Do private family firms rely on internal finance to grow?
Evidence from different legal origins†
Ignacio Requejoa,*
a
IME and Family Business Centre, University of Salamanca, E37007, Spain
This version: November 2nd, 2016.
Abstract
We investigate whether family control mitigates the dependence of business growth on
internal finance. Firm age and the institutional environment are considered in the study. Our
results are based on a new sample of private firms from two regions in which family
ownership is widely widespread: Western Europe and East Asia. However, the countries that
we cover differ from each other in their legal origins. We find that the growth of private
family firms is less reliant on internal finance, thus supporting that family reputation helps to
alleviate the constraint imposed by scarce internal resources. Consistent with this
interpretation, family firms’ lower dependence on internal funds is mainly driven by mature
firms. The beneficial effect of family control is especially pronounced in common law
countries, in which external providers of funds are more strongly protected. Therefore, family
control and a protective institutional environment complement each other to facilitate
business growth.
JEL Classification: D92, G32, K40, L25.
Keywords: business growth, family control, institutional environment, private firms.
†
Acknowledgments. Part of this research was conducted while the author was a visiting scholar at the Chair of
Financial Management and Capital Markets at the TUM School of Management, Technische Universität
München. The facilities and hospitality received are gratefully acknowledged. I would like to thank Thorsten
Beck, Daniel Bias, Patrick Bielstein, Rafel Crespí, Cristina Cruz, Mario Fischer, Christoph Kaserer, Pilar
Marques, Mattias Nordqvist, José A. Novo, Julio Pindado, Sabine Rau and Daniel Urban, for comments and
suggestions on previous versions of this paper. I have benefited from the comments of seminar participants at the
TUM School of Management, the 2015 IBEW Family Business Workshop in Palma de Mallorca and the 2015
IFABS Corporate Finance Conference in Oxford. I am also grateful to the Research Agency of the Spanish
Government, DGI (Grant ECO2013-45615-P) and the German Academic Exchange Service (DAAD) for
financial support. All errors are my own responsibility.
*
Address for correspondence: Ignacio Requejo, University of Salamanca, Dept. Administracion y Economia de
la Empresa, Salamanca, E37007, Spain; Tel.: +34 923 294763; fax: +34 923 294715. E-mail: [email protected]
1
Do private family firms rely on internal finance to grow?
Evidence from different legal origins
1. Introduction
Previous economics and finance literature supports that a country’s growth depends on the
institutions that govern the economy and the corporate sector. As Levine and Zervos (1998)
document, economic growth is positively affected by stock market liquidity and a developed
banking industry. The features of the institutional environment in which companies operate,
such as the existence of active stock markets and well-developed legal systems, should
facilitate business operations and growth (Demirgüç-Kunt and Maksimovic, 1998). Financial
development can indeed foster innovation and economic growth indirectly by reducing the
cost of external finance (Rajan and Zingales, 1998). Ensuring optimal allocation of resources
can be vital to avert retarding economic growth (Morck, Yavuz and Yeung, 2011). One of the
main drivers, if not the most important one, of economic growth and job creation is the
business community, and especially private firms. 1 In fact, as Demirgüç-Kunt and
Maksimovic (1998) contend, we can expect the growth of individual firms and the growth of
the economy to be related with each other if investment opportunities in a country are
correlated. However, adequate financial and governance institutions at a country level are
necessary to promote the growth of companies and in turn increase the welfare of citizenry.
As recently highlighted by the head of the Confederation of British Industry (CBI), the UK
employers’ federation, governments and businesses should cooperate to create a vibrant and
powerful community of medium-sized companies, whose role will be vital to the prosperity of
society (Thompson, 2014). Thus, better knowledge on the factors that shape business growth
will help us to improve our understanding on how economies and societies will evolve.
In this context, we investigate whether lack of internal resources hampers the growth of
private firms in Western Europe and East Asia, which are regions characterized by prevalence
of concentrated ownership structures. Private firms usually have limited access to external
financing and hence their internally generated funds become their primary source of funds to
grow. Going a step further, we analyze to what extent private firms’ dependence on internal
finance is affected by who the owners of the firm are. More precisely, we differentiate
between family and non-family firms given that family control is the most predominant
1
Throughout the manuscript, the terms “private” and “unlisted”, as qualifiers of businesses and firms, are
used interchangeably to refer to companies that are not listed in a stock exchange. Previous studies support the
important role of unlisted firms even in countries with developed financial systems (see, among others, Brav,
2009; Nagar, Petroni and Wolfenzon, 2011; Michaely and Roberts, 2012).
