Original Article

Influence of Family Ownership Global Business Review

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and Governance on Performance: © 2020 IMI
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DOI: 10.1177/0972150919880711
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Aman Srivastava1
Shikha Bhatia1

Abstract
This study examines how firm performance is impacted by family ownership and governance in an
emerging market. Employing a panel data set of listed companies from National Stock Exchange (NSE)
of India for the period 2011–2017, this study analyses the relationship between family ownership and
firm performance while controlling for variables like impact of external environment and characteristics
of firms. The performance of firms is measured by accounting measures of performance and Tobin’s
Q. The findings of this study suggest that family ownership and firm performance have a nonlinear
relationship and family ownership has a positive impact on firm performance till a certain point and
after that it starts affecting firm performance negatively. This study also finds that family involvement in
governance positively affects the firm performance.

Keywords
Family ownership, family firms, ownership structure, firm performance, corporate governance

Introduction
Family-managed listed corporations have existed for long across the globe. These firms have played a
significant role in economic development by employment generation, wealth creation and industrialization
(Dharmadasa, 2014). Claessens and Yurtoglu (2013), while investigating the corporate governance
issues and their impact on firm performance, highlighted the importance of family firms. These firms
play an important role and represent a dominant form of ownership in both developed and emerging
markets. LaPorta et al. (1999) reported that around 30 per cent of firms across the world are controlled
by families. In the USA, family firms constitute one-third of the firms (Anderson & Reeb, 2003;
Villalonga & Amit, 2006). Likewise, in Europe, family firms constitute over 40 per cent of the listed
corporations (Faccio & Lang, 2002). However, in East Asian economies, the number of family firms
goes up to two-third (Claessens, Djankov, & Lang, 2000). The existence of such large proportion of
family firms across the globe has led to research on influence of family ownership on performance of

1
International Management Institute, New Delhi, India.

Corresponding author:
Shikha Bhatia, International Management Institute, New Delhi, Delhi 110016, India.
E-mail: shikha.bhatia@imi.edu
2 Global Business Review

listed firms (Anderson & Reeb, 2003; Barontini & Caprio, 2006; Daily & Dollinger, 1992; Demsetz &
Lehn, 1985; Miller, Le Breton-Miller, Lester, & Cannella, 2007; Villalonga & Amit, 2006). The attempts
to explore and examine the relationship of family ownership and involvement with firm performance
have given mixed and inconclusive findings, with studies reporting positive, negative or neutral
relationship between family ownership and firm performance (refer to Table 1 for details). Many studies
document that family involvement creates value for shareholders (Anderson & Reeb, 2003; Chu, 2011;
Dyer, 2006; Kowalewski, Talavera, & Stetsyuk, 2010; Maury, 2006; Pindado, Requejo, & de la Torre,
2008; San Martin-Reyna & Duran-Encalada, 2012; Silva & Majluf, 2008). Contradicting this evidence,
many studies claim that listed family firms do not outperform non-family firms (Filatotchev, Lien, &
Piesse, 2005; McConaughy & Phillips, 1999; Miller et al., 2007). Research attempts have been made to
identify the reasons for such contradictory evidence, concluding that most research evidence has failed
to capture the relationship between family firms and their performance (Dyer, 2006). Divergence in
findings is also found in performance of firms where family is involved in governance. Such conflicting
results may be attributed to differences in definition of family firm, sampling techniques and variables
used, time periods and methodologies applied.
Given the inconclusive findings on performance of family firms, this study contributes to the literature
of family firms in an emerging market dominated by a mix of some family-owned businesses and modern
professional non-family-owned corporations with evolving institutional and regulatory structure. This
study aims to examine two specific issues. The first is the examination of effect of family ownership on
firm performance. The second is the investigation of the impact of family involvement in governance
and succession on firm performance. This study finds that family firms have superior performance.
However, family ownership improves firm performance only up to a certain level, beyond which it is
found to adversely affect firm performance. This implies that family ownership in a firm is beneficial
due to stewardship effect and reduced agency costs till an inflection point only and all the benefits
become counter bearing once this point is breached. As for the family’s involvement in governance,
return-based performance measures display superior performance, but the market value is not significantly
impacted. This has an important implication that although the presence of family members on board may
be helping the firm generate better returns, the market may not conceive the positive benefits and price
the share accordingly.
The remainder of this article is organized along the subsequent lines. The second section presents the
theoretical framework and literature review; the third section discusses the data, variables and
methodology; the fourth section discusses results and analysis; and the fifth section presents concluding
remarks and implications.

