Asia Pac J Manag
DOI 10.1007/s10490-010-9216-6
Does family business excel in firm performance?
An institution-based view
Weiping Liu & Haibin Yang & Guangxi Zhang
# Springer Science+Business Media, LLC 2010
Abstract We offer an institution-based view to the classic inquiry on the
relationship between family business and firm performance, which has been
dominated by traditional theories such as agency theory and the resource-based
view. Specifically, we argue that institutions define family business characteristics
such as ownership concentration and family management, and also affect the
performance of family business. Our research contributes to a reconciliation of prior
inconsistent findings and calls further attention to the embedded nature of family
business in institutions.
Keywords Family business . Institutions . Governance characteristics .
Institution-based view
Family businesses have dominated the economic landscape around the world
(Claessens, Djankov, Fan, & Lang, 2002; La Porta, Lopez-de-Silanes, & Shleifer,
1999; Morck & Yeung, 2003). In the United States, one third of the companies listed
in the Standard & Poor 500 are owned or managed by families (Anderson & Reeb,
2003a). In countries such as those in South and East Asia, Latin America, and Africa,
family businesses are becoming even more prevalent, with a vast majority of private and
We would like to thank Mike Peng (Editor-in-Chief Emeritus) for his constructive comments and hands-on
editorial assistance. Thanks also go to two APJM reviewers and Yi Jiang for their very helpful comments.
W. Liu
Department of Management, School of Business and Management, Hong Kong University of Science
and Technology, Clear Water Bay, Hong Kong
e-mail: [email protected]
H. Yang (*) : G. Zhang
Department of Management, City University of Hong Kong, Kowloon, Hong Kong
e-mail: [email protected]
G. Zhang
e-mail: [email protected]
W. Liu et al.
publicly traded firms either owned or controlled by families (Carney & Gedajlovic,
2002; Claessens et al., 2002; Claessens, Djankov, & Lang, 2000; Faccio & Lang, 2002).
The prevalence of family businesses has intrigued academia for decades (Arregle,
Hitt, Sirmon, & Very, 2007; Boyd, 1990; Morck, Scheifer, & Vishny, 1988; Villalonga
& Amit, 2006). Two streams of research can be identified in the broad family business
literature. One stream compares and contrasts the performance implications between
family and non-family firms. Some studies find that family firms outperform nonfamily firms (Carney & Gedajlovic, 2002), while others find the opposite (Barth,
Gulbrandsen, & Schone, 2005; Westhead & Howorth, 2006). Another stream of
research investigates how the specific characteristics of family business affect firm
performance, especially those related to governance structure. The results are also
highly inconsistent. For example, when compared with family firms managed by
outside CEOs, firms managed by family CEOs have been found to be more productive
(Durand & Vargas, 2003), less productive (Barth et al., 2005; Westhead & Howorth,
2006), or equally productive (Barontini & Caprio, 2006) in different research contexts.
While the proposition that “institutions matter” has long been acknowledged,
prior research has predominantly used agency theory and the resource-based view
(RBV) as major explanations of the family business-performance relationships (see
Appendix I, II, III, IV, V). However, family firms behave and perform differently
when operating in countries with different institutional environments (Steier, 2009).
Studies adopting an institution-based view find that the institutional context has a
strong bearing on family business practices and performance. For example, Peng and
Jiang (2006, 2010) find that having a family CEO is value-enhancing in
underdeveloped countries, while it has no significant effect in more developed
countries. They argue that the benefits and costs of family businesses may be
influenced by the institutional environments in different countries, such as the level
of legal and regulatory protections for shareholders. A more recent meta-analysis of
the relationship between ownership concentration and firm performance finds that
ownership concentration is more efficient in regions with less than perfect legal
protection of minority shareholders, but less efficient and even redundant in regions
with strong legal protection of shareholders (Heugens, van Essen, & van Oosterhout,
2009). Although informative, these studies fall short of presenting a holistic view of
family business-performance relationships across institutions. As Bhagat and his
colleagues (2010) argue that robustness of management theories needs to be further
examined in various institutional contexts, our research attempts to address two
critical questions in the family business literature: (1) What is the role of the
institutional environment in affecting the choice and performance difference between
family and non-family business? (2) How does the institutional environment drive
the specific characteristics of family business and its performance?
Extending the institution-based view of business strategy and corporate
governance (Peng & Jiang, 2010; Peng, Sun, Pinkham, & Chen, 2009; Peng, Wang,
& Jiang, 2008), we provide an in-depth analysis of how institutional forces
differentially regulate family business and performance in different institutional
environments. Our research has two major contributions. First, by comparing family
firms with non-family firms across institutions, we explore how and to what extent
family firms perform distinctively from non-family firms in different institutional
environments. Second, by focusing on family firms only, we explore how and in
Does family business excel in firm performance? An institution-based view
P2
Performance Difference
• Family business vs. non-
Firm Identity
P1
• Family business vs. non-
family business
family business
Institutional Environment
• Underdeveloped vs. developed
P3
Family Business Dimensions
• Family ownership concentration
• Family management
• Family control of the board
Family Firm Performance
P4-7
Figure 1 Conceptual framework
what ways institutions influence family firms and their performance (see Figure 1).
In doing so, this research attempts to reconcile prior inconsistent findings and
enhance our understanding of family business across institutions. Our framework
suggests that family businesses interact closely with the institutional environment,
which are not just “background,” but play active and critical roles in affecting family
firm performance.