2
ownership structure in the early stages of a firm’s life cycle (Burkart, Panunzi and Shleifer,
2003; Franks, Mayer, Volpin and Wagner, 2012). Family ownership is common among
publicly listed corporations (e.g., La Porta, Lopez-de-Silanes and Shleifer, 1999) and this type
of ownership is also very frequent among unlisted firms (Claessens and Tzioumis, 2006).
When comparing family to non-family private firms in terms of their growth patterns, we
make a distinction between family control and concentrated ownership. We also take into
account the age of the company given the existing differences between founder-led businesses
and mature family firms (e.g., Anderson, Duru and Reeb, 2009). Accounting for firm age is
relevant in our study because business growth is likely to be affected by the years of existence
of the company. In addition, we exploit the cross-country nature of our sample of unlisted
firms and study to what extent a better regulatory framework relaxes the dependence of
business growth on internal finance. We focus on a country’s legal origin because it captures
the extent to which external providers of funds in general are protected from controlling
shareholders’ expropriation. Furthermore, we investigate whether the effect of family control
on the growth patterns of private firms varies across common law and civil law countries.
To achieve our objective, we obtain a large sample of private firms from Western
European and East Asian countries. The main reason to focus on these two regions is that
prior research documents the important role that concentrated ownership, in general, and
family control, in particular, play there (Claessens, Djankov and Lang, 2000; Faccio and
Lang, 2002). Western Europe and East Asia are therefore homogenous in terms of their
predominant corporate ownership structures, but at the same time these two geographical
areas comprise both common law and civil law countries, each of which offers different
protection levels to creditors and outside investors. Such heterogeneity enables our crosscountry comparisons. The sample includes firms for which we can get several consecutive
years of data. This requirement is necessary to implement our research strategy, which
enables us to address unobservable heterogeneity and endogeneity problems. Additionally, to
identify family companies, we get information on the ultimate owner of the business.
The growth model that we develop to test our hypotheses is based on the empirical
specification of Carpenter and Petersen (2002) due to its suitability to analyze whether scarce
internal finance is an obstacle to business growth. We extend Carpenter and Petersen’s
specification by accounting for the dynamics of business growth and by considering some
additional control variables that are relevant in our setting. We use the panel data
methodology in the estimation process to alleviate unobservable heterogeneity concerns.
Controlling for this type of individual effect is vital because controlling owners and managers
3
differ from each other in their preferences for certain growth strategies. Moreover, the models
are estimated with the system generalized method of moments (thereafter, system GMM)
because this estimation method enables us to control for the endogeneity problem that arises
when analyzing the relation between internal finance and business growth.
Our results show that the growth of private firms strongly depends on the availability of
internal finance. This is already an important result because most previous related studies
either examine the impact of country-level institutions on economic growth or analyze the
effect of cash flow on business growth focusing on publicly listed corporations. Although the
growth of private companies is constrained by scarce internal finance, there are differences
across companies. In particular, private family firms exhibit lower reliance on cash flow to
finance their expansion. This difference persists when we compare family businesses with
firms that exhibit comparable ownership concentration levels. We also account for the age of
the company and find that the lower dependence of unlisted family firms’ growth on internal
finance is more pronounced among mature family firms, which are more likely to be in the
hands of second or later generations. Young private firms are more severely constrained by
lack of cash flow regardless of their ownership structure. The institutional environment also
plays an important role. Operating in a common law country, in which regulation better
protects the interests of creditors and outside investors, mitigates the strong positive effect of
cash flow on firm growth. We also find that family firms enjoy lower dependence on
internally generated funds primarily in common law countries. Therefore, the beneficial
effects that derive from family control are more pronounced when family firms operate in an
environment in which external providers of funds are more strongly protected by the law.
The present study makes four main contributions to the literature. First, we advance prior
research on corporate ownership structure by investigating the effect of this governance
mechanism on business growth. More specifically, we pay special attention to the differences
that exist between family and non-family firms in terms of their growth patterns. Thus far,
most studies that examine the consequences of a firm’s ownership structure focus on the
relation between corporate control and measures of market performance. Important policy
implications can be derived from our study because the private sector is the main engine of
economic growth. Therefore, the research questions that we investigate and the answers that
we provide are also related to the economics literature on the drivers of wealth creation. Our
approach differs from prior related research in that our unit of analysis is the firm, and not the
country, region or industry, and in that we explore indirect channels of a country’s growth.
