DIFFERENT PATHS OF OWNERSHIP TRANSITION IN
ENTREPRENEURIAL FIRMS
Karl Wennberg, Imperial College London Business School, United Kingdom
Karin Hellerstedt, Jönköping International Business School, Sweden
Mattias Nordqvist, Jönköping International Business School, Sweden
ABSTRACT
In this paper we investigate the long-term and short-term performance implications of different paths of ownership
transitions in privately held family firms. We are interested in the change of ownership structure that occurs in
privately held firms when the founding entrepreneur(s) departs and decide to transfer ownership of the firm to
family members or outsiders, and the performance implications for the firm being transferred. We use a unique
longitudinal data set gleaned from Swedish matched employer-employee data during the period 1990-2007 to
compare transition of ownership within a family with transition of ownership to outsiders. We simultaneously model
five different performance measures: (i) return on equity (ROE) (ii) earnings before income tax (EBITA), (iii) sales,
(iv) number of employees and (v) survival. Our findings suggest that succession outside the family is positively
related to sales growth and employee growth. However, profits, measured by EBITA and ROE, are not statistically
significant between the two groups.
INTRODUCTION
In this paper we investigate the long-term and short-term performance implications of different paths of
ownership transitions in privately held family firms. That is, we are interested in the change of ownership structure
that occurs in privately held firms when the founding entrepreneur(s) departs and decide to transfer ownership of the
firm to family members or outsiders, and the performance implications for the firm being transferred. Change in
ownership entails change in governance in the firm, but also ownership change entails a redirection of the firms’
activities, strategic focus and financial structure.
Much entrepreneurship research assumes that firms are started through the act of founding by one individual or a
group of individuals. However, entrepreneurship may also involve the taking over and renewing of established
businesses (cf. Parker & van Praag, 2006), potentially providing a revitalizing hand in the governance of the firm. A
large share of all privately held firms in many developed nations are likely to shift ownership within the near future
as their owners approach retirement. Successful transition of these (as well as other firms facing transition) may be
critical for national economic well being and growth. To date, there is limited knowledge on how changes in
ownership might effects long-term firm performance. As a consequence, there is an acute need for studies
investigating how firms might be successfully transferred to new owners and the economic implications of different
transition routes.
Among owner-manager entrepreneurs, some decide to (i) sell their firm to an external party (Wennberg et al.,
2009), (ii) hand over the business to family members and/or relatives such as siblings, children and grandchildren
(Sharma et al., 2003). The exit of one generation of firm owner-managers is also related to the entrepreneurial entry
of others. This process is highly relevant for entrepreneurship scholars as it involves entrepreneurial exit as well as
entrepreneurial entry, but it is equally important for practitioners and policy makers as it addresses the highly topical
issue of ownership transition. There is limited knowledge on the performance consequences form firms of these
different routes of ownership transitions and the current paper addresses this issue.
In this study we investigate the effects of two different succession routes. We use a unique longitudinal data set
covering all privately held firms in Sweden during the period 1990-2007 to compare transition of ownership within a
family with transition of ownership to outsiders. The aim is to investigate the two routes of family succession and
sale that owner-managers can choose when exiting from self employment. We report both short-term and long-term
performance differences between family and non-family ownership transition. We simultaneously model five
different performance measures: (i) return on equity (ROE) (ii) earnings before income tax (EBITA), (iii) sales, (iv)
number of employees and (v) survival. Post transition performance is reported for up to five years following the
transition, allowing for a longer time span than prior studies.
THEORY
Firm Performance
Several studies, invoking partly differential theoretical arguments, have attended investigating the performance
of family firms versus non-family firms. Principal agency theory posits several arguments why information
asymmetries between managers and owners are lower in family-controlled businesses, (Jensen & Meckling, 1976;
Leland & Pyle, 1977), suggesting they have a more effective organizational structure (McConnaughy et al., 1998)
and also stronger incentives to improve firm performance (Saito, 2008). On the contrary, studies invoking rentseeking theory have suggested that the owners of family firms often seek to fulfill their private needs and benefits
via the business, hence trading off high performance in favor of other benefits such as status, intergenerational
stability, or psychological well-being (cf. Shleifer & Vishny, 1997; Morck & Yeung, 2004).
Empirically, these studies are tainted by the fact that family firms are in no sense an homogenous groups.
Instead, it is a highly heterogeneous group of companies. Studies indicate that firms owned and managed by the
founding family outperform other businesses (Anderson & Reeb, 2003; Saito, 2008). However, if a firm is owned
and managed by the second generation performance levels decrease (Saito, 2008; Villalonga & Amit, 2006; Bloom
& Van Reenen, 2007). Thus, it appears that not only is the family vs. non-family distinction important to consider.
