OWNERSHIP STRUCTURE AND FIRM PERFORMANCE IN NON-LISTED

FIRMS: EVIDENCE FROM SPAIN1

Blanca Arosa 2

Txomin Iturralde

Amaia Maseda

University of the Basque Country, UPV/EHU, Spain

Abstract:

This study provides new evidence regarding the way in which ownership concentration

influences non-listed firm performance focusing on the conflict between majority and

minority shareholders, and differentiating between the behavior of family and non-

family firms, using data from 586 non-listed Spanish firms. In first-generation family

firms our research shows that agency theory can be used to explain the role of

ownership concentration in balancing conflicts between shareholder groups. A greater

concentration of firm ownership in the first generation may bring the monitoring and

expropriation hypotheses into play, whereas firms in which subsequent generations have

joined may show a greater spread of ownership. In first generation family firms, the

classic owner-manager conflict is mitigated due to the large shareholder’s greater

incentives to monitor the manager. However, a second type of conflict appears. The

large shareholder may use its controlling position in the firm to extract private benefits

at the expense of the small shareholders.

1 The authors thank Cátedra de Empresa Familiar de la UPV/EHU for financial support (DFB/BFA and European Social Fund). We also thank four anonymous referees and participants at the World Family Business Research Conference of IFERA, June 2009, Limassol (Cyprus) and the XIX Congreso Nacional, of ACEDE, September 2009, Toledo (Spain) for their helpful comments. All errors are our responsibility. 2 Correspondence to: Blanca Arosa, Departamento de Economía Financiera I, Avda. Lehendakari Agirre, 83, Universidad del País Vasco, E48015 Bilbao, Spain. Tel.; +34-94-6017058. Fax: +34-94-6013879 E-mail: blanca.arosa@ehu.es

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The empirical evidence shows that for family firms, the relationship between ownership

concentration and firm performance differs depending on which generation of the

family manages the firms.

In first-generation family firms the results show a positive relationship between

ownership concentration and corporate performance at low level of control rights as a

result of the monitoring hypothesis and a negative relationship of high level of

ownership concentration as a consequence of the expropriation hypothesis. To reduce

the expropriation effect, it could be considered opening family firms’ equity to other

shareholders but maintain family control rights.

Key words: Ownership, SMEs, non-listed firms, family firms, performance

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1. – Introduction

The influence of ownership structures on firm performance has been researched

extensively in the theoretical and empirical literature. The relevant literature suggests

that ownership structure is one of the main corporate governance mechanisms

influencing the scope of a firm’s agency cost. Jensen and Meckling (1976) suggested

that ownership concentration has a positive effect on performance because it alleviates

the conflict of interest between owners and managers. The opposite view of the

ownership structure directs attention towards the effects of the agency problem resulting

from the combination of concentrated ownership and owner control (Fama and Jensen,

1983). This combination allows controlling shareholders to extract private benefits from

the firm at the expense of minority shareholders (Demsetz, 1983; Shleifer and Vishny,

1997; Porta et al., 2000; Demsetz and Villalonga, 2001; Villalonga and Amit, 2006).

A growing body of research on ownership structure has focused on the impact of

ownership concentration on performance in family firms (McConaughy et al., 1998;

Ang et al., 2000; Anderson and Reeb, 2003a; Habbershon et al., 2003; Chrisman et al.,

2003; Cronqvist and Nilsson, 2003; Maury, 2006; Villalonga and Amit, 2006;

Bennedsen et al., 2007; Miller et al., 2007; Eddleston et al., 2008). Nevertheless, the

results of the studies have not been conclusive, and existing studies on the relationship

between family ownership and firm performance mainly use data collected from large

firms. Although scholars have reported that most family firms are small and medium-

sized enterprises (SMEs), empirical studies that explicitly examine how family

ownership influences the performance of SMEs are still necessary. This lack of studies

is probably due to difficulties in collecting reliable and systematic data on SMEs. Given

that SMEs play a dominant role in the economic development of industrialized regions

and most family firms are SMEs (Poza 2007), a study that investigates the association

between family and non-family ownership and SME performance is of academic

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significance (Chu, 2009). In this regard, analyzing whether ownership structure acts as

an control mechanism in non-listed SMEs is necessary to fill this gap in the current

literature.

The aim of this paper is to analyze the usefulness of ownership concentration as an

internal control mechanism that prevent or reduce the potential conflict of interest that

arise between different agents involved in non-listed SMEs and, in the case of family

firms, also consider the generational effect. To test our hypothesis that ownership

concentration moderates conflicts between opposing groups in the firm, we examined

the relation between firm performance and ownership concentration in family and non-

family firms.