Theoretical Framework and Literature Review

Although a vast body of literature has examined the family firms, there exists no consensus on issues like
constitution of family firms and performance of family firms. These studies have taken divergent views
on what constitutes the family firms. Anderson and Reeb (2003) defined family firms as having equity
ownership and presence of family member on board. Some studies only recognize specific percentage of
family ownership and voting rights to define family ownership (Andres, 2008; Barontini & Caprio,
2006; Bhatia & Srivastava, 2017; Bjuggren & Palmberg, 2010; Cai, Luo, & Wan, 2012; Chu, 2011; Jiang
& Peng, 2011; Maury, 2006), while other studies additionally define family firms with a founder family
member or its descendent in active control as CEO (Block, Jaskiewicz, & Miller, 2011; Cai et al., 2012;
Gill & Kaur, 2015; Lee, 2006; McConaughy, Walker, Henderson, & Mishra, 1998; Villalonga & Amit,
Srivastava and Bhatia 3

2006). Likewise, past research has documented divergent effects of family ownership on firm
performance. As can be seen from Table 1, a strand of literature provides evidence of family firms
performing better than non-family firms. Such divergent findings of effects of family involvement on
firm performance create unique paradoxical conditions for firms, as they are not sure of the effects of
ownership and governance dynamics on firm performance. It is therefore important to understand the
theoretical foundations that explain positive, negative or neutral effects of family ownership and control
on firm performance. Agency and stewardship theory form the main theoretic base for all studies on the
themes examining the relationship between family ownership and firm performance.
The theory of agency costs was propounded by Jensen and Meckling, 1976 wherein they document
the conflicts of interest between managers and shareholders. The conflicts between managers and owners
are found to ascend because of their divergent goals, which arise due to separation of ownership and
control. The managers many a times focus more on their personal goals even at the cost of company’s
goals; such divergence arises due to information asymmetry, as managers have better idea of risks,
expected profitability and growth opportunities. Agency theory prescribes need for monitoring managers'
behavior and aligning their interests with those of owners (Fama & Jensen, 1983). Conversely,
stewardship theory proposes that managers are naturally pro-organizational and act as stewards of
business rather than seeking to accomplish their own goals (Davis, Schoorman, & Donaldson, 1997). In
family firms, the managers being owners may assume a role of steward and work towards firm goals
rather than individual ones and many a times such owner-managers may become altruistic and may even
forego personal goals in favour of those of organization (Corbetta & Salvato, 2004). It is imperative to
understand the subtleties of agency cost and stewardship theories in an emerging market context, to find
out the real relationship between family ownership and firm performance. To clearly comprehend the
influence of family on firm performance, evidence on family involvement in ownership and governance
is separately examined and hypothesized.

Family Ownership and Firm Performance

Evidence on agency cost for family-owned firms is mixed, Anderson and Reeb (2003), Maury (2006),
Villalonga and Amit (2006), and San Martin-Reyna and Duran-Encalada (2012) documented that family-
owned firms have fewer agency problems and better performance. Conversely, DeAngelo and DeAngelo
(2000), Gomez-Mejia, Nunez-Nickel, and Gutierrez (2001), Morck, Wolfenzon, and Yeung (2005), and
Schulze, Lubatkin, and Dino (2003) found that family ownership enhances agency problems and reduces
firm performance. It may be due to family oligarchic control (Morck et al., 2005), altruistic nepotism
(Schulze et al., 2003) or focus on private benefits (DeAngelo & DeAngelo, 2000).
For a family firm, the stewardship theory is found to be more relevant as managers and owners being
the same, the focus is ought to be on achievement of firm goals (Corbetta & Salvato, 2004). In fact,
Corbetta and Salvato (2004) and Eddleston and Kellermanns (2007) found that family firm owners are
rather highly altruistic and even sacrifice their own interests for achievement of business goals.
Accordingly, family firms which are still managed by the owners should find goal congruence and their
management would lead to suppression of agency costs (Corbetta & Salvato, 2004; Miller & Le Breton-
Miller, 2006). Thus, based on stewardship theory, family-owned firms are expected to outperform the
non-family firms, nevertheless, such benefits may not arise for all family firms and would be restricted
to the ones wherein family members act as stewards (Corbetta & Salvato, 2004; Eddleston & Kellermanns,
2007; Miller & Le Breton-Miller, 2006). Based on the evidence in literature on agency and stewardship
theories, family ownership is expected to enhance firm performance. It is thus hypothesized that there is
a positive relationship between family ownership and firm performance.
Table 1. Family Involvement and Firm Performance