Family business and institutional environment
Family business differs from non-family business in that family business is governed
and/or managed by members of the same family or a small number of families with a
vision of continuing the business across generations (Chua, Chrisman, & Sharma,
1999). Prior studies have used different ways to define the “family business”
concept, including family ownership, voting control, involvement in management,
control of the board, intention for family succession, or a self-perception of being a
family business (Chrisman, Chua, & Sharma, 2005; Chua et al., 1999; GomezMejia, Larraza-Kintana, & Makri, 2003; Litz, 1995). The selection and combination
of one or more of these dimensions lead to a variety of definitions. To achieve a
thorough understanding of family business, we define family business more broadly
and inclusively: a firm is defined as a family firm if it is controlled by the founders,
or by the founders’ families and heirs (Burkart, Panunzi, & Shleifer, 2003). This
definition covers a variety of family businesses and allows for enough variations in
our further investigation of the specific governance characteristics. Family
ownership, family management, and family control of the board are the most
important indicators of family business (Chua et al., 1999; Villalonga & Amit,
2006).
Agency theory and RBV are two dominant theories in explaining the family
business-performance relationships. Agency theory views organization as a nexus of
contracts between principals and agents, and argues that because of goal congruence
and close relationships between family owners and family managers, principal-agent
conflict is reduced in family firms and leads to higher performance. RBV in family
business research argues that family involvement helps develop family resources and
capabilities that contribute to firm performance (Habbershon, Williams, &
W. Liu et al.
MacMillan, 2003; Sirmon & Hitt, 2003). However, both agency theory and RBVbased explanations could be externally determined (Miller & Shamsie, 1996; Oliver,
1997; Priem & Butler, 2001), and thus provide only a partial explanation of the
relationships (Shleifer & Vishny, 1997).
In contrast to the more traditional agency theory and RBV, recent corporate
governance research has recognized the importance of institutions (Davis, 2005).
Institutions are rules of the game in a society, or more formally, the devised
constraints that shape human interaction (North, 1990: 3). An institution-based view
addresses the embeddedness of firms in the institutional environment (Peng et al.,
2008, 2009). It is the institutional arrangements or a set of fundamental political,
social, and legal rules that shape the strategic behaviors and outcomes of firms
across institutions (North, 1990). For example, legal institutions such as corporate
laws regulate the internal relationships of firms and their relationships to shareholders, providing legal and regulatory regimes for corporate operation; economic
institutions such as the infrastructure for capital distribution influence firms’ access
to resources and their operation cost in market; political institutions help establish a
stable social structure that facilitates economic exchanges among firms. Researchers
in the stream of comparative corporate governance have investigated the roles of
country-level institutions on firm-level practices in corporate governance (Aguilera
& Jackson, 2003; Aoki, 2001; Crouch, 2005). According to them, diversity of
corporate governance practices and varieties of capitalism originate from the diverse
institutional configurations in these countries (Carney, Gedajlovic, & Yang, 2009;
Hall & Soskice, 2001; Morck & Steier, 2005; Steier, 2009). A more recent study by
Aguilera, Filatotchev, Gospel, and Jackson (2008) advocates an open-system
approach to understand the interdependence between the broader environmental
context and governance practices, in particular, how environmental factors shape the
costs, contingencies, and complementarities of different corporate governance
practices and their effectiveness.
Notwithstanding the potential impact of the institutional environment on firm
practices and performance, it is surprising to see how little research has paid
attention to the institutional impact on family business (see Burkart et al., 2003;
Jiang & Peng, 2010; Peng & Jiang, 2006, 2010 for some exceptions). By
incorporating agency theory and RBV with an institution-based view, we attempt
to uncover the significant impact of institutions on family business and performance.
The comparison between family and non-family business across institutions1
Institutions may have bearing on two critical aspects of family business: its
occurrence and its performance as compared with non-family business. Prior
research has primarily focused on the performance comparison, but leaves the
institutional impact unexplored for these two aspects (See Appendix I for a review).
Family business researchers have identified some key differences between family
and non-family firms such as the use of administrative mechanisms to limit
deceptive or self-interested behavior (agency theory-based argument), or the use of
1
The comparison excludes state-owned firms since their governance structure and market activities are
subject heavily to government intervention.
Does family business excel in firm performance? An institution-based view
family resources to facilitate business operation (RBV-based argument) (Maury,
2006).
Agency theorists argue that the agency cost arises from two types of conflicts:
principal-agent (Agency Problem I) and principal-principal (Agency Problem II)
(Villalonga & Amit, 2006). It is expected that the cost of principal-agent conflict is
much lower in family firms than non-family firms because of the goal alignment
between family owners and managers (Jensen & Meckling, 1976), or because of the
family owners’ strong incentive to monitor and discipline managers (Pollak, 1985).
Instead, the cost of principal-principal conflict, or the tendency of large family
shareholders to expropriate benefits of non-family minority shareholders, is found to
be higher in family firms than in non-family firms, hurting firm performance (Fama
& Jensen, 1983; Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Unfortunately,
when addressing the performance variations of family versus non-family firms, most
studies have taken a one-sided view and emphasized only one agency problem while
overlooking the other. It remains unanswered as to under what conditions one
agency problem will outweigh the other.
RBV is another perspective that has been employed to identify the competitive
advantages of family firms. Studies adopting this perspective attempt to identify the
unique resources and capabilities that make family firms unique and allow them to
develop competitive advantages (Habbershon et al., 2003). They find that family
businesses possess hard-to-duplicate capabilities or “familiness” capitals, such as
human capital (Sirmon & Hitt, 2003), social capital (Arregle et al., 2007), physical
and financial capital (Dyer, 2006), trust and reputation (Aronoff & Ward, 1995),
integrity and commitment to relationships (Lyman, 1991), and entrepreneurship
(Zahra, Hayton, & Salvato, 2004).
Both agency theory and RBV perspectives on family business limit their attention
to the effects of agency cost or specific resources while paying less attention to the
role of external institutions in conditioning firm activities (Meyer & Peng, 2005). In
contrast to previous studies, our institution-based framework emphasizes the
embeddedness of family business in its institutional environment.