Our results indicate that there is no relationship between ownership concentration and

performance regardless of whether firms are family or non-family owned. This paper

has not been able to confirm the relationship between the ownership concentration and

firm profitability in non-listed firms. These results are in line with previous studies of

non-listed firms (Westhead and Howorth, 2006; Castillo and Wakefield, 2006).

However, for family firms, our results suggest that the relationship between ownership

concentration and firm performance differs depending on which generation of the

family manages the firms. In first-generation family firms the results show a positive

relationship between ownership concentration and corporate performance at low level of

control rights as a result of the monitoring hypothesis and a negative relationship of

high level of ownership concentration as a consequence of the expropriation hypothesis.

Both the monitoring and the expropriation effects are confirmed.

Our study contributes to the existing literature in several different ways. First, we

analyze the relationship between ownership structure using the ownership concentration

as an independent variable and firm performance in non-listed firms. Second, our

findings provide a new perspective on the role that ownership concentration plays in

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corporate governance as an internal control mechanism in family firms. We consider the

role of this internal control mechanism in mitigating moral hazard conflicts between

shareholder groups with diverging interests in family firms. Third, in first-generation

family firms our research shows that agency theory can be used to explain the role of

ownership concentration in balancing conflicts between shareholder groups.

The remainder of the article is organized as follows. Section 2 contains a review of the

literature regarding the ownership structure as a control mechanism and presents the

hypothesis. Section 3 presents the data and the analysis procedure used to conduct the

empirical study. Section 4 presents the main results and the discussion of the

investigation. Section 5 introduces the principal conclusions, and the paper ends with a

list of bibliographical references.

2. - Theoretical Background

2.1.- Literature Review

According to Jensen (2000), firms are affected by different mechanisms of corporate

control, one of them being ownership structure. This internal control mechanism is

significant in determining firms’ objectives, shareholder wealth and the level of

discipline of managers.

The literature on ownership structure has focused on three dimensions: the ownership

concentration (Demsetz and Lehn, 1985; Shleifer and Vishny, 1986; McConnell and

Servaes, 1990; Leech and Leahy, 1991; Morck et al., 2000; Westhead and Howorth,

2006; Castillo and Wakefield, 2006; Marttínez et al., 2007, Sraer and Thesmar, 2007;

Sciascia and Mazzola, 2009), insider ownership (Stulz, 1988; Morck, et al., 1988;

McConnell and Servaes, 1990; Faccio and Lasfar , 1999), and owner identity (Galve

and Salas, 1992; Pedersen and Thomsen, 1997). The ownership concentration may

result in a reduction in problems arising from the divergence of interests between

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different agents, including an analysis of the prevailing hypothesis of monitoring

compared to that of expropriation.

In the context of companies with high ownership concentration, agency theory suggests

that controlling shareholders often use their power to undertake activities intended to

obtain private profit to the detriment of minority shareholders’ wealth (Shleifer and

Vishny, 1997; La Porta et al., 1999, 2000; Francis et al., 2005; Miller et al., 2007). A

greater concentration of voting rights can therefore lead to greater incentives for

controlling shareholders to obtain private benefits. This trend may be exacerbated in the

case of family firms because those benefits remain in the controlling family, whereas in

non-family firms, they are distributed among a large number of shareholders

(Villalonga and Amit, 2006). In this regard, some scholars have argued that controlling

family shareholders can easily advocate for their own interests at the expense of those

interests of minority shareholders by treating the company as a family employment

service or a private bank, by limiting top management positions to family members or

by making extraordinary dividend payouts (Shleifer and Vishny, 1997; Demsetz, 1983;

Fama and Jensen, 1983). In these situations, agency costs take the form of dividends

and extraordinary remunerations or of the entrenchment of the family management

team. This entrenchment results in certain expropriatory practices of the controlling

family shareholders wielding power over minority shareholders and ultimately reducing

firm profitability (De Angelo and De Angelo, 2000; Morck et al., 2000; Gómez-Mejía

et al., 2001; Fan and Wong, 2002; Francis et al., 2005; Santana et al., 2007).

However, another group of authors suggested that the distinctive features of family

firms have a positive effect on their corporate behavior. The family's interest in the

long-term survival of the business as well as its concern for maintaining the reputation

of the firm and the family, lead the family to avoid acting opportunistically with regard

to the earnings obtained (Anderson and Reed, 2003a; Burkart et al., 2003; Wang, 2006).

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Families have concerns and interests of their own, such as stability and capital

preservation, which may not align with the interests of other firm investors.

In general, the empirical evidence is not conclusive. Some empirical findings indicate

that firms with concentrated ownership structure, such as founding families, show lower

profitability than those firms with a dispersed ownership structure (Fama and Jensen,

1983; De Angelo and De Angelo, 2000; Gómez-Mejía et al., 2001). In contrast,

empirical studies by Anderson and Reeb (2003a), Burkart et al. (2003), and Wang

(2006) report that controlled family ownership positively influences firm performance.