Do Family Firms Demonstrate

Author(s) Country Year Sample Period Dimension of Family Ownership Dependent Variable Superior Performance?
Anderson and USA 2003 403 firms from S & 1992–1999 1. Fractional equity ownership 1. ROA (EBITDA) Yes
Reeb P 500 2. Family presence in board of 2. ROA (Net
directors Income)
3. Tobin’s Q
Andres Germany 2008 Frankfurt stock 1998–2004 1. 25% or more voting shares 1.Tobin’s Q, Yes (but only for firms where
exchange, 275 firms held by founders and/or family 2.Returns on Assets founding family is active in
2. If family ownership is less (EBITDA) executive or supervisory board)
than 25%, they are represented 3.Returns on Assets
in executive or supervisory (EBIT)
board
Barontini and 11 2006 675 corporations 1999–2001 More than 10% ultimate voting 1.Tobin’s Q Yes (descendant managed firms
Caprio Continental in 11 countries in rights and cash-flow rights of 2. ROA do not demonstrate superior
European continental Europe, the largest shareholder. performance)
firms excluding Ireland and
UK
Bhatia and India 2017 179 companies from 2003–2015 Fractional equity ownership 1. ROA No (curvilinear relationship
Srivastava S&P BSE 500 index 2. ROE between promoter holding and
3. Tobin’s Q firm performance is reported)
Bjuggren and Sweden 2010 110 companies from 1999–2005 Family member is the largest Marginal Q Yes (when ownership and
Palmberg Stockholm stock shareholder or controls control are aligned)
exchange minimum 20% of outstanding
shares
Block et al. USA 2011 Standard and Poor’s 1994–2003 1. Fractional equity ownership Tobin’s Q Yes (for family ownership
500 2. Role in top management (market-to-book and not significant for family
value) management)
Cai et al. China 2012 351 firms listed 2004–2007 1. Presence of Family CEO 1. Tobin’s Q Yes
on Shanghai and 2. Family or individual holding 2. ROA
Shenzhen stock at least 20% of control rights
exchanges of firm
Chu Taiwan 2011 786 firms listed 2002–2007 Family shareholding ROA Yes (but effect diminishes when
on Taiwan stock family members are not involved
exchange and over- in management and control)
the-counter securities
exchange market
(Table 1 Continued)
(Table 1 Continued)
Do Family Firms Demonstrate
Author(s) Country Year Sample Period Dimension of Family Ownership Dependent Variable Superior Performance?
Daily and USA 1992 186 manufacturing Family or key relatives working 1. Size Yes
Dollinger firms in the firm 2. Growth
3. Margins
4. Perceived
Performance
Dharmadasa Sri Lanka 2014 151 Firms from 2011–2013 Family members individually 1. ROA Yes (for Japan but negative
and Japan Colombo stock or jointly hold at least 20% 2. ROE relationship for Sri Lanka)
exchange and Tokyo of voting stocks and the
stock exchange president or chairperson had
a relationship with the given
family.
Gill and Kaur India 2015 231 companies from 2006–2010 1. Fractional equity ownership 1. ROA Yes
S&P BSE 500 Index 2. CEO is the founding family 2. Tobin’s Q
member of descendant of the
family
3.Family presence in board of
directors
Jiang and Peng 8 Asian 2011 744 large listed family 1996 Family and/or its members are Cumulative stock Yes (however, there is mixed
countries firms and 688 listed largest owner(s) holding at least return evidence for large firms)
(Hong family firms 5% of control rights
Kong,
Indonesia,
Philippines,
Singapore,
South
Korea,
Taiwan and
Thailand)
Kowalewski Poland 2010 217 Polish firms 1997–2005 1. Family has legal control over 1.ROE Yes (for firms with family CEOs)
et al. voting rights 2.ROA
2. Founder or descendant runs
the company
(Table 1 Continued)
(Table 1 Continued)
Do Family Firms Demonstrate
Author(s) Country Year Sample Period Dimension of Family Ownership Dependent Variable Superior Performance?
Lee USA 2006 Standard and Poor’s 1992–2002 1. Equity ownership 1. Employment Yes
500 2. Family presence in board of growth
directors 2. revenue growth
3. CEO is the founding family 3. gross
member of descendant of the income (before
family taxes)
4. growth
5. netprofit
margin
Maury Western 2006 1672 firms from 13 1998 Family controlling 1. ROA Yes (only for active family
Europe Western European shareholder holding at 2. ROE controlled firms)
countries least 10% of the voting 3. Tobin’s Q
rights
McConaughy USA 1998 The BusinessWeek 1986–1988 Public corporations in which 1. Market-to-book Yes
et al. CEO 1000 founders or members of the equity ratios
founder’s family are CEOs 2.market returns
McConaughy USA 1999 175 listed firms 1986–1988 Founding family has active 1. ROE No (descendant controlled
and control 2. Profit Margin firms demonstrate superior
Phillips 3. ROE performance)
Miller et al. USA 2007 Fortune 1000 firms 1996–2000 Multiple members of the same Tobin’s Q No
and 100 smaller family are involved as major
public owners or managers
Companies
Villalonga and USA 2006 Fortune 500 firms 1994–2000 1. Fractional equity ownership 1. ROA Yes (only when founder is the
Amit 2. Family presence in board of 2. Tobin’s Q CEO or Chairman)
directors
3. CEO is the founding family
member of descendant of the
family
Source: Compiled from various studies.
Srivastava and Bhatia 7