Different types of ownership and succession is likely to be important for the development of the firm. Most recent
performance research have examined the effects of family control in big, publicly listed companies while the
majority of family controlled firms in most economies in fact are private, small and medium-sized enterprises. In
this paper, we focus on performance in the latter type of family firm since the applicability of research from large,
public family businesses to their private and smaller counterparts is unclear (Astrachan, 2010).
The Relationship Between Exit Route and Firm Performance
Performance in relation to firm succession is a topic that has received increased attention. Theoretically, there are
arguments favoring both types of transitions, i.e. intergenerational transition and transition to non-family members.
It has, for example, been argued that the transaction costs for intergenerational succession is lower and the tacit
knowledge on how to actually run the firm profitably has been acquired by family successors over the years leading
up to a succession (Bjuggren & Sund, 2002). Thereby, the costs for intergenerational succession are lower and the
knowledge idiosyncrasies imply that the firm will be more profitable if a family member takes over the running of
the firm. On the contrary, several claims purport that family succession can harm performance. Reasons include the
following: a smaller resource and competence pool from which talented successors can be drawn (Pérez-González,
2006), increased risk for self control problems, family conflicts (Schulze, Lubatkin, Dino & Buchholtz, 2001),
nepotism and expropriation of minority shareholder wealth (Miller, LeBreton-Miller, Lester & Cannella, 2007).
Recently, studies investigating the impact of family vs. non-family succession for the firm’s future development
have been conducted. That is, how firm performance is affected by someone from the family taking over the
business as opposed to an outsider doing so. Studies on this topic are limited, but results so far hold that firms taken
over by outsiders generally perform better than firms that remain within the family (Bennedsen et al., 2007;
Cucculelli & Micucci, 2008; Grünfeld et al., 2009). Available studies have primarily focused on CEO succession
and/or large companies (e.g. Pérez-González, 2006). For small and medium sized private companies however, the
ownership and management of the firm often go hand in hand, as does the succession of the two. Therefore, there is
a need for studies probing into the transition of ownership as a complement to the studies focusing on CEO
succession. There are several methodological challenges facing researchers seeking to isolate the impact of family
vs. non-family succession. For example, family firms are often argued to have a long-term view on firm
development (James, 1999; Tagiuri & Davis, 1992), which in turn could have implications for research designs used
to investigate performance effects of firm successions.
Short Term Versus Long Term Effects on Firm Performance
Family controlled firms are often noted for their long-term orientation and persistence (James, 1999; Miller and
LeBreton-Miller, 2005), which often results in stability and patience in terms of, for instance, acceptance of long
pay-off times for investments and other strategic decisions (Zellweger, 2007). Lumpkin, Brigham and Moss (2010)
defines long term orientation as the tendency to prioritize the long range implications and impact of decisions and
actions that come to fruition after an extended time period. Zahra, Hayton, and Salvato (2004) argue that long-term
orientation is a common feature of the organizational culture that can contribute to distinct advantages in family
firms. For instance, top managers of family businesses often have longer tenures and greater interest in their firm’s
long-run performance (Zellweger 2007; James, 1999) than non-family firms. Moreover, a key characteristics of
many family businesses is a desire to pass on the business on to the next generations of family owners and create a
lasting family legacy (Habbershon and Pistrui, 2002; Ward, 2004).
Long term orientation is also linked to the observation that family firms often are less dependent on external
stakeholders that demand (short-term) dividends and financial growth (Carney, 2005). Family firm owners and
managers can thus make strategic decisions with more independence (Kets de Vries, 1993), and ‘creative
unorthodoxy’ (Miller and Le Breton-Miller, 2005). Furthermore, scholars have recently noted that the long termorientation of family firms can be associated with an entrepreneurial orientation that supports strong performance.
For example, Miller and Le Breton-Miller (2005:232) concluded that “the only way to sustain good performance is
to act in the long-run interests of the company and all of its stakeholders”. Lumpkin et al. (2010) suggest that a
long-term orientation is positively associated with the entrepreneurial dimensions of innovativeness, proactiveness
and autonomy, which can drive positive performance outcomes (Rauch et al., 2009).
Hence, there are strong indications that a long term orientation of family firms can drive positive performance.
This long term orientation could very well be passed on to future generations. However, given current studies, if
firm performance is measured too close to the transition point, the long term effects will not be allowed to surface
(Astrachan, 2010). We believe that the relatively short timeframes adopted has influenced available studies to draw
premature conclusions. It may be the case that short term performance is worse if a family member takes over the
business compared to a person or entity unrelated to the family as suggested by prior research. New owners from
outside the family are more likely to introduce new strategies and organizational changes that are related to
increased expectations of short-term performance. However, based on extant family business literature, there are
reasons to believe that performance is better over the long term if the family continue to own the firm. Therefore, we
argue that there is a need to study post succession several years after the succession takes place.