2.2.- Hypothesis Development

Empirical studies that are specifically focused on examining the relationship between

ownership-concentrated non-listed firms and performance are scarce. This scarcity is

probably due to difficulty collecting data on SMEs and because there is no official

database of family firms.

In firms with high ownership concentration some studies focused on the conflict

between large and small shareholders or controlling and minority shareholders (Shleifer

and Vishny, 1997; La Porta et al., 1999, 2000; Francis et al., 2005; Miller et al., 2007).

When large shareholders effectively control firms, their policies may result in the

expropriation of minority shareholders. The conflicts of interest between large and small

shareholders can be numerous, including controlling shareholders enriching themselves

by not paying out dividends or other expropiatory practices. Fan et al., (1999) show that

the concentration of control is negatively associated with market valuation.

In this context, the first hypothesis proposes that an ownership concentration will be

associated with a negative impact on performance. Accordingly, the following

hypothesis is presented:

H1: There is a negative relationship between ownership concentration and non-listed

firm profitability.

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Among non-listed firms, founding families represent a special type of shareholders.

Family owners differ from other shareholders in two main aspects: the interest of the

family in the long-term survival of the firm and the concern of the family for the

reputation of the firm and the family itself.

Anderson and Reeb (2003a), Villalonga and Amit (2006), Maury (2006), Barontini

Caprio (2006) and Pindado et al. (2008) find a positive relationship between corporate

performance and ownership concentration. The long-term goal of family firms suggests

that these family firms desire longer-term investment projects than other shareholders.

The wealth of the family is closely related to the value of the company, so families have

strong incentives to monitor agents (Anderson and Reeb, 2003a) and create long-term

loyalty in them (Weber et al., 2003).

Moreover, due to the substantial and long-term presence of families in firms and their

intention to preserve the family name, families have a greater interest in the company

than others do. Furthermore, families are more likely to give up short-term benefits due

to incentives to pass the business to future generations and protect the family’s

reputation (Wang, 2006). Also, this perspective generates a reputation for the family

that involves creating long-term economic consequences for the company compared to

non-family firms (Anderson et al., 2003). Strong control mechanisms can motivate

family members to communicate more effectively with other shareholders and creditors,

using higher quality financial reporting and, consequently, reducing the cost of debt

(Anderson et al., 2003).

These arguments suggest that the sustained presence of family owners in the firm may

have positive economic consequences (Anderson et al, 2003; Wang, 2006). Thus, we

expect family firms to be more profitable than non-family ones.

H2: There is a larger positive relationship between family ownership concentration and

firm profitability in non-listed family firms than in non-family ones.

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Nevertheless, high ownership concentration can trigger other problems with corporate

governance and other types of cost. If there are controlling shareholders, they are more

likely to be able to use their power to undertake activities intended to obtain private

profit to the detriment of minority shareholders’ wealth (La Porta et al., 1999;

Villalonga and Amit, 2006). Furthermore, this trend can be exacerbated in the case of

family-controlled firms, where the agency costs may take the form of dividends and

extraordinary remunerations or the entrenchment of the family management team,

showing certain expropriatory practices that ultimate reduce profitability (DeAngelo

and De Angelo, 2000; Gómez-Mejía et al., 2001; Fan and Wong, 2002; Francis et al.,

2005; Santana et al., 2007).

There are two potential costs that can generate a negative effect on certain levels of

ownership concentration (Pindado et al., 2008). On the one hand, there is the incentive

of the owning family to carry out actions that increase its personal utility, resulting in

poor firm performance (Anderson and Reeb, 2003a). Derived from this fact, one can

assume that high levels of ownership concentration may be related to less efficient

investment decisions, which can lead to a reduction in firm performance (Cronqvist and

Nilsson, 2003). On the other hand, there are authors who suggest that a high family

ownership concentration is related to the influence of the controlling family on its

managers, which may, in turn, be related to a higher level of entrenchment of managers

(Gomez-Mejia et al., 2003).

In summary, family ownership may have both positive and negative effects on the

functioning of the firm. Numerous empirical studies have found a nonlinear relationship

between ownership concentration and firm performance in listed family firms (Thomsen

and Pedersen, 2000; Anderson and Reeb, 2003a; Maury, 2006; Pindado et al., 2008).

This relationship implies that when ownership is less concentrated, there is a positive

effect on performance, as a result of the monitoring hypothesis. That is, all shareholders

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devote their efforts to monitoring managers to maximize the value of the firm.

However, as ownership becomes more concentrated, the relationship between the two

variables becomes negative as a result of the expropriation hypothesis. When

shareholder ownership is high enough, shareholders tend to expropriate wealth from

minority shareholders and look for their own wealth.