The relationship between family ownership and firm performance may not always be linear. Based on
agency theory, it is expected that family-owned firms will have lower agency costs; however, very high
levels of ownership concentration may cause family opportunism, which may bring down performance
(Anderson & Reeb, 2003; Maury, 2006; Pindado, Requejo, & De La Torre, 2011). According to Anderson
and Reeb (2003) and Kowalewski et al. (2010) firm performance is enhanced for family-owned firms till
ownership reaches a tipping point and increase in ownership beyond this point will be counterproductive
and will lead to a decline in performance. Furthermore, stewardship theory also postulates that benefits
of family ownership for enhanced firm performance will accrue only if the owner-managers act as
stewards of the business (Andres, 2008; Pindado et al., 2011). Based on these arguments, it is hypothesized
that the relationship between family ownership and firm performance is not linear, rather it is curvilinear,
implying that initially, with an increase in family ownership, firm performance will improve but beyond
a level, further increase in ownership would cause firm performance to decline.
Documented evidence suggests that family firms’ age may have a bearing on their performance. With
passage of time, positive effects of family ownership erodes and this becomes more pronounced with
subsequent generation taking control (Anderson & Reeb, 2003; Block et al., 2011; Villalonga & Amit,
2006). Anderson and Reeb (2003) and Villalonga and Amit (2006) find that as compared to older firms,
the younger listed family firms are more likely to have a positive effect on firm performance. With
family expansion over a period of time, increase in nepotism and entrenchment effect, the family firms
may witness an increase in agency costs (Anderson & Reeb, 2003; Block et al., 2011; Miller et al., 2007;
Villalonga & Amit, 2006). This may further give rise to non-transparent activities aimed at private gains
and may create conflicts between different sets of family owners. Furthermore, the stewardship
advantages of family owners may fade with time as a business moves to the next generation of owners.
It is thus hypothesized that younger family firms perform better than their older counterparts.

Family Involvement in Governance and Firm Performance

Family involvement in governance of listed firms may affect its performance, as family owner’s
representation on board may allow family to wield control over the business (Anderson & Reeb, 2003;
Giovannini, 2010). In the presence of conflicting evidence on effects of family involvement in governance
and firm performance, many studies suggest that family firm’s boards should have independent directors
so that the interests of non-family shareholders are protected (Anderson & Reeb, 2003). On the contrary,
Lee (2006) and Miller et al. (2007) claimed that family presence in board is healthy and such positive
impact of family representation on board is more pronounced during the founder generation. Besides, the
stewardship theory also propounds that family involvement in governance leads to better performance
(Andres, 2008; Chu, 2011; Giovannini, 2010). Many studies also report a strong influence of founders
on board on firm performance (Andres, 2008; Lee, 2006; Miller et al., 2007). It is thus hypothesized that
family board representation on founder generation positively affects the firm performance. Although
most of the studies document a positive influence of founder presence on board and firm performance
(Andres, 2008; Lee, 2006; Miller et al., 2007), it is expected that such benefits may continue to be
available to family firms in subsequent generations’ board representation as well. Based on stewardship
theory, it is expected that, family presence in board of directors accentuates firm performance (Chu,
2011; Giovannini, 2010) as family owners acting as stewards of the business will try to reduce conflicts
and add to long-term orientation of the firm (Giovannini, 2010). It is thus hypothesized that family
presence in board in subsequent generations positively affects the firm performance.
8 Global Business Review

It is worth exploring the influence of dual role of Chair and CEO observed by family owners on firm
performance. Agency theorists believe that separation of ownership and control reduces agency conflicts
and thereby suggest that separate individuals should assume the role of Chair and CEO (Millstein &
Katsh, 2003). However, those supporting stewardship theory posit that firms where family owner takes
the dual role of Chair and CEO perform better, as there is concentration of decision-making in one hand
(Donaldson & Davis, 1991; García-Ramos & García-Olalla, 2011). Braun and Sharma (2007), examining
UK family firms, did not find support between Chair–CEO duality and firm performance but construed
that the dual role would allow the family owner to act as a steward and manage the business more
effectively and in interest of all owners. It is thus hypothesized that family involvement in governance
through assuming duality role positively affects firm performance.

Objective and Rationale of Study

This study investigates the performance of family firms in an emerging market setting. It specifically
aims at discerning how family ownership and family involvement in governance impact the firm
performance and firm value.

Data and Methodology

This study draws data from the top 500 companies by market capitalization as represented by Nifty 500
index of National Stock Exchange (NSE) of India. Nifty 500 covers large business organizations with
diverse industry backgrounds and represents more than 95 per cent of market capitalization on NSE. To
control for drastic differences in capital structure in the sample, financial firms, utilities and public sector
undertakings have been excluded. Furthermore, companies with incomplete and illogical data have been
excluded, resulting in a final sample of 179 firms belonging to 18 different Industries. A panel data of
selected companies has been analysed for the period 2011–2017. Two sets of data were required for this
study, the family ownership and governance data and the financial data. The first set of data was collected
from annual reports of the sample companies. All financial data had been extracted from the Ace Equity
database maintained by Accord Fintech Pvt. Ltd., which has share price data and historical financial data
of more than 38,000 companies for more than 15 years.

Method
With the objective of investigating the influence of family ownership and governance on firm
performance, this study uses the model proposed by Anderson and Reeb (2003).