Occurrence of family business across institutions The occurrence of family business
reflects firms’ adaptation to specific institutional environments. First, an underdeveloped institutional environment (e.g., legal regulation, managerial labor market,
takeover market) often encourages the development of a firm’s internal control
mechanisms, such as family ownership, while a developed institutional environment
often reduces a firm’s dependence on internal mechanisms (e.g., ownership structure,
boards of directors, and the incentive system for managers), and encourages
dispersed ownership (La Porta, Lopez-de-Silanes, Shleifer, & Vishny 1998; Walsh &
Seward, 1990). In an underdeveloped institutional environment such as many Asian
countries, the inherent institutional deficiencies force firms to rely on family
resources for survival (Carney et al., 2009; Klapper & Love, 2004) while in a
developed institutional environment such as the United States and the United
Kingdom firms have relatively easy access to institutional resources. Although many
modern corporations also started with a concentrated family ownership (Chandler,
1990), the development of the national institutions, especially better protection of
investor rights, encourages founding families and their heirs to dilute their equity to
W. Liu et al.
attract minority shareholders and delegate day-to-day management to professional
managers (Berle & Means, 1932).
Second, internal family governance represents an effective substitute in the void
of market discipline (Steier, 2009). Managers as agents of owners (principals) may
engage in self-serving behavior that is detrimental to the owners’ wealth
maximization (Fama & Jensen, 1983; Jensen & Meckling, 1976). When the
institutions (e.g., takeover markets, legal and regulatory institutions) are underdeveloped, the cost of monitoring and enforcing contracts becomes high since the
governance vacuum makes it difficult to measure or observe the behavior of agents
(Hill, 1995; Williamson, 1985). Family governance, to some extent, can circumvent
managerial opportunism and therefore be critically needed in an underdeveloped
institution (Dharwadkar, George, & Brandes, 2000).
Proposition 1 There will be a negative relationship between the level of institutional
development and the likelihood of having a family business versus the likelihood of
having a non-family business.
Performance comparison between family and non-family business across institutions The level of institution development may also help explain the performance
differences between family and non-family business. In an underdeveloped
institutional environment, family firms enjoy the advantages of a reduced Agency
Problem I as compared with non-family firms, because it is easier for family
members to have aligned interests in managing firms. Regarding Agency Problem II,
it is expected that the principal-principal conflict between controlling shareholders
and minority shareholders tends to be more severe in family firms than in non-family
firms because of the lack of institutional monitoring (Young et al., 2008). However,
we contend that although family owners may expropriate minority shareholders to
some extent, they will not do so to sacrifice their large and long-term investment,
while non-family firms do not have such a constraining mechanism (Chua et al.,
1999; Chung & Luo, 2008). Compared with non-family firms, family owners are
motivated to continue their family business (Aguilera et al., 2008; Becht & Roel,
1999), develop longer time horizon (Dreux, 1990; Stein, 1989), and care about
family reputation and standing in the society (DeAngelo & DeAngelo, 2000). As a
contrast, the lack of market discipline for non-family firms is likely to induce
opportunistic behavior and decrease firm performance (Li, Wang, & Deng, 2008).
Further, it is also harder for non-family firms to raise necessary resources in an
underdeveloped institution, while family firms may be able to do so from family
connections at a lower cost (Anderson, Mansi, & Reeb, 2003). The above analysis
suggests that the reduction of agency costs and the access of family resources may
ultimately enable family firms to outperform non-family firms in an underdeveloped
institutional environment.
Conversely, when firms operate in a developed institutional environment, the
legal and regulatory systems afford strong constraints to managerial opportunism,
reducing the principal-agent cost difference (Agency Problem I) between family and
non-family firms. The legal and regulatory institutions also constrain the tendency of
majority family shareholders to expropriate the benefits of minority shareholders,
leading to insignificant differences in Agency Problem II between family and non-
Does family business excel in firm performance? An institution-based view
family firms. Consistent with RBV, developed institutions often abound with mature
financial and labor markets (e.g., adequate monetary and human supply) where both
family and non-family firms can acquire financial support and human resources
easily. Family resources and involvement may not significantly increase family firm
performance in a developed institutional environment since firms can rely on the
external market for critical resources and capabilities. Empirical studies find that
family firms outperform non-family firms more significantly in countries with
underdeveloped institutions such as continental European countries, but less
significantly in countries with more developed institutions such as Norway (Barth
et al., 2005). Thus:
Proposition 2 Family firms will more significantly outperform non-family firms in
an underdeveloped institutional environment than in a developed institutional
environment.
Institutional influences of family business
Family businesses vary in the modes and degrees of family involvement. Attempts to
capture the varying modes of family involvement have pointed to several important
governance characteristics, such as family ownership, family involvement in
management, and family control of the board (Villalonga & Amit, 2006). Previous
studies used to blur these three concepts; our research clarifies the three dimensions
and presents a model to address the multi-faceted nature of family business in
different institutions.
Institutions as antecedents of family business The institution-based view on corporate
governance contends that external institutions influence managerial choice of
governance structure and practice (Jiang & Peng, 2010; Peng & Jiang, 2010; Young
et al., 2008). As noted earlier, an underdeveloped institutional environment—in
particular, the weak formal regulatory regimes and restricted product and labor
markets—often fails to provide market discipline and external support to firms. When
there are few rules and procedures to protect their interests and activities, firms are
motivated to reduce uncertainty by gaining control of the firm (Jensen, 1993). The
desire for power and control thus may lead to a high level of family ownership and
control (Jensen, 1993). The controlling family shareholders may even exploit the
institutional voids to gain control rights far greater than cash flow rights of the firm
through the use of cross-shareholdings and pyramids (Peng & Jiang, 2006, 2010).