This observation led us to hypothesize that the relationship between family ownership

and profitability is nonlinear in non-listed family SMEs. More specifically, we propose

that the relationship is inverted U-shaped. First, we propose a positive relationship

between ownership concentration and firm performance at low levels of the former as a

result of the monitoring hypothesis and a negative relationship afterwards as a

consequence of the expropriation hypothesis.

H3: There will be an inverted-U-shaped relationship between family ownership

concentration and firm profitability.

According to Schulze et al. (2001), whereas the main source of agency problems is the

separation between ownership and monitoring, such problems do not exist in first-

generation family firms because the same person is responsible for making management

and supervision decisions. Reductions in agency costs may be achieved by entirely

eliminating the separation between owners and management. In such cases, the interests

of principal and agent are aligned, and it is assured that the management will not

expropriate the shareholders’ wealth (Miller and Le-Breton Miller, 2006).

Because the family property is shared by an increasingly large number of family

members, conflicts may start to arise when the interests of the family members are not

aligned, and the agency relations between the various participants in the firm are

conducted on the basis of economic and non-economic preferences (Chrisman et al,

2005; Sharma et al., 2007). Schulze et al. (2001) argued that family relationships tend to

generate agency problems, mainly because control over firm resources enables

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owner/managers to be generous to their descendents and other relatives. Parental

altruism is a trait that positively links the controlling owner’s welfare to that of other

family members. Over time, however, the economic incentive to do what maximizes

personal utility can blur the controlling owner’s perception of what is best for the firm

or family (Schulze et al., 2003).

A greater concentration of firm ownership in the first generation may bring the

monitoring and expropriation hypotheses into play, whereas firms in which subsequent

generations have joined may show a greater spread of ownership. As a family firm

enters second and later generations, the number of family members involved often

grows, including founder’s descendents and in-laws. Sometimes, there is harmony and

the possibility of new talent coming into the business—but as relatives proliferate, so

too does the potential for conflict among those running the business, among the owners,

and between the two groups (Miller and Le-Breton Miller, 2006). Schulze et al. (2003)

argued that these conflicts are especially likely to occur when the distribution of

ownership is balanced between competing blocks, as often occurs as later generations

enter the business. Again, agency issues arise if those in control or running the business

exploit other family or nonfamily owners, thereby serving as stewards not of the

business, but of their own nuclear family. Such exploitation may be more common

where rival ownership blocs among family factions have different interests and roles

(e.g., extracting dividends vs. growing the business), and where there has been a

turbulent family history (Miller et al., 2005). Another potential problem as the

generations progress is the growing demand for dividends from a greater number of

family members who no longer directly work for the business.

In this sense, we expect an inverted-U-shaped relationship in family firms managed by

subsequent generations.

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H4: There is an inverted-U-shaped relationship between family ownership

concentration and firm profitability in family firms managed by subsequent generations.

3. - Empirical Research: Method, Data and Analysis

3.1. – Population and sample

We conducted this study on Spanish firms included in the SABI (Iberian Balance Sheet

Analysis System) database for 2006. We imposed certain restrictions on this group of

companies to reach a set that would be representative of the population. First, we

eliminated companies affected by special situations such as insolvency, winding up,

liquidation or zero activity. Second, restrictions concerning the legal form of companies

were imposed; we focused on limited companies and private limited companies because

they have a legal obligation to establish boards of directors. Third, we eliminated listed

companies. Fourth, we studied only Spanish firms with more than 50 employees—i.e.,

companies large enough to ensure the existence of a suitable management team and a

controlling board to monitor firm performance. Finally, companies were required to

have provided financial information in 2006. Based on these conditions, the sample

under study was comprised of 3723 non-listed Spanish firms.

There is no official database of family firms, and the level of difficulty of collecting

data on SMEs is high also. In addition, the lack of an agreed definition of family firm

leads to the use of restrictive samples (Daily and Dollinger, 1993; Schulze et al. 2001,

2003; Chua et al., 2003; Miller et al., 2007). Given these limitations, detailed analysis of

the information in the databases and surveys are the only way to identify family and

non-family non-listed firms. This study involves a combination of these two methods of

identification.

In this study, a family firm is a firm that meets two conditions: a) a large body of

common stock held by the founder or family members, allowing them to exercise

control over the firm, and also b) family members who participate actively in

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monitoring the firm. Like La Porta et al. (1999), we established 20% as the minimum

percentage of a firm’s equity considered as a controlling interest. To ensure compliance

with these two conditions, we conducted an exhaustive review of shareholding

structures (percentage of common stock) and composition (name and surnames3 of

shareholders) and also examined the composition of the board of directors of each of the

3723 selected companies in the database.

We accordingly classified a firm as a family firm if the main shareholder was a person

or a family with a minimum of 20% of firm equity and there were family relationships

between this shareholder and the directors based on the coincidence of their surnames.