Yit = a0 + a1 X1it + a2 X2it + a11-17 X3t + εit

where
Yit = firm performance represented by ROA, ROE and Tobin’s Q
X1it = Family firm, binary variable that take value of ‘1’ when the founding family is present in firm
(as defined earlier) and ‘0’ otherwise
Srivastava and Bhatia 9

X2it = control variables (size, age, leverage, growth opportunities and risk of firm)
X3t = Year dummy variables, one for each year of sample period
Literature also documents the presence of nonlinear relationship between family ownership and firm
performance (Anderson & Reeb, 2003; Morck, Shleifer, & Vishny, 1988). In order to examine the same,
family ownership and squared family ownership were taken as independent variables in the panel data
regression model. Furthermore, effect of family involvement in firm’s governance on firm performance
has been examined by employing three linear regression models using duality, family succession and
family representation on board as proxies for family involvement in governance.
Based on the literature, a set of dependent, independent and control variables has been identified and
employed in the study. The variables used in the study and their definition are shown in Table 2.
Both accounting and market-based measures of firm performance are considered as dependent
variables. In line with previous studies, this study employs EBITDA-based return on asset (ROA) and
net income-based return of equity (ROE) as accounting performance measure. Tobin’s Q has been used
as market-based measure of performance. Tobin’s Q is calculated by dividing market value of firm (MV)
by total assets (TA).
This study follows the definitions proposed by Anderson and Reeb (2003) for defining a family firm
(fractional equity ownership of family and family representation on board). In this study, family firms
are differentiated from non-family firms by introducing a dummy variable that equals to one if family
has 10 per cent or more equity ownership and at least two-family member representation on board.
Additionally, different proxies like fractional equity ownership of promoter’s family and squared family
ownership have been included for family ownership. The dummy variable was included to define age of
the firm as old or young. In order to examine family governance dummy variables for family board
representation, family succession and CEO duality were also included.
Based on the determinants of profitability of family firms as recognized by literature (Anderson &
Reeb, 2003; Villalonga & Amit, 2006), a set of control variables has been identified, which account for
differing firm- and industry-specific characteristics. This study includes size of the firm (natural log of
total assets), growth opportunities (capital expenditure over sales), leverage (debt over total assets), firm’s
age (natural log of age since incorporation of firm) and risk profile of firm (volatility of monthly stock
returns of last 5 years) as control variables. The description of these variables is provided in Table 2.

Table 2. Variable Description

Variable Label Description

Dependent
Return on assets (EBITDA) (%) ROA EBITDA divided by operating assets
Return on equity (%) ROE Net Income divided by shareholders equity
Tobin’s Q TQ Market value of firm divided by total assets
Independent
Family firm FF Dummy variable taking the value of 1, if the firm is a
family firm and 0 otherwise
CEO duality DUA Dummy variable taking the value of 1, if CEO is also
the chairman
Family ownership (%) FO Fractional equity ownership of promoter’s family
Family board representation FBR Dummy variable taking the value of 1 when at least two
board members are present in board
(Table 2 Continued)
10 Global Business Review

(Table 2 Continued)
Variable
Young family firm
Old family firm
Family succession
Non-family succession
Control Variables
Growth opportunity
Leverage
Stock return volatility
Firms size
Firm’s age
Source: The authors.
Label Description
YFF Dummy variable taking the value of 1, if the firm is a
family firm with less than or equal to 20 years of age
OFF Dummy variable taking the value of 1, if the firm is a
family firm with greater than 20 years of age
FS Dummy variable taking the value of 1 in a family firm, if
a family member succeeds as CEO
NFS Dummy variables taking the value of 1 in a family firm,
if a non-family member succeeds as CEO
GO Capital expenditure divided by sales
LEV Debt divided by total assets
SRV The standard deviation of monthly stock deviation of
monthly stock returns for the prior 5 years
SIZE The natural log of total assets of the firm
AGE The natural log of the number of years since the firm’s
incorporation

Robustness and Specification Test

This study performed various robustness and specification tests for validating the results. Multiple times,
regressions were run by changing various proxies for independent variables to test for endogeneity and
regressions were performed using random effect among the other tests. This study also included various
proxies for independent variables and different combinations of the core regressors to test the robustness
of estimated coefficients. In addition, specification tests were performed to ensure the proper specification
of the proposed model. The unit root tests were conducted to test stationarity of data and the Hausman
test was used to test the consistency of random model.
Residuals of reduced form of regression were extracted to test for endogeneity against the supposed
endogenous variables. Further, the regressions using residuals were run and no endogeneity was found.

Analysis
Table 3 presents descriptive statistics of the key variables for the study. The average and median
profitability levels are higher for all firms, with the maximum values of ROA and ROE being 57 per cent
and 73 per cent, respectively, while the minimum values being –8 per cent and –42 per cent, respectively.
For market measure, Tobin’s Q maximum and minimum value were 13.63 and 0.22, respectively, with
average value of 2.18. These results indicate that significant dispersion is observable among the
performance measures. Growth opportunities, leverage, stock return volatility, size and age have mean
values of 0.13, 0.28, 0.18, 9.18 and 3.49, respectively.
Srivastava and Bhatia 11

Table 3. Descriptive Statistics for Family and Non-family Firms

Mean Median Maximum Minimum Std Dev.