Moreover, when there is limited access to resources through formal channels
(e.g., labor markets or banks), firms are more likely to rely on kin networks and
family ties to obtain resources, such as human capital, social capital, financial
capital, and other intangible assets (Arregle et al., 2007; Dyer, 2006; Sirmon & Hitt,
2003). Thus, when operating in underdeveloped institutions, family firms are likely
to have higher levels of family ownership, involvement in management, and family
members on the board, since they can provide better internal control mechanisms
and better access to resources.
In contrast, when firms operate in developed institutions, such as strong
protection of shareholder rights or developed product and labour markets, they rely
W. Liu et al.
less on internal control mechanisms and informal family ties to operate business
because external governance mechanisms and formal channels are efficient enough
in supporting firm operation (Walsh & Seward, 1990). A lower level of family
involvement in business operation is more likely to be witnessed (Steier, 2009).
Proposition 3 There will be a negative relationship between the level of institutional
development and (1) family ownership concentration, (2) family involvement in
management, and (3) the proportion of family members on the board.
Institutions as a moderator between family business and performance
Family ownership concentration and performance across institutions The relationship between family ownership concentration and family firm performance has never
been consistent (see Appendix II for a review). Both positive (Carney & Gedajlovic,
2002) and negative (Claessens et al., 2002) relationships have been reported.
Recently, scholars find that the relationship between family ownership concentration
and firm performance may be complex and nonlinear (Anderson & Reeb, 2003b;
Claessens et al., 2002; Thomsen & Pedersen, 2000). As the ownership stake
increases, the founding family may initially have greater incentives to monitor
managers and business activities, provide vital resources, and adopt appropriate
strategies to maximize firm values. This is particularly the case when the top
managers are also family members. The cost to align the goals of owners and
managers will decrease dramatically. However, as ownership increases beyond a
certain point, large family owners gain nearly full control of the company and are
powerful enough to use the firm to generate private benefits that are not shared by
minority shareholders (Claessens et al., 2000). Such entrenchment effects may even
mitigate the positive effects of the reduced monitoring cost, decreasing firm value
(Fama & Jensen, 1983).
Though informative, these studies have assumed away the institutional context.
We extend these arguments by further proposing that the strength of such
relationships may vary across institutions. In underdeveloped institutions, increased
ownership stake by family members may initially contribute to firm performance
since ownership concentration brings the benefits of a reduced Agency Problem I.
Increased ownership also increases the incentive of family owners to ensure business
operation. In addition, scare resources can be secured through family ties, which turn
to be a critical channel for resources in weak institutions. When family ownership
becomes large enough, due to the absence of legal and regulatory laws, the
concentrated ownership may foster opportunism and expropriation (e.g., altruism
toward kin, conflicting intentions and behaviors among family members), and may
even offset the positive alignment effects beyond a particular level of ownership,
suggesting a more significant and steeper inverted U-shape relationship.
Conversely, in developed institutions strong legal and regulatory systems provide
sufficient protection toward investors, making the benefits of a reduced Agency
Problem I less significant, while the developed financial and labor markets reduce a
firm’s dependence on family resources, making the resource provision function of
family business less important. The preference of family business toward inside
financing even imposes constraints, preventing them from gathering enough external
Does family business excel in firm performance? An institution-based view
resources to finance growth opportunities (Dunn & Hughes, 1995; Gallo & Vilaseca,
1996). Family opportunism and their expropriation of minority shareholders may
also be prevented effectively by the developed institutions (Burkart et al., 2003; La
Porta, Lopez-de-Silanes, Shleifer, & Vishny, 2002). Accordingly, the inverted Ushape relationship may not be as significant as that in underdeveloped institutions
(see Figure 2).
Proposition 4 There will be an inverted U-shape relationship between family
ownership concentration and family firm performance, and this relationship will be
stronger and more significant in an underdeveloped institutional environment than
that in a developed institutional environment.
Family management and performance across institutions The existing literature
differentiates family management from non-family management on the basis of CEO
appointment. It is believed that family firms run by family CEOs may perform
differently from family firms run by non-family CEOs (a hired CEO outside the
founding family). Both agency theory and RBV have been used to examine the
relationship between the presence of a family or non-family CEO and firm
performance; however, the results are highly inconclusive (see Appendix III for a
review).
Studies adopting agency theory argue that there are significant advantages and
also disadvantages in appointing family members as CEOs (Anderson & Reeb,
2003b). Since the founding family both owns and manages the firm, Agency
Problem I can be reduced greatly. When a family member holds the CEO position,
Agency Problem II can be severe because family CEOs as inside shareholders may
have greater incentives to expropriate minority shareholders (Fama & Jensen, 1983).
It seems difficult to make any conclusions without considering the conditions under
which the reduced Agency Cost I may outweigh the increased Agency Cost II
associated with a family CEO.
Studies adopting the RBV emphasize a family CEO’s easy access to unique
resources through kinship networks, such as human, social, and financial capital;
however, family capital can be detrimental to the firm if managed inappropriately.
Sons, daughters, and other relatives who are incompetent or unqualified may be
appointed as firm managers, hurting firm performance (Schulze, Lubatkin, & Dino,
Figure 2 Family ownership
concentration and family firm
performance in developed and
less developed institutions
High
Family Firm
Performance
More developed
Less developed
Low
Low
High
Family Ownership Concentration
W. Liu et al.
2003a). Altruism, non-merit-based compensation, and irrational strategic decisions
may also offset the benefits of these resource advantages (Gomez-Mejia, NunezNickel, & Gutierrez, 2001; Schulze, Lubatkin, & Dino, 2003b).