The composition of the management was also reviewed in search of family relationships

between shareholders and managers.

Based on the 3723 companies preselected, the original sample used in this study is a

2958 firm random sample. Of these firms, 586 responded the questionnaire correctly:

217 non-family firms (37%) and 369 family firms (63%) for which there were data on

ownership structures, accounting variables and boards of directors. The 586 firms are a

representative sample with a confidence level of 95% (Malhotra and Birks, 2007).

3.2. – Data

Data were collected by means of telephone interviews, a method that ensures a high

response rate, and financial reporting information was obtained from the SABI

database. The questionnaire collects information on the variables required for study that

could not be obtained from the SABI database and that would be captured more reliably

through a survey. In particular, this included information regarding the ownership

structure, the composition of the board of directors and company management.

3 The Spanish surname system, whereby women never take their husband’s surnames and children take both surnames (father’s and mother’s surname) makes second-degree relationships (uncles, aunts, first cousins, and so on) easier to identify.

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To guarantee the greatest possible number of replies, managers were made aware of the

study in advance by means of a letter indicating the purpose and importance of the

research. In cases where they were reluctant to reply or made excuses, a date and time

were arranged in advance for the telephone interview. The final response rate was

approximately 19.81%, and the interviewees were persons responsible for the

management of the firms (financial managers in 56.48% of cases, chief executive

officers in 31.06%, presidents in 1.54%, and others in 10.92%).

3.3.- Measurement of variables

In this section, we present the variables used in the empirical analysis. Access to

information is limited in the case of non-listed firms; as a result, the information used

comes from two different sources: the SABI database, which collects financial

information from the Spanish Official Register; and a survey used to obtain information

about variables not in the SABI database.

3.3.1.- Dependent variable

Following Anderson and Reeb (2003a), Sciascia and Mazzola (2009), and Chu (2009),

we use profitability as the dependent variable that examines the effect of non-listed

ownership structure on firm performance. Profitability is measured by the accounting

measure Return on Assets (ROA). ROA measures the ability of the assets of the

company to generate profits and is considered a key factor when taking into account

future firm investments (Masson, 2002). It is considered, therefore, an indicator of firm

profitability.

As suggested by Anderson and Reeb (2003a, 2003b), we have constructed ROA as

Earnings before Interest and Taxes (EBIT) scaled by the book value of total assets,

leaving aside the financial performance of the firm. EBIT is a traditional method of

measurement that does not include capital costs and, instead, includes only the

operating margin and operating profit.

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3.3.2.- Independent variables

Family firm: We classified a firm as a family firm if the main shareholder was a person

or a family with a minimum of 20% of firm equity and there were family relationships

between main shareholder and directors based on the coincidence of surnames. Toward

this end, following the methods of Anderson and Reeb (2003b) and Wang (2006), we

created a dummy variable (FD) that takes the value 1 if the firm meets the criteria for

being considered a family firm and a value of 0 otherwise.

Generation managing the firm: The different characteristics attributed to family firms

depending on the generation managing the firm make it necessary to classify family

firms according to the generation managing it. Consistent with Miller et al. (2007) the

GEN variable takes the value of 1 if the company is managed by the first generation and

0 otherwise. In this sense, we analyze whether the behavior of family firms varies

depending on which generation manages the firm.

Ownership Concentration: To measure the ownership structure as an internal control

mechanism, we use the ownership concentration variable. Consistent with Pindado et

al., (2008), we have created two variables to measure the ownership concentration:

Family ownership concentration (FOC) for family firms and Ownership concentration

(OC) for non-family ones. Each of these variables measures the percentage of

ownership in the hands of the largest shareholder, which, in the case of family firms, is

a family shareholder.

3.3.3.- Control Variables

Insider ownership: The INSOWN variable shows the percentage of ownership of the

insider directors and the chief executive officer (Anderson and Reeb, 2003b; Villalonga

and Amit, 2006).

Composition of the board of directors: The OUTSIDERS variable is calculated as the

percentage of external directors out of the total number of directors (Anderson and

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Reeb, 2003a; Barontini and Caprio, 2006). The aim of this variable is to measure the

monitoring capacity of the board of directors and to analyze its influence on the

profitability of the firm.

Firm size: The SIZE variable can also influence the relationship between ownership and

firm performance (Anderson and Reeb, 2003a, Carter et al., 2003; Barontini and Caprio,

2006; Wang, 2006; Santalo and Diestre, 2006; Chu, 2009). To avoid the problems of

extreme values, we construct it using the natural logarithm of total assets.

Growth opportunities: According to Scherr and Hulburt (2001), the GROWTHOP

variable has been calculated as Sales0/Sales-1,. In this case, the firms that grew more in

the past will have the most growth opportunities in the future.