ROA 0.16 0.15 0.57 –0.08 0.09
ROE 0.08 0.06 0.73 –0.42 0.09
TQ 2.18 1.42 13.63 0.22 1.91
GO 0.13 0.07 5.34 –0.01 0.28
LEV 0.28 0.30 0.82 0.00 0.19
SRV 0.18 0.14 0.70 0.06 0.12
SIZE 9.18 9.05 13.13 5.51 1.42
AGE 3.49 3.40 4.73 1.79 0.63
Source: The authors.

Table 4 exhibits the differences in mean values in each key variable for family and non-family firms.
The difference between mean tests was performed to examine the performance of family and non-family
firms. Based on the average values, there appears to be no significant difference between the financial
performance of family and non-family firms in India. However, these are preliminary indicators and
nothing definite can be concluded based on the mean value of indicators and a more detailed analysis is
required to draw meaningful conclusions.
The correlation matrix presented in Table 5 displays that correlation between family ownership is
very low with all measures of firm performance. In fact, family ownership has negative but low
correlation with stock return volatility. Chair–CEO duality and family board representation have low and
negative correlation with measures of firm performance. All measures of performance have positive and
strong correlation among themselves. Furthermore, return on assets, return on equity and Tobin’s Q have
a negative correlation with firm size, leverage and growth opportunities. The low coefficient of correlation
suggests that the estimates and models employed are not affected by problems of multicollinearity.

Table 4. Difference of Mean Tests Between Family and Non-family Firms

Non-family Firms Family Firms t-Statistic

ROA 16.00% 15.93% 0.091
ROE 7.30% 8.14% –1.229
TQ 2.22 2.10 0.869
GO 0.75 0.16 3.115**
LEV 0.26 0.32 –3.832**
SRV 0.17 0.19 –1.194
SIZE 9.27 9.14 1.145
AGE 3.43 3.44 –0.063
Source: The authors.
Note: * significant at 1% level.
12 Global Business Review

Table 5. Correlation Matrix

FO ROA ROE TQ AGE SIZE LEV SRV GO DUA FBR

FO 1 0.04 0.03 0.08 0.12 0.08 0.03 –0.02 0.02 0.05 0.09
ROA 1.00 0.81 0.70 0.00 –0.34 –0.62 –0.11 –0.17 –0.07 –0.01
ROE 1.00 0.60 0.07 –0.26 –0.71 –0.16 –0.14 –0.05 –0.01
TQ 1.00 –0.03 –0.30 –0.54 0.04 –0.13 –0.16 –0.08
AGE 1.00 0.08 –0.08 –0.06 –0.13 –0.09 –0.08
SIZE 1.00 0.34 0.13 0.16 –0.05 –0.12
LEV 1.00 0.08 0.25 0.19 0.18
SRV 1.00 –0.03 0.04 0.03
GO 1.00 0.14 0.02
DUA 1.00 0.35
FBR 1.00
Source: The authors.

Family Ownership and Firm Performance

The results of effect of family ownership on firm performance measured through return on assets, return
on equity and Tobin’s Q are presented in Table 6. In case of accounting measures of performance, family
ownership is found to have strong and positive influence on firm performance, implying that family
ownership reduces agency conflicts. Family-owned firms generally have long-term focus and are thus
more stable (Anderson & Reeb, 2003; Block et al., 2011). The strong positive influence of family
involvement in ownership corroborates the prior research in this field (Anderson & Reeb, 2003; Andres,
2008; Block et al., 2011; Miller et al., 2007; Poutziouris, Savva, & Hadjielias, 2015). These findings
provide support to hypothesized positive relationship between family ownership and firm performance.
However, family ownership concentration is not found to have a significant impact on firm’s market
performance. Although there is a significantly positive impact of family firms on firm performance, the
same does not reflect in the market performance of the firm. Such disparity may be attributed to the fact
that market does not positively perceive family firms as they anticipate agency problems and corporate
governance issues (Poutziouris et al., 2015). Firm accounting and market performance measures are
found to be negatively impacted by leverage, stock return volatility, firm size and age, while firm growth
opportunities positively affect firm performance. Leverage, which represents firm’s financial risk,
negatively affects the firm performance as increase in use of debt would negatively affect profitability as
it would increase interest cost (Arora & Bodhanwala, 2018). Likewise, stock return volatility is a function
of perceived risk of the firm and has been found to negatively affect firm performance. As family firms
grow in size, the specific benefits of cohesive family unit also start to fade and cause the firms to witness
deterioration in performance. Existence of growth opportunities allow the firms to get better returns as
is evidenced by the positive and significant coefficient of growth opportunities.
In order to examine the effect of family firm’s age on its performance, this study includes two dummy
variables for young family firm and old family firm. The family-owned firms with age of less than or
equal to 20 years are categorized as young family firms, while those family-owned firms with age of
more than 20 years are classified as old family firms. Columns two, four and six of Table 6 exhibit the
Srivastava and Bhatia 13

results of regression where the dummy variables for young and old firms have been used to determine
the specific effects of age of family firms on its performance. The older firms are found to have a
negative effect on accounting measures of firm performance, while younger firms have a positive
influence on firm performance as measured by accounting indicators. This implies that younger family
firms have better performance than non-family firms but older firms where the descendants take charge
of operations may witness a decline in performance due to rise in nepotism and entrenchment effect,
thereby increasing agency costs (Anderson & Reeb, 2003; Block et al., 2011; Miller et al., 2007;
Villalonga & Amit, 2006)