Recent studies have found that the relationship between family CEOs and family
firm performance is subject to institutional environment. Researchers find that in
countries with underdeveloped legal and regulatory institutions to protect minority
shareholders, family management such as a family CEO may be beneficial, while in
countries with a strong legal system to prevent expropriation by majority
shareholders, non-family CEOs are optimal (Burkart et al., 2003; Peng & Jiang,
2010). The mixed evidence may also result from the ambiguous definition and
inconsistent operationalizations of a family CEO. Previous studies define and
operationalize a family CEO ambiguously: some define a family CEO as a founder
CEO, while others define a family CEO as including either a founder or a
descendant CEO. Considering the significant differences between founder-controlled
and descendant-controlled firms (Schulze et al., 2003a, 2003b; Villalonga & Amit,
2006), we believe it is necessary to differentiate different types of CEOs and
examine how they influence firm performance. Specifically, we classify family firms
into those managed by founder, descendant, or outside CEO (Gedajlovic, Lubatkin,
& Schulze, 2004), and consider how their performance impacts vary across
institutions.
Founder CEO. Family business literature recognizes the influential effects of
founders on firm performance. Compared with firms managed by outside CEOs,
founder CEO-managed firms enjoy the benefits of decreased principal-agent conflict
and greater access to unique resources. Compared with descendant CEOs, founder
CEO-managed firms enjoy many advantages, including the founder’s greater
obligation to preserve wealth for the next generation (Bruton, Ahlstrom, & Wam,
2003), tacit knowledge and experience (Lee, Lim, & Lim, 2003), and broad social
networks (Jayaraman, Khorana, Nelling, & Covin, 2000). Empirical studies confirm
that the performance of family firms run by founders actually outperform other firms
(Anderson et al., 2003; Anderson & Reeb, 2003b; Villalonga & Amit, 2006) (see
Appendix IV for a review).
We extend these arguments by further proposing that the positive effect of a
founder CEO on family firm performance may be stronger in an underdeveloped
institutional environment. Without the presence of strong institutions such as
regulative and legal systems, descendant CEOs and outside professional CEOs may
engage in deceptive, opportunistic, or self-interested behavior (Zhang & Ma, 2009).
Compared with descendant or outside CEOs, founder CEOs run the firm from
scratch to success. Their long tenure and central positions in the firm encourage
founders to exert greater commitment and motivation to firm operation (McConaughy,
2000). In addition, because of the underdeveloped strategic factor market, founder
CEOs’ multiple access to resources may also create competitive advantages. In
countries with more developed legal and regulatory institutions to protect investors,
the advantages associated with a founder CEO may not be so distinctive, since even
when the family firm is run by an outside CEO, his or her behavior can be
effectively monitored and disciplined, and agency problems can be reduced to a
large extent. Thus, we expect that although family firms managed by founders
outperform those managed by descendant or outside managers in developed
Does family business excel in firm performance? An institution-based view
institutions (Anderson & Reeb, 2003b; Villalonga & Amit, 2006), such performance
differences will be stronger and more significant in underdeveloped institutions
(Willard, Krueger, & Fesser, 1992).
Proposition 5 Family firms managed by a founder CEO will experience higher
performance than those managed by descendants or outside CEOs. The performance
difference will be larger and more significant in an underdeveloped institutional
environment than that in a developed institutional environment.
Descendant CEO. Although descendant CEO-managed firms enjoy some benefits
of the reduced principal-agent conflict compared with those managed by outside
CEOs, the presence of a descendant CEO tends to contribute less to firm
performance, since the descendant CEO has been found to: (1) have less sense of
stewardship for the business and lack the motivation, commitment, and incentive to
sustain it (Andersson, Carlsen, & Getz, 2002); (2) be selected on the basis of family
ties rather than professional expertise and is very likely to be unqualified or
incompetent (Barth et al., 2005); (3) have difficulties taking over the tacit
knowledge, managerial skill (Morck & Yeung, 2003), and social capital from
founders (Steier, 2001); and (4) have greater concern about their own welfare and be
more likely to expropriate minority investors (Villalonga & Amit, 2006). Empirical
evidences on the performance impacts of descendant CEOs are mixed (see
Appendix IV for a review); some studies find that the performance of firms run by
descendants are actually below the average (Morck, Strangeland, & Yeung, 2000;
Villalonga & Amit, 2006), while some others find no significant performance
difference between firms run by descendants and firms run by other managers (Sraer
& Thesmar, 2007).
Taking the external institutional environment into account, we propose that a
developed legal and regulative mechanism can substitute for the ineffective internal
governance structure and to some extent mitigate the negative effects of a
descendant CEO, reducing the performance difference with firms managed by
founders or outsiders. In underdeveloped institutions, altruistic transfer of family
ownership and control to the descendants is more likely to occur. On the one hand,
parents’ altruism, in particular their inability to discipline underperforming children
who serve in management positions, leads to less effective monitoring of family
managers (Schulze et al., 2003b); on the other hand, the appointment of less-thanqualified family members as CEOs may encourage free riding, shirking, and other
forms of opportunistic behaviors (Schulze et al., 2003b).
Proposition 6 Family firms managed by a descendant CEO will experience the
lowest performance compared with those managed by a founder CEO or an outside
non-family CEO. The performance difference will be larger and more significant in
an underdeveloped institutional environment than that in a developed institutional
environment.
Family control of the board and performance across institutions Firm boards take
the responsibilities of monitoring corporate management and provide resources and
services. In the family business literature, specific topics that have been investigated
include the performance implications of board size, the diffusion of inside and
W. Liu et al.
outside directors, patterns of board interlocks between firms, and board capital
(Boyd, 1990; Dalton, Daily, Johnson, & Ellstrand, 1999). Considering that the
investigation of family member involvement is the main focus of this paper and the
emphasis of corporate governance literature on the unique role of inside directors as
monitors (Fama & Jensen, 1983; Johnson, Daily, & Ellstrand, 1996), we
conceptualize board composition as the proportion of family members on the board
and explore its relationship with family firm performance.