Debt: The LEV variable is controlled because ownership structure may influence firm

financial structure (Demsetz and Lehn, 1985). This variable has been measured as the

ratio of total debt to total assets (Coles et al., 2005; Wang, 2006).

Firm age: AGE is measured as the natural logarithm of the number of years since the

establishment of the firm.

Industry: SECT is measured using dummy variables following the Spanish industrial

classification (CNAE).

3.4. Summary statistics

Table 1 presents descriptive statistics for the variables in the analysis. We shown mean

values for family and non-family firms. The average ownership stake in family firms is

nearly 50%; in non-family firms, it is around 74%. As different generations join the

firm, that capital is diluted significantly, which may explain the difference that occurs

between the two types of organizations: 42% of the family firms in the sample are part

of the second generation and 19% are part of the third and successive ones. The Spanish

non-listed firms generally have three significant partners who control around 90% of the

17

equity; this analysis lets us identify who has the control in the company and determine

its level of representation in government bodies.

TABLE. 1 – Descriptive statistics of sample firms: Mean values for variable measures Family Firms Non-family Firms

Number of observations 369 217

Number of business segments 2.47 1.36

Fraction of single-segment firms 63.60 88.46

Ownership concentration (%) 68.84 73.82

Insider ownership (%) 50.17 33,10

Board of Director’s composition (Outsiders %) 37.48 35.43

Return on Assets (%) 6.42 6.41

Growth opportunity (Sales0/Sales-1) 1.14 1.11

Leverage (Total Debt / Total Assets) 61.98 64.47

Firm’s size (Total Assets) 23709.48 63835.39

Firm’s age (years) 40 33

Source: Data of ownership structure, board of directors and management from the survey, and financial information from SABI.

Family firms in the sample show significantly more diversification, with nearly 64%

reporting only one line of business compared to 88.46% of non-family ones. Insider

ownership levels are higher in family firms, mainly due to the CEO’s percentage of

ownership, which is on average 5% in nonfamily firms and 20% in family firms. Board

of director composition, return on asserts, growth opportunities and leverage are not

significantly different in family and non-family firms. Non-family firms are larger than

family ones and, with regard to age, we note that family firms are on average 40 years

old and non-family ones only 33, suggesting that the former are well established.

TABLE. 2 - Correlation data Variables 1 2 3 4 5 6 7 8

1 ROA 1

2 Ownership concentration 0.061 1

3 Insider ownership 0.019 -0.191*** 1

4 Outsiders -0.019 -0.036 -0.407*** 1

5 Growth opportunity 0.014 -0.004 0.048 -0.056 1

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6 Leverage -0.277*** 0.037 0.049 -0.049 0.000 1

7 Firm’s size -0.099** -0.002 -0.053 -0.016 0.032 0.106** 1

8 Firm’s age -0.006 0.022 -0.022 0.014 0.004 0.022 -0.013 1

*** and ** indicate significance at 1% and 5% levels, respectively.

As shown in Table 2, the correlation coefficients are weak and do not violate the

assumption of independence of the variables. To test for multicollinearity, the VIF was

calculated for each independent variable. Myers (1990) suggests that a VIF value of 10

and above is cause for concern. The results indicate that all of the independent variables

had VIF values of less than 10.

4. – Results and discussion

Table 3 presents the results of our linear regression evaluating the influence of

ownership concentration on business performance for family and non-family firms.

In first regression, we examined the influence of ownership concentration on firm

performance. As noted in Table 3 (column I), the overall model is significant (F statistic

= 1.95; p < 0.01). Our results show a nonsignificant relationship (β1 = 0.0172) between

ownership concentration and firm performance. Thus, firm value seems to be insensitive

to this variable. The results were not expected, and hypothesis 1 was not supported.

Instead, we divide the sample up into family firms and non-family ones.

A positive coefficient is found between family ownership concentration and the

profitability of firms (Table 3, column II), but the relationship is not significant. This

lack of significance leads us to conclude that there is effectively no relationship between

the variables of family ownership concentration and profitability, so we do not accept

hypothesis 2.

TABLE. 3- Relationship between ownership concentration and company firm profitability

ROA I II III IV V VI Constant 0.1043 0.1652* 0.1161* 0.1704* 0.0700 0.1773*

FOC 0.0064 0.0775 0.0299

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FOC*GEN 0.1941**

FOC2 -0.0577 -0.0104

FOC2*GEN -0.1971**

OC 0.0172 0.0209 0.0084

OC*FD 0.0127 0.0181

OC2 -0.0029

OC2*FD -0.0287

INSOWN 0.0010 0.0130 0.0050 0.0166 0.0065 0.0103

OUTSIDERS -0.0198 -0.0271 -0.0307* -0.0250 -0.0339* -0.0252

GROWTHOP 0.2241** 0.5836*** 0.2991*** 0.3971*** 0.4715*** 0.3591**

LEV -0.1138*** -0.0871* -0.1260*** -0.0787** -0.1146*** -0.0800**

SIZE -0.0048 -0.0013 -0.0009 -0.0002 -0.0014 -0.0004

AGE -0.0098 -0.0084 -0.0086 -0.0093 -0.0065 -0.0070

R2 0.12 0.16 0.15 0.17 0.18 0.21

***,** and * indicate significance at 1%, 5% and 10% levels, respectively. Models I, III and V contain the entire sample. Models II, IV and VI refer only to family firms.

If we compare the behavior of family and non-family firms, the results are not

significant (Table 3, column III). In this case, neither 1, which reflects the relationship

between ownership concentration and firm profitability in non-family firms, nor 2,

which reflects the extent to which family firm status influences the relationship between

ownership concentration and profitability, is significant.

The presence of a majority shareholder in the company can result in agency problems

between controlling and minority shareholders (Shleifer and Vishny, 1997). Following

this argument, there are studies that have found a nonlinear relationship between

ownership concentration and profitability (Gedajlovic and Shapiro, 1998; Thomsen and

Pedersen, 2000; Miguel et al., 2004).

Our study conducts further tests to examine the possibility of nonlinearity between firm

performance and ownership concentration. So an inverted-U-shaped relationship is

expected.

20

The results are shown in Table 3 (columns IV and V). For family firms (column IV), a

positive coefficient is found for concentration of ownership and a negative coefficient

for its square, but neither is significant. These results do not allow us to confirm

whether there is a nonlinear or inverted-U-shaped relationship between concentration of

ownership and profitability in the case of non-listed family firms. Therefore, we cannot

accept hypothesis 3. If we consider the whole sample and compare the behavior of

family and non-family firms, we can see similar results (column V).

Both family and non-family firms show positive coefficients for ownership

concentration and negative coefficients for its square, which may indicate the existence

of a nonlinear relationship between ownership concentration and firm profitability.

However, these coefficients are not significant in the case of the companies in the

sample.

No relationship is found between the ownership concentration and firm profitability. In

addition, no evidence is obtained to support the monitoring and expropriation

hypotheses for the companies analyzed. The arguments tested in relation to listed firms

do not arise for non-listed ones. In this case, the level of ownership concentration does

not appear to have any direct influence on the behavior of shareholders, which can be

related to the non-listed status of the firm and its similar ownership structure.

Table 3 (column VI) shows the results for ownership concentration and firm

profitability taking into account the generation managing the family firm.

The results show that there is no relationship between ownership concentration and

profitability in family firms not managed by the first generation because 1 and 3 are

not significant. However, in the first generation, family firms exhibit an inverted-U-

shaped relationship because the coefficients 2 and 4 are significantly positive and

negative, respectively. Once a family has a sufficient ownership level for unchallenged

21

control, shareholders benefit more from expropriating minority shareholders than from

maximizing company value.

Firms managed by the first generation have more concentrated ownership structures. As

new generations join a firm, the ownership structure becomes more dispersed, which

may be the reason for the results. These generational effects seem to be critical to our

understanding of the relationship between ownership concentration and performance. In

first generation family firms, the classic owner-manager conflict is mitigated due to the

large shareholder’s greater incentives to monitor the manager. However, a second type

of conflict appears. The large shareholder may use its controlling position in the firm to

extract private benefits at the expense of the small shareholders. This increased

ownership concentration may be the cause of the different behaviors observed. If the

large shareholder is an individual or a family, it has greater incentives for both

expropriation and monitoring, which are thereby likely to lead the problem between

majority and minority shareholders to overshadow owner-manager conflict (Villalonga

and Amit, 2006).

Our findings show that, up to a certain degree of ownership concentration, the

supervision hypothesis is predominant, providing that shareholders are focused on

monitoring management. However, when ownership concentration is high, shareholders

try to expropriate wealth from minority shareholders because of the great influence that

a controlling family can exercise.

Up to a 49% ownership concentration for first-generation family firms, the monitoring

hypothesis prevails. After this cut-off point, the expropriation hypothesis prevails.

22

Figure 1. Relation between ownership concentration and firm profitability

McConnaughy et al. (1998), Anderson and Reeb (2003a, 2003b), Adams et al. (2003),

Villalonga and Amit (2006) and Barontini and Caprio (2006) found a positive effect on

profitability in firms where the founder is the chief executive officer. However, our

findings show a nonlinear relationship; thus, beginning with a certain level of ownership

concentration, the positive effect does not exist and the expropriation hypothesis

prevails.