Given that family and non-family firms are believed to have different focus in terms of firm performance
(cf. Shleifer & Vishny, 1997; Morck & Yeung, 2004) we believe that they not only have a different time
perspective, but also tend to focus on different types of performance measures. Firms taken over by outsiders tend to
be run more like “professional enterprises” in using financial leverage, etc (Bennedsen et al., 2007). Conversely,
firms taken over by insiders are believed to use less leverage and proritize survival or the firm. This leads us to posit
the following hypotheses:
H1: Transition of ownership outside the family is positively related to growth
H2: Transition of ownership outside the family is positively related to returns on equity
H3: Transition of ownership within the family is positively related to firm survival
METHODS
In order to answer the research questions, we draw on detailed longitudinal data on both individuals and firms.
With the help of Statistic Sweden (SCB) we have combined several data sources and obtained detailed information
on individuals and firms over a long time period. In short, we access a census panel of all privately held firms and
their owners in Sweden covering the 1990 to 2007 period. In addition, we have links to other individuals, such as
spouses, parents, siblings and children. This enables us to distinguish between family succession and outside sale.
Thereby, we adopt a multi-level approach to the study of entrepreneurial exit and entry. This study design is
theoretically called for but rare within entrepreneurship research (Davidsson & Wiklund, 2001; Davidsson, 2004).
Consequently, our approach offers methodological implications to the research field at large as we take several
levels of analysis into consideration.
The individuals included in the analyses are identified in a step wise process. First, we identify individuals that
any time during the observation period are part-owners of a privately held firm. We link these individuals to their
parents, children and partners. These links allow us to distinguish between firms taken over by family members or
outsiders. We also rely on firm level data for all privately held firms that these individuals own and run during the
observation period. The long study period and richness of data enable us to study the businesses and the individuals
involved prior to, during, and after a potential ownership transition. Financial information about these firms is
available from 1997 and onwards. Since we account for pre succession performance, we limit our study to
transitions taken place from 1999 and onwards. In short, we compare firm performance from two years prior to a
succession with post succession performance one, three and five years after the succession has taken place. Thereby,
we allow for a longer time frame than prior studies that have looked at performance one to three years post
succession.
In order to shed light on firm performance we compare return on equity (ROE), sales, profits (EBITA) and
number of employees prior to and after a succession has taken place, while distinguishing between family and nonfamily transitions. In short the observation period is 1990 to2007. In order to study the pre and post transition
performance we have focused on transfers occurring in 1999 or later. Only firms employing more than 10 people are
included in the analyses. In addition we have only included firms that remain in the sample for the time period of
interest following the transition. Therefore, more observations are included in the analyses evaluating performance
one year after the transition than in the analysis comparing differences in performance after five years. In total, we
have a sample of 5,081 firms (and transitions). Approximately 15% of those are transitions within the family while
85% are transitions to outsiders.
We used Difference-in-difference estimation (with OLS) in order to compare pre-succession performance with
post-succession performance. Difference-in-difference estimation has been used in similar studies (e.g. Bennedsen et
al., 2007). The impact of transition type is obtained by estimating:
where y is the outcome of interest, i.e. performance. post is a dummy variable stating if the time period is before
(0) or after (1) the succession. withinfam is a dummy variable stating if the firm belongs to the treatment group (i.e.
within family succession) or to the control group (outside family succession). The coefficient of interest, δ 1, takes
the interaction term of post and withinfam and is equal to one for the within family succession post the succession.
The coefficient shows the difference pertaining to the family succession. In short the difference-in-difference
estimate for the two groups and the pre and post succession period can be expressed as:
Difference-in-difference estimation assumes that there are no systematic differences in any other pre-treatment
variables or more precisely that such differences between the two groups should be the same over time. In other
words, the type of transition should be uncorrelated with variables predicting firm performance. There is a risk that
such unobserved heterogeneity between the groups does exist and therefore, one should interpret our results with
caution. In addition, DD estimation has been criticized for producing inconsistent standard errors. In future analyses,
it is critical to complement our analyses with other techniques such as IV estimation with 2Stage-least squares
regression as well as propensity score matching. This will enable us to better isolate the impact of descendant vs.
non-descendant ownership transition on firm performance. In experimental situations it is important to compare
counterfactual cases, i.e. the treatment group and the non-treatment group are either (preferably) randomly assigned
or resemble one another as much as possible on other critical dimensions. Since, in our case, the treatment is not
random, it is crucial that we adopt e.g. propensity score matching in order to find comparable cases. Another
shortcoming of the current paper relates to success bias since non surviving firms are dropped from the analyses of
firm performance.