Some studies find that a high proportion of family members on the board decreases
firm value (Daily, 1995; Daily & Dalton, 1994a, 1994b), while others find that family
directors are in a better position to evaluate CEO strategic decision making, increasing
firm value (Cochran, Wood, & Jones, 1985; Kesner, 1987) (see Appendix V for a
review). The mixed effect of family members’ presence on the board might be
contingent on the institutional environment. First, we argue that the overall proportion
of family members on the board has a negative effect on firm performance. Board is in
a position to monitor firm operation and performance (Fama & Jensen, 1983). For the
board of directors to be effective, it must be independent of management. When there
are too many family members on the board, board independence and its monitoring
effect would be reduced, undermining the board’s responsibility to oversee, evaluate,
and discipline top management (Baysinger & Hoskisson, 1990). In addition, the
increased proportion of family members brings down the diversity of the board,
consequently providing redundant resources. Too many insiders on the board also
influence the legitimacy of the board (Hillman & Dalziel, 2003).
Second, we further propose that the strength of the negative main effect between
family control of the board and performance is subject to variations across
institutions. In developed institutions the inappropriate internal mechanisms (e.g.,
high proportion of family directors) may be partially substituted by external
mechanisms (Walsh & Seward, 1990). Institutions can work as counterbalance for
the internal governance mechanisms to resolve governance conflicts (Jensen, 1993;
Rediker & Seth, 1995; Suhomlinova, 2006) and they were found to matter more for
firms with poor governance structure (Klapper & Love, 2004). Strong institutional
laws and regulations can effectively constrain managerial opportunism, making the
monitoring role of the board less important, and the negative relationship between
the proportion of family members on the board and firm performance may be less
significant. Conversely, in underdeveloped institutions, the monitoring responsibility
of the board and functions of providing resources and services cannot be effectively
shouldered by the ineffective external governance mechanisms and markets, which
strengthen the negative relationship between the proportion of family members on
the board and family firm performance.
In addition, when the board is dominated by family members, it will undermine
the resource acquisition role of the board especially in underdeveloped institutions.
Firms often use board co-option as a way to secure external resources, including
information, access to finances, and important social interactions (Arregle et al.,
2007). For instance, Japanese firms often invite bank representatives to sit in their
boards to secure bank loans. When firms cannot get them in the open market, they
rely more on the board to get such critical resources (Johnson et al., 1996). Thus,
when the board is dominated by family members, it may impede family firms to
acquire resources through co-option from external stakeholders.
Does family business excel in firm performance? An institution-based view
Proposition 7 There will be a negative relationship between the proportion of family
members on the board and family firm performance. This relationship will be
stronger and more significant in an underdeveloped institutional environment than
that in a developed institutional environment.
Discussion
A “context free” assumption of prior studies on family business has been inadequate
to explain variations of family firm structures and performances across institutions
(Davis, 2005). Departing from prior studies, this research provides a fresh
institution-based view to re-examine the relationship between family businesses
and performance. We propose that some prior inconsistent findings may be
reconciled if we take the broader institutional environment into account. The
research suggests that institutions are more than background conditions, playing
critical roles in defining the governance characteristics of family business and
regulating their performance impacts. We believe that an adequate theory of family
business cannot be fully established without considering the institutional environment where the family businesses are embedded.
Family businesses are regulated by the opportunities and constraints imposed by
institutions. It is not surprising to see that some areas witness a greater abundance of
family business than others, such as East Asia (Steier, 2009). We argue that the
emergence of family business complements an underdeveloped institutional
environment in that the former provides necessary financial, legal, and governance
protections, while a developed institutional environment may have less demand for
this kind of family protection.
Our research suggests that family governance may be an effective substitute for
institutional voids, helping firms overcome some ill-functioning institutional
environments. Just as Steier (2009: 531) has noted, “family is itself a primary
institution that will continue to be manifest in the governance of economic systems
throughout the world.” It is expected that family firms will outperform non-family firms
more significantly in underdeveloped than in developed institutions, and the family
protection against agency costs will be more pronounced. We further differentiate the
family business into three dimensions: family ownership concentration, family
management (founder CEO or descendant CEO), and family control of the board. We
propose that family businesses can be a mixed blessing for firm performance in an
underdeveloped institutional environment. The positive returns from a founder CEO
will be enlarged in an underdeveloped area while the negative returns from a descendant
CEO will also be amplified. This suggests that the proper management of a family
business in an underdeveloped institutional environment is necessary to fully realize its
merits.
Our research makes three important contributions to the literature. First, it is one
of the few pieces of research that provides an institution-based view to examine the
relationships among institutions, family businesses, and firm performance. This
moves from the context-free model suggested in prior studies informed by agency
theory and RBV to a context-embedded model involving institutional context as a
critical factor to resolve the shortcomings in under-socialized economic perspectives
W. Liu et al.
of family business. It complements and enriches the family business literature by
drawing attention to the often overlooked importance of institutions (Hoskisson,
Eden, Lau, & Wright, 2000; Peng et al., 2009; Wright, Filatotchev, Hoskisson, &
Peng, 2005), and advancing our understanding of how institutional environments
influence family businesses and performance.
Second, our research has taken a fine-grained approach to investigate the relationship
between family business and firm performance. We go beyond prior studies by
explicitly examining three distinct dimensions of family businesses and untangling the
different effects of each on firm performance. This helps to explain the ambiguities in
family business studies and significantly advance the research in this area.
Last, our consideration of institutional environment helps capture the patterned
variations in family businesses across institutions and resolve some inconsistent or
controversial findings in prior studies. The classical question of whether family
businesses excel in firm performance cannot be adequately addressed if we fail to
acknowledge the critical role of their institutional environment. In a broad sense, our
work, from a family business perspective, contributes to the expanding literature on
the institution-based view (Peng et al., 2008, 2009), which now has featured the
institution-based view of market entries (Meyer, Estrin, Bhaumik, & Peng, 2009), of
corporate diversification (Lee, Peng, & Lee, 2008), of corporate governance (Jiang
& Peng, 2010; Peng & Jiang, 2010; Young et al., 2008), and of entrepreneurship
(Lee, Yamakawa, Peng, & Barney, 2011).
Conclusion
This research has proposed an institution-based view to examine the relationships
among institutions, family businesses, and firm performance. It advances our
understanding of family business by introducing the critical role of institutional
environments. We hope that this will call attention to the embedded nature of family
businesses in institutions, and that future research will build on our work by
improving and reformulating the understanding of family businesses across different
institutional environments.
Appendix I Comparison of family vs. non-family firms*
Author
Sample
Conclusion
Theory used
Anderson &
Reeb, 2003b
403 firms from S&P
500, 1992–1999
Family firms are significantly better
Agency
performers than non-family firms in terms theory
of ROA and Tobin’s Q; In well-regulated
and transparent markets, family ownership in public firms reduces agency
problems without leading to severe losses
in decision-making efficiency.
Barth et al., 2005
Norway firms, 1996
Family-owned firms are less productive
than non-family-owned firms.
Agency
theory
Does family business excel in firm performance? An institution-based view
Author
Sample
Conclusion
Claessens et al.,
2002
East Asian firms
In East Asian economies, the excess of
Agency
large shareholders’ voting rights over cash theory
flow rights reduces the overall value of the
firm, albeit not enough to offset the
benefits of ownership concentration.
Demsetz &
511 firms from all
Villalonga, 2001 sectors of the US
economy, 1976–1980
Theory used
No statistically significant relation between Agency
ownership structure and firm
theory
performance.
Ownership structures differ across firms
because of differences in the
circumstances facing firms, such as
scale economies, regulation, and the
stability of the environment in which
they operate.
Lins, 2003
1, 433 firms from 18
emerging economies.
Firm values are lower when a management Agency
theory
group’s control rights exceed its cashflow rights. These effects are significantly
more pronounced in countries with low
shareholder protection.
Maury, 2006
1, 672 non-financial
firms in 13 Western
European countries
(1) Family control outperform non-family Agency
control in terms of profitability in diftheory
ferent legal regimes; (2) Family control
lowers the agency problem between
owners and managers, but gives rise to
conflicts between the family and minority shareholders when shareholder protection is low; (3) Family control
increase profitability in legal environments with strong governance regulations.
Morck et al., 1988 371 Fortune 500 firms,
1980
Younger founder-controlled firms are more Agency
theory
valuable; For older firms, Tobin’s Q is
lower when the firm is run by a member
of the founding family than when it is
run by an officer unrelated to the founder.
Tobin’s Q first increases, then declines, and
finally rises slightly as ownership by the
board of directors rises.
Schulze,
Lubatkin, Dino,
& Buchholtz,
2001
American family
businesses, 1995
Private ownership and owner management Agency
not only reduce the effectiveness of
theory
external control mechanisms, they also
expose firms to a “self-control” problem
created by incentives that cause owners to
take actions which “arm themselves as
well as those around them.”
Westhead &
Howorth, 2006
905 private firms in the
UK
Closely held family firms did not report
superior firm performance.
*Institutional effects are italicized.
Agency and
stewardship
theories
W. Liu et al.
Appendix II Family ownership concentration and firm performance
Author
Sample
Conclusion
Theory used
Anderson &
Reeb,
2003a
319 firms in S&P 500,
1993–1999
Firms benefit from the presence of founding Agency theory
families; Firm gains from family control
starts to taper off when the ownership stake
exceeds 30%.
Carney &
106 publicly traded
Gedajlovic, Hong Kong firms in
2002
1993
Coupled ownership and control is positively
related to accounting profitability, dividend
payout levels and financial liquidity, and
negatively related to investments in capital
expenditures.
Agency theory,
resourcebased view
Claessens et
al., 2002
1,301 publicly traded
firms in eight East
Asian countries
Firm value increases with the cash-flow
Agency theory
ownership of the largest shareholder, falls
when the control rights of the largest
shareholder exceed its cash-flow ownership.
La Porta et
al., 2002
539 large firms from 27
wealthy economies
Lower valuations for firms in countries with Agency theory
worse protection of minority; Higher firm
valuations in countries with better protection
of minority shareholders and in firms with
higher cash-flow ownership by the controlling shareholder.
Morck et al., 371 Fortune 500 firms in First increasing and then diminishing returns
1988
1980
to concentration and negative returns after
about 30% concentration.
Agency theory
Morck et al., Canadian public
2000
corporations
Family ownership, particularly when in the
hands of the successors to the founder,
negatively affects firm performance.
Agency theory
Schulze et
al., 2003a
During periods of market growth, the
Agency theory
relationship between the use of debt and the
dispersion of ownership among directors at
family firms is U-shaped.
1,464 American family
businesses, 1995
Shleifer &
Vishny,
1997
(1) Family ownership add value when the
Agency theory
political and legal systems of a country do
not provide sufficient protection against the
expropriation of minority shareholder; (2)
As ownership gets beyond a point, large
owners are wealthy enough to prefer to use
firms to generate private benefits of control
that are not shared by minority
shareholders.
Thomsen &
Pedersen,
2000
435 European largest
companies
Family ownership is associated with a
negative MBV premium in the United
Kingdom, but not on the continent.
Agency theory
Zahra, 2003
409 US manufacturing
firms
Family ownership and involvement in the
firm as well as the interaction of this
ownership with family involvement are
significantly and positively associated with
internationalization.
Stewardship
theory
Does family business excel in firm performance? An institution-based view
Appendix III Family CEO and firm performance
Author
Sample
Conclusion
Theory used
Anderson &
Reeb,
2003b
S&P 500 Industrial firms
from 1993–1999
A positive performance effect when family Agency theory
members serve as CEOs relative to
unrelated CEOs; Family firms with family
CEOs experience the greatest reductions in
firm risk relative to non-family firms or to
family firms with outside CEOs.
Barontini &
Caprio,
2006
Agency theory
675 publicly traded firms When a descendant takes the position of
in 11 Continental Europe
CEO, family-controlled companies are not
countries
statistically distinguishable from nonfamily firms in terms of valuation and
performance.
Barth et al.,
2005
Firms in Norway
Business and Industry
(NHO) in 1996
Family-owned firms managed by outside
Agency theory
CEOs are equally productive as nonfamily-owned firms, while family-owned
firms managed by a person from the owner
family are significantly less productive.
Durand &
Vargas,
2003
Survey by the Bank of
France in 1997
Owner-controlled firms have a greater
Agency theory
productive efficiency than agent-led firms.
Gomez-Mejia 276 Spanish newspapers
et al., 2001
over 27 years (1966–
1993)
Non-family firms monitor CEOs better; Firm Agency theory
performance and business risk are much
stronger predictors of chief executive
tenure when a firm’s owners and its
executive have family ties and that the
organizational consequences of CEO
dismissal are more favorable when the
replaced CEO is a member of the family
owning the firm.
McConaughy, 82 founding family
2000
controlled firms
Family CEOs have superior incentives for
Agency theory
maximizing firm value and, therefore, need
fewer compensation-based incentives.
Morck et al.,
1988
Canadian firms
Agency theory
Tobin’s Q increases when the founding
family holds one of the top two positions;
Heir-controlled firms showed low industryadjusted financial performance relative to
other firms of same ages and sizes.
Westhead &
Howorth,
2006
905 independent private
companies in the UK
The management rather than the ownership
structure of a family firm was associated
with firm-performance. Private family
firms should avoid employing family
members in management roles.
Agency
theory,
stewardship
theory
W. Liu et al.
Appendix IV Founder CEO vs. descendant CEO and firm performance
Author
Sample
Conclusion
Theory used
Jayaraman et al.,
2000
US public corporations Founder management has no main effect Agency
on stock returns over a 3-year holding
theory,
period, but that firm size and firm age
resourcemoderate the CEO founder status—firm based view
performance relationship.
McConaughy,
Walker,
Henderson, &
Mishra, 1998
US founding family
controlled firms
Morck et al., 1988
371 Fortune 500 firms For older firms, Tobin’s Q is lower when Agency
theory
in 1980
the firm is run by a member of the
founding family than when it is run by
an officer unrelated to the founder.
Morck et al., 2000
Canadian firms
Firms controlled by heirs of the founder
show lower profitability than founder
and family outsider controlled firms in
the same industry; New wealth created
by founders enhances firm value, but
managerial entrenchment and distorted
incentive structures impede the growth
of firm value in descendant-inherited
firms.
Perez-Gonzalez,
2006
US nonfinancial,
nonutility firms in
COMPUSTAT in
1994
Firms where incoming CEOs are related Agency
to the departing CEO, to a founder, or to theory
a large shareholder by either blood or
marriage underperform in terms of
operating profitability and market-tobook ratios, relative to firms that
promote unrelated CEOs.
Villalonga & Amit,
2006
Fortune 500 firms
during 1994–2000
Controlled by heirs of the founder show Agency
theory
lower profitability than founder and
family outsider controlled firms in the
same industry. The conflict between
family and non-family shareholders in
descendant-CEO firms is more costly
than the owner manager conflict in nonfamily firms.
Descendant-controlled firms are more
efficient than founder-controlled firms.
Agency
theory
Agency
theory
Appendix V Family control of the board and firm performance
Author
Sample
Conclusion
Theory used
Anderson Founding-family controlled In firms with continued founding-family
Agency theory
& Reeb, firms in S&P 500
ownership and relatively few independent
2004
directors, firm performance is significantly
worse than in non-family firms; A moderate family board presence provides sub-
Does family business excel in firm performance? An institution-based view
Author
Sample
Conclusion
Theory used
stantial benefits to the firm.
Boyd,
1990
147 firms in Moody’s
manuals and Compact
Disclosure database
Boards are smaller in a more uncertain
environment and have an increased
number of interlocks. This relationship
was stronger in high-performing firms.
Agency theory,
resource
dependency
theory
Ford,
1988
Inc. 500 firms
Resource
Greater numbers of outsiders had
significantly less influence or importance. dependency
theory
The presence of outsiders may actually
reduce the influence of the board.
Schulze et American family
al., 2001
businesses in 1995
Outsider representation on boards shows a
significant negative effect on firm
performance.
Agency theory
Vance,
1964
Firms with insider-dominated boards per- Agency theory,
resource
formed better than firms with outsiderdominated boards for the successful, large, dependency
publicly-owned companies.
theory
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Weiping Liu (PhD, City University of Hong Kong) is a visiting scholar in the Department of
Management, Hong Kong University of Science and Technology. Her main research areas include product
innovation and strategic management in transition economies.
Haibin Yang (PhD, University of Texas at Dallas) is an assistant professor of management at the City
University of Hong Kong. His research interests are strategic networks, acquisitions, and entrepreneurship.
Guangxi Zhang (MEd, Zhejiang University) is a doctoral student at the City University of Hong Kong.
Her research interests are innovation, strategic networks, and acquisitions.