Table 6. Family Ownership and Firm Performance

Variable ROA ROE Tobin’s Q

0.329* 0.296* 0.161* 0.191* 5.245* 3.484*
C
(0.023) (0.037) (0.020) (0.032) (0.035) (0.046)
0.012** 0.027** 0.121
FF
(0.006) (0.005) (0.133)
0.005* 0.005* 0.014** 0.011** 0.124* 0.131*
GO
(0.011) (0.011) (0.009) (0.009) (0.024) (0.024)
–0.288* –0.283** –0.338* –0.322* –5.347 –5.372
LEV
(0.016) (0.016) (0.014) (0.014) (0.381) (0.372)
–0.041* –0.033** –0.079* –0.073* 1.333 1.497
SRV
(0.023) (0.024) (0.020) (0.021) (0.547) (0.544)
–0.007** –0.007** 0.001** –0.001** –0.163* –0.160*
SIZE
(0.002) (0.002) (0.002) (0.002) (0.050) (0.048)
–0.004 –0.0136** –0.002** –0.0019** –0.099 –0.394
AGE
(0.004) (0.008) (0.004) (0.007) (0.105) (0.184)
0.012* 0.010* 0.443
YFF
(0.019) (0.017) (0.443)
–0.041* –0.021* –0.321
OFF
(0.020) (0.017) (0.449)
Adjusted R2 0.418 0.423 0.542 0.518 0.315 0.325
Source: The authors.
Note: ** and * significant at 1% and 5% level, respectively.

Table 7. Nonlinear Relationship Between Family Ownership and Firm Performance

ROA ROE Tobin’s Q

Intercept 0.201* 0.091** 0.501*
FO 0.049** 0.050** 0.010**
FO2 –0.080** –0.084** –0.012**
GO –0.028** –0.011* 0.059**
LEV 0.007* –0.046* 0.029*
SRV –0.046** –0.050** –0.018**
(Table 7 Continued)
14 Global Business Review

(Table 7 Continued)
ROA ROE Tobin’s Q
SIZE 0.008* 0.009* 0.020**
AGE –0.011** –0.01* 0.006*
Adjusted R 2
0.418 0.520 0.326
Inflection point 31% 30% 42%
Source: The authors.
Note: ** and * significant at 1% and 5% level, respectively.

Nonlinear Relationship Between Family Ownership and Firm

Performance
Literature documents the presence of nonlinear relationship between family ownership and firm
performance (Anderson & Reeb, 2003; Bhatia & Srivastava, 2017; Morck et al., 1988). Existence of
nonlinear relation between firm performance and family ownership was proposed by Morck et al. (1988)
and further evidence was provided by Anderson and Reeb (2003). To examine the existence of nonlinearity
in the relationship, percentage of family ownership and square of family ownership are employed in the
regression model. Table 7 reports the results or nonlinear model. The results depict that the relationship
between firm performance and family ownership is nonlinear. Initially, increase in family ownership
positively affects the financial performance of a firm till a point, called point of inflection, after which
further increase in family ownership negatively affects the firm performance. The point of inflection
where positive effect of family ownership on firm performance starts tapering is approximately 30 per
cent for accounting measures of performance and 42 per cent for market measure of performance. Thus,
the findings suggest that the relationship of firm performance with family ownership is curvilinear.
These findings are in line with Anderson and Reeb (2003), who reported the points of inflection at 27.6
per cent and 30.8 per cent for accounting measure and market measure of performance, respectively. The
hypothesis of curvilinear relationship between family ownership and firm performance is proved from
the results.

Family Involvement in Governance and Succession and Firm Performance

To examine the impact of family involvement in governance and succession, family board representation
and role of duality (family CEO–Chair) have been introduced in the models. Effect of family involvement
in governance through family representation on board on firm performance is further examined. The
findings show positive impact of family board representation on return on assets and return on equity;
however, the results are insignificant for market measure of performance. Family involvement in
governance allows firms to focus on long-term shareholders’ interests. This study thus partially provides
support to hypothesis of positive relationship between family involvement in governance and firm
performance. Furthermore, column one for each performance measure presents the effect of CEO–Chair
Duality on firm performance. It can be observed that duality positively affects accounting measures of
performance; however, the results are negative but insignificant for Tobin’s Q. This suggests that
although the firm performance is improved when family owner assumes the dual role of both CEO and
Srivastava and Bhatia 15

Chairman, the market value of firm declines due to perceived agency problems and corporate governance
issues by outsiders (Poutziouris et al., 2015). So, duality can affect firm performance positively from
shareholder’s perspective, but at the same time, it may be negatively perceived in market and may thus
adversely affect firms’ market value. This evidence again provides partial support to the hypothesized
positive relationship between family involvement in governance through CEO–Chair duality and firm
performance. However, family succession impacts are not significant on firm performance measures.