Family firms’ different degree of dependence on internal funds as source of finance offers one
4
possible answer to the variation in growth rates across countries. In addition, by investigating
the growth of unlisted family firms, we contribute to family firm research and the family
business sector, for which the survival of the company is of the utmost importance.
Second, we not only investigate how an internal governance mechanism such as a firm’s
ownership structure affects business growth, but also consider the institutional environment in
which companies operate. The cross-country nature of our sample enables us to explore to
what extent more protective institutions facilitate business growth by relaxing firms’ reliance
on internal finance. Unlike previous studies, we do not examine the direct consequences of
institutional characteristics on firm performance and corporate decisions. Instead, we shed
new light on how the institutions that govern the corporate sector can promote business
growth by reducing firms’ reliance on their own generated funds. We exploit heterogeneity
across countries in their legal origins because, as the law and finance literature highlights,
common law countries offer both creditors and shareholders stronger protection compared to
civil law countries. Moreover, the regulatory framework should be especially important in our
work because managers and controlling owners of unlisted firms are not affected by the
disciplining force of other external mechanisms, such as capital markets, and because private
firms are more opaque than their public counterparts.
Third, the article advances prior research by examining the effect of ownership structure on
business growth in a new setting. On the one hand, we analyze a sample of large private
companies that are comparable to public corporations in terms of size, but that are not listed
in any stock exchange. This type of company should be especially interested in achieving
sustainable growth to prepare the next stage of its life cycle, which could involve launching
an initial public offering. On the other hand, this is one of the first studies that investigate the
growth of businesses in an international context. Our focus on Western Europe and East Asia
is particularly suitable for our investigation because in these geographical regions family
control is widely widespread. Furthermore, countries in these two areas belong to either the
common law or civil law traditions, which exhibit different protection levels, thus enabling us
to exploit the international nature of the sample.
Fourth, our research strategy represents an improvement on most previous studies on the
determinants of business growth. The starting point of our growth model is the specification
first proposed by Carpenter and Petersen (2002). But we extend their empirical model by
accounting for the dynamics of business growth. Furthermore, we obtain several consecutive
years of data for each firm to control for unobservable heterogeneity. Controlling for
individual effects is of paramount importance because the propensity to grow and the way in
5
which the company expands its activities are strongly influenced by the management style of
the controlling owners and managers. The managerial culture and style of corporations
remains constant over time, but cannot be observed by the researcher. In this context, getting
panel data confers a noteworthy advantage on our research to avoid drawing biased
conclusions. In addition, we estimate the business growth model using an instrumental
variable estimator, the system GMM, that enables us to address the endogeneity problem that
affects most corporate finance and governance research. In particular, we exploit a set of
internal instruments contained within the panel itself (Wintoki, Linck and Netter, 2012).
The remainder of the paper is organized as follows. Section 2 reviews previous literature
on business growth and presents our hypotheses. The data and estimation method are
described in Section 3. Section 4 presents the empirical models and discusses the main results
of the study. Several robustness tests are conducted in Section 5. Finally, Section 6 highlights
our main findings and conclusions.
2. Literature review and hypothesis development
2.1. Effect of internal finance on business growth
The potential of firms to grow and expand their business operations depends to a large
extent on the availability of funds that enable them to finance their investment projects. Due
to market imperfections, scarce internally generated funds are one of the main constraints to
business growth (Carpenter and Petersen, 2002). The growth of small- and medium-sized
enterprises and private companies is especially reliant on internal financing due to the limited
access of these firms to formal sources of external finance (Beck and Demirgüç-Kunt, 2006;
Rahaman, 2011). Asymmetric information problems, which underlie the pecking order theory,
explain that businesses resort to internal funds as their first option to finance value-creating
projects (Chay, Park, Kim and Suh, 2015). Agency problems between corporate insiders and
investors can also explain that business growth depends on the ability of companies to
generate profits. Similarly, underdeveloped financial institutions at a country level can be a
hurdle for the expansion of promising firms. In such scenario, firms rely primarily on internal
cash flow to increase the scale and scope of their activities.
In their seminal work, Carpenter and Petersen (2002) analyze the dependence of firms’
growth on internal finance focusing on small publicly listed corporations in the United States.
They conclude that the growth of most firms