agency that records data regarding vital matters such as births, deaths, marriages, identity, and nationality.

4 According to the Santiago Stock Exchange's 2019 almanac report, the market place capitalisation in 2019 was US$205.798 meg. Our sample amounted to a marketplace capitalisation of US$160.480 million in that fiscal year.

5 According to the Santiago Stock Substitution's 2019 annual report, there were 203 listed companies on the main exchange of Chile that year. Our sample includes 160 publicly listed companies.

vi Four steps were taken to place the controllers of founding-family firms. The first stride was to request the articles of incorporation of listed firms from the Documentary Center of the Commission for Financial Market. In doing and then, we were able to determine the name(s) of the founder(s). The second step was to draw upwardly the family tree of the family unit. For this, we used information from the visitor's website and almanac report and from the Civil Registration and Identification Service (a Chilean public entity that provides information on civil status, births, marriages, and deaths, among other things). The tertiary step was to review the almanac reports to identify the decision-making shareholder. Finally, the fourth step was to institute whether the controlling shareholder (step 3) was the founder (footstep ane) or a member of the founding family (pace 2). This methodology is comparable with that in previous literature focused on economies with high buying concentration (Briano-Turrent et al., 2020; Caprio et al., 2011; García-Ramos & García-Olalla, 2011; Jong & Ho, 2019; Poletti-Hughes & Williams, 2019; Samara & Berbegal-Mirabent, 2018).

seven The family unit-firm variable identifies companies controlled by a family unit, regardless of whether it is the founding family unit.

8 Given that the original Arellano and Bond (1991) estimation system can perform poorly if the ratio of the variance of the console-level consequence to the variance of the idiosyncratic error is too large (López-Iturriaga & Santana-Martín, 2015), Arellano and Bover (1990) and Blundell and Bail (1998) adult the ii-stage GMM-SE, which improves on the original Arellano and Bail (1991) technique by expanding the musical instrument lists to include instruments in levels and instruments in differences.

ix Past structure, increases equally default risk decreases and vice versa.

10 The farthermost indicate of 39.31 percent of OWNFOUNDFAM is computed when the regression in model i, tabular array 5 is optimised by calculating the first derivative of VALUE1 with respect to OWNFOUNDFAM. Hence, model 1 would be expressed equally VALUE1 = iv.4387 + 3.1938 ×OWNFOUNDFAM − 4.0622 ×OWNFOUNDFAM ² + other variables. And once it is derived with respect to OWNFOUNDFAM and equalised to 0 to optimize VALUE1, it takes the grade ∂ VALUE1 / ∂ OWNFOUNDFAM = 3.1938 − (two)4.0622 ×OWNFOUNDFAM = 0. Finally, solving for, OWNFOUNDFAM, we obtained the extreme point at which VALUE1 is maximised: 39.31 per centum.

eleven Nosotros used fixed furnishings (FE) and feasible generalised least squared (F-GLS) models as culling econometric approaches for robustness checks. The FE model allowed us to deal with the time-invariant heterogeneity of firms in the sample, and the F-GLS model addressed pocket-size heteroskedasticity problems in the Iron outputs. Overall, the results were qualitatively comparable with those reported using the GMM-SE method.

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Source: https://www.tandfonline.com/doi/full/10.1080/1331677X.2021.1986673

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