Conclusion and Implications

This study aimed to identify the effects of family involvement in ownership and governance on firm
performance in an emerging market and documents superior performance of family firms, which
corroborates results of prior research in this field (Anderson & Reeb, 2003; Andres, 2008; Maury, 2006;
Poutziouris et al., 2015; Villalonga & Amit, 2006). Better performance of family firms may be attributed
to reduced agency conflicts due to family ownership (Anderson & Reeb, 2003; Miller et al., 2007) and
family owners’ role as stewards (Miller & Le Breton-Miller, 2006). In addition, it has been further found
that such positive performance holds true till a specific level of family ownership only, which points to
a curvilinear relationship. Family involvement in governance and succession also improves firm
performance.
These findings have important implications. This study finds that family ownership and firm
performance follow a curvilinear relationship. This implies that family firms need to understand that
their ownership in the firm can positively influence the performance of the firm but only till a certain
point after which the complexity and costs overcome the expected benefits of stewardship and agency
benefits. So, the family firms need not keep very high levels of ownership and should not increase
beyond the inflection point. It is found that the younger family firms report better performance than the
older performance, which has an important implication. As firms age and ownership passes to the next
generation, benefits of stewardship start to fade. In addition, with increase in family members and
introduction of new members, nepotism and entrenchment effect sets in, thereby increasing agency cost
and reducing the superior performance. So, as firms age and newer generations take control, the family
firms should introduce professional managers and clear transparent standards for corporate governance.

Table 8. Family Ownership and Impact of Succession and Governance

ROA ROE Tobin’s Q

1 2 3 1 2 3 1 2 3
0.329* 0.296* 0.322* 0.164* 0.191* 0.151* 5.608 3.484 5.430
Intercept
(0.024) (0.037) (0.024) (0.020) (0.032) (0.021) (0.542) (0.847) (0.557)
0.006** 0.016** –0.333
DUA
(0.006) (0.005) (0.136)
–0.041* –0.010* –0.322
FS
(0.020) (0.017) (0.450)
–0.013* –0.010* 0.443
NFS
(0.019) (0.017) (0.443)
0.013** 0.021** –0.090
FBR
(0.006) (0.005) (0.131)
(Table 8 Continued)
16 Global Business Review

(Table 8 Continued)
ROA ROE Tobin’s Q
1 2 3 1 2 3 1 2 3
–0.007* –0.005* –0.005* 0.010** 0.013* 0.013* 0.177 0.131 0.115
GO
(0.011) (0.011) (0.011) (0.009) (0.009) (0.009) (0.244) (0.242) (0.243)
–0.284* –0.283* –0.290* –0.330* –0.322** –0.337* –5.098 –5.373 –5.217
LEV
(0.017) (0.016) (0.017) (0.014) (0.014) (0.014) (0.380) (0.372) (0.385)
–0.040* –0.033* –0.042* –0.076* –0.073** –0.073* 1.404 1.497 1.407
SRV
(0.024) (0.024) (0.024) (0.020) (0.021) (0.020) (0.546) (0.545) (0.552)
–0.007** –0.007** –0.007** 0.000** –0.001** 0.001** –0.185 –0.160 –0.175*
SIZE
(0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.050) (0.049) (0.050)
–0.004** 0.014** –0.004** 0.003** 0.002** 0.003** –0.110 0.395 –0.100
AGE
(0.005) (0.008) (0.005) (0.004) (0.007) (0.004) (0.105) (0.184) (0.105)
Adjusted R2 0.414 0.423 0.420 0.526 0.518 0.532 0.319 0.325 0.314
Source: The authors.
Note: ** and * significant at 1% and 5% level, respectively.

Limitations and Scope for Future Research

Although, the research examines the aspects of family ownership and governance on firm performance
in an emerging market, it may suffer from some limitations. The population for the sample was large
firms and could be further enlarged to include small and medium-sized firms to allow for inclusion of
family firms with losses as well, thereby making findings more generalized. Secondly, this study captures
only financial performance as a proxy for firm performance, certain diverse financial and non-financial
performance measures like credit rating, brand value, customer satisfaction employee development may
be analysed. Thirdly, the influence of family on governance is captured by including dummy variables
of family representation on board and future studies can incorporate proportionate family representation
on board and management to better capture the effects of higher and lower family board representation
on performance. In addition, this study tested the CEO duality but did not include other important
dimensions of corporate governance such as board size, percentage of independent directors, pyramidal
structure, shareholding of directors and presence of family members on board committees, which could
have further substantiated the influence of family governance on firm performance. Furthermore, this
study did not incorporate any personal characteristics of the CEO, such as age, education and religiosity,
which could have provided newer insights. Finally, this study draws the sample from an emerging market
of a single country, which has its specific characteristics, culture, regulations and risks, and in order to
obtain more generalized results, a multi-country study can be pursued.

Acknowledgements
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve
the quality of the article. Usual disclaimers apply.
Srivastava and Bhatia 17

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The authors received no financial support for the research, authorship and/or publication of this article.

ORCID iD
Shikha Bhatia https://orcid.org/0000-0001-9969-4150

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