Key Variables
Ownership transition (succession) can take place either within the family or outside the family. Family transition
is measured as the point in time when one or both parents leave the ownership and management of the firm to the
hands of at least one of their children. Outside transition is measured as the point in time when the owner/managers
leave their firm and other non-family members take over the ownership and management of the firm.
Sales is a yearly measure and consist of the total net sales of the firm as reported to the tax authorities. In the
analyses the natural log of sales is relied upon. It enables
Earnings before income tax (EBITA) is the profit of the firm as reported to the tax authorities. It is continuous
variable measured on a yearly basis as the result after financial income and expenses. Also here the natural log of the
variable is included in the analyses.
Return on equity (ROE) is calculated as EBITA over owners’ equity. Finally, employment is the number of fulltime equivalents working for the firm. It is measured on a yearly basis.
Table 1 reports descriptive statistics for the different performance measures both prior to and after the
succession. After the succession there is also information concerning growth rates (measured as growth in that
particular variable compared to the value reported two years prior to the succession). Performance measures and
growth rates are reported one, three and five years post succession. Prior to succession, the firms that are transferred
within the family are, on average, larger, have higher sales and return on equity. However, they are not necessarily
more profitable. Future studies could incorporate also other financial measures such as assets, investments and debt
levels in order to more readily capture the financial structure of the firm.
____________________
Insert Table 1 around here
____________________
In order to graphically display the growth rates we have also included four graphs. Graph 1 through 4 display
growth in EBITA, sales, employees and ROE respectively. Except for EBIT, firms transferred outside the family
appear to have increased growth rates, while firms transferred within the family remain at the same levels or actually
experience negative growth. It appears to be the case that the rates level off and/or start increasing again year five,
implying that the phenomenon of firm succession and its effects should indeed be studied over long time periods.
RESULTS AND DISCUSSION
In this section we report the results obtained in the difference-in-difference estimation as well as chi-square
statistics for survival rates. These results are related to the three hypotheses developed in the theoretical chapter.
According to Hypothesis 1 we expect that Transition of ownership outside the family is positively related to growth.
Even if the descriptive statistics presented in the method section, along with the graphs displayed, seemed to support
this hypothesis the results in Table 2 provide a more nuanced picture. In fact, we are only able to observe a positive,
and statistically significant, relation between type of succession and growth in sales and employees. Firms
transferred outside the family perform better in terms of sales and number of employees. Table 1 also revealed that
differences in the mean size of the firms becomes smaller over time. Thus, we receive partial support for hypothesis
1.
Hypothesis 2 states that Transition of ownership outside the family is positively related to return on equity. This
hypothesis is not supported in our analyses. According to the estimates in Table 2, the relationship is in the
anticipated direction, i.e. that outside family succession is positively related to return on equity wile inside family
succession is negatively related to the dependent variable. However, these differences are not statistically significant
and therefore we reject Hypothesis 2. Nevertheless, it is interesting to note the pattern observed in Graph 4. Here it
appears to be the case that firms transferred outside the family, on average, initially have lower returns on equity.
Over time, however, they catch up with the other group of firms and in fact obtain the same returns.
Consequently, depending on whose perspective is taken (micro or macro level), the implications of these
findings differ. As we do not find support for differences in e.g. profitability, the business owner may not perceive
changes in sales and employees as problematic. Policy makers, on the other hand may be more interested in
employment and sales growth levels post succession.
____________________
Insert Table 2 around here
____________________
Finally, according to Hypothesis 3 Transition of ownership within the family is positively related to firm survival.
Chi-square statistics are used to test this hypothesis and the results are presented in Table 3 below. The results show
that there indeed are differences in survival rates between the two groups studied. More precisely, of the firms
studied, 12.3% of the firms transferred outside the family eventually shut down during the observation period, while
the equivalent figure for the firms transferred within the family is 23.7%. Thus, we do not find support for
Hypothesis 3. Rather, the relation is reversed to our expectations.
____________________
Insert Table 3 around here
____________________
In order to fully assess the relationship with firm survival we see a need to conduct further analyses employing
more sophisticated techniques making full use of the panel structure of the data.