5.- Conclusions

The aim of this study is to analyze the usefulness of ownership concentration as an

internal control mechanism that prevent or reduce the potential conflict of interest that

arise between different agents involved in non-listed SMEs and, in the case of family

firms, also to consider the generational effect. To test our hypothesis that ownership

concentration moderates conflicts between opposing groups in the firm, we examined

the relation between firm performance and ownership concentration in family and non-

family firms. Moreover, unlike most previous studies, our study did not focus on large

listed companies, but instead, adopted a sample that includes mainly SMEs, none of

which is listed. In an ownership concentration context, we used a sample of 586 non-

listed Spanish firms, of which 217 are non-family firms and 369 are family firms.

The main results of this research suggest that the ownership concentration does not have

a direct influence on the behavior of shareholders, which can be related to the non-listed

status of firms. Thus, this paper has not been able to confirm the relationship between

ROA

FOC

Monitoring Expropiation

23

ownership concentration and firm performance for non-listed firms. The results indicate

that the arguments validated for listed firms do not apply to non-listed ones.

However, for family firms, our results suggest that the relationship between ownership

concentration and firm performance differs depending on which generation manages the

firms. In first-generation family firms the results show a positive relationship between

ownership concentration and corporate performance at low level of control rights as a

result of the monitoring hypothesis and a negative relationship of high level of

ownership concentration as a consequence of the expropriation hypothesis. Both the

monitoring and the expropriation effects are confirmed.

This study contributes to the existing literature in several different ways. First, we

analyze the relationship between ownership structure using the ownership concentration

as an independent variable and firm performance in comparing family and non-family

firms. Second, our findings provide a new perspective on the role that ownership

concentration plays in corporate governance as an internal control mechanism in family

firms. We consider the role of this internal control mechanism in mitigating moral

hazard conflicts between shareholder groups with diverging interests in family firms.

Third, for first-generation family firms, our research shows that agency theory can be

used to explain the role of ownership concentration in balancing conflicts between

shareholder groups. Fourth, previous family firm studies (Anderson and Reeb, 2003a,

2003b) have focused on relatively large publicly traded family firms (S&P 500). The

shortage of studies on non-listed firms is probably due to the difficulty of collecting

data on SMEs as well as a lack of an official database of family firms. Nevertheless, this

study has focused on non-listed family and non-family SMEs and has chosen a

combination of two methods of identification of non-listed SMEs: the detailed analysis

of the information in databases and the survey.

24

Several implications arise from our findings. These results suggest that family

ownership is related to higher firm performance depending on the role the family plays

in the firm. If the family is a large shareholder with a board of directors or executive

representation, family firm behavior differs from other concentrated ownership

structures and seems to face different agency problems. In our analysis, in 94% of

family firms, the chief executive is a member of the family, and the boards of directors

are composed mainly of relatives, so their incentives to expropriate wealth from

minority shareholders are larger when they extend beyond their ownership rights. It is

much easier for family shareholders to coordinate their actions and use their voting

rights to maximize their own wealth.

To reduce the expropriation effect, it could be considered opening family firms’ equity

to other shareholders but maintain family control rights, which would secure the

advantages of concentrated ownership.

These results can be explained in several ways. On one hand, La Porta et al. (1998)

showed that Spanish firms have a higher percentage of ownership concentration in

comparison with U.S., U.K., Japanese and German firms. In addition, the presence of

controlling shareholders with interests different from those of minority owners would

make it easier to expropriate the latter’s wealth; on the other hand, the structure of the

boards of directors in Spain implies that board members manage the company and also

supervise its activity, so one might question their role in monitoring management and

controlling for expropriation.

It must also be considered that the rules governing the treatment of minority

shareholders in a weaker investor protection system such as in Spain could explain the

likelihood of expropriation.

This research has some limitations. First, it was very difficult to obtain a database of

non-listed firms and even more difficult to obtain one for family firms. This lack of data

25

has kept us from distinguishing between lone founder and other family firms. Second,

our data are cross-sectional and they refer to 2006; therefore, we cannot make clear

inferences regarding causality. Only a panel data sample will allow researchers to test

and support our findings. Third, data were collected exclusively in Spain, therefore

limiting the possibility of generalizing our findings.

Several recommendations for future research can be formulated. First, researchers

should analyze the usefulness of ownership concentration as an internal control

mechanism distinguishing, like Miller et al (2007), between lone founder and true

family firms. Second, a research design based on longitudinal data would be more

suitable for this kind of study because it would increase the reliability of findings

related to causality directionality. Third, a similar study could be conducted in countries

other than Spain to increase the validity of our results.

We conclude that the relationship between ownership concentration and firm

performance differs depending on which generation of the family manages the firms. In

first-generation family firms the results show a positive relationship between ownership

concentration and corporate performance at low level of control rights as a result of the

monitoring hypothesis and a negative relationship of high level of ownership

concentration as a consequence of the expropriation hypothesis. These results show that

agency theory can be used to explain the role of ownership concentration in balancing

conflicts between shareholder groups.

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