CONCLUSIONS
This research aims to systematically address gaps in empirical research on entrepreneurship, family businesses,
and ownership succession. We have used public matched employer-employee data compiled and administrated by
Statistics Sweden to follow individuals and firms over a long time period. Thereby, we can study the exit routes in
established firms and the probability of successful intergenerational transfers. In this paper we have reported
performance changes following ownership transitions. More specifically, we set out to study the economic effects of
two ownership transition routes. We have not been able to fully support our hypotheses. We found partial support
for Hypothesis 1, no support for Hypothesis 2 and a reversed relation for Hypothesis 3. However, our findings
suggest that succession outside the family is positively related to sales growth and employee growth. Over time,
non-family businesses increase their sales at a faster paste than family firms. The findings concerning profits
(measured by EBITA and ROE) are not as straight forward and the differences observed are not statistically
significant. In terms of firm survival, firms transferred outside the family are more likely to survive over time.
Overall, our findings suggest that in order to assess the different transition routes and the effects on performance,
it is necessary to consider different types of performance measures and whose perspective is taken (the firm, the
family or policy makers). In addition, it is critical to investigate long term effects as well as short term consequences
since the observed trends change over time or potential differences crystallize over time.
CONTACT: Karin Hellerstedt,; [email protected]; (T): +46-(0)36-101855; (F): +46-(0)36-161069;
Jönköping International Business School, Jönköping, Sweden.
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Table 1. Firm performance by succession type, means, standard deviation and growth rates
Outside family succession
Firm performance
Mean
t=-2 ROE
Within family succession
s.d.
Mean
s.d.
-0.549
39.185
0.095
1.896
ln ROE
-1.077
1.246
-1.382
1.122
EBITA
3923.417
117117.700
3227.872
19676.520
6.762
1.662
6.869
1.706
45371.760
182768.900
55535.390
254420.900
ln Sales
10.071
0.969
10.141
0.975
Employees
28.893
74.976
Outside family
succession
40.495
243.225
ln EBITA
Sales
Firm performance
Mean
t=+1 ROE
s.d.
Within family succession
Growth
Mean
s.d.
Growth
-0.196
37.355
64%
0.289
2.654
204%
ln ROE
-0.927
1.215
14%
-1.233
1.173
-11%
EBITA
4727.027
105551.600
20%
2998.896
25250.340
-7%
7.057
1.679
4%
6.948
1.536
1%
55841.830
183254.500
23%
ln Sales
10.234
1.020
2%
10.179
0.971
0%
Employees
33.193
77.995
15%
42.373
298.385
5%
ln EBITA
Sales
t=+3 ROE
57263.910 265193.200
3%
0.209
7.020
138%
0.158
2.296
67%
ln ROE
-0.976
1.245
9%
-1.261
1.076
9%
EBITA
2232.685
36364.090
-43%
1969.242
7774.180
-39%
7.085
1.618
5%
6.944
1.437
1%
ln EBITA
Sales
54265.680
126024.800
20%
ln Sales
10.268
1.018
2%
10.197
0.909
1%
Employees
32.204
59.964
11%
32.756
85.262
-19%
0.268
3.866
149%
0.326
1.200
243%
t=+5 ROE
48588.740 115474.100
-13%
ln ROE
-0.976
1.266
9%
-1.407
1.154
2%
EBITA
1701.363
15672.340
-57%
2322.129
6935.009
-28%
7.119
1.608
5%
6.935
1.602
1%
62615.250
170188.300
38%
ln EBITA
Sales
48987.830 121628.000
-12%
ln Sales
10.346
1.027
3%
10.202
0.907
1%
Employees
35.038
69.732
21%
32.790
85.493
-19%
Graph 1. Growth in EBITA
Graph 1. Growth in sales
Graph 1. Growth in employees
Graph 1. Growth in return on equity
Table 2. Mean Difference-in-difference (DD) estimates of post succession performance
ROE
Mean Differencein-differences
(t=+1)
-0.1589
Mean Differencein-differences
(t=+5)
-0.6941
Mean Differencein-differences
(t=+5)
-0.5854
(2.0309)
(1.7009)
(1.9801)
-0.0813
-0.1119
-0.1563
ln EBITA
ln Sales
Employees
(0.1063)
(0.1125)
(0.1256)
-0.1229**
-0.1390**
-0.2122**
(0.0569)
(0.0609)
(0.0673)
-2.7373
-11.366*
-14.1647**
(28.893)
(5.9155)
(6.9025)
***, ** and * denote significance at the 1, 5 and 10 percent level, respectively.
Standard errors are presented in parentheses
Table 3. Firm survival by type of succession
Outside family
succession
Within family
succession
Total
Pearson Chi2: 69.5888***
No firm exit
3,803
87.8%
571
76.3%
4,333
85.3%
Firm exit
571
12.3%
177
23.7%
748
14.7%
Total
4,374
707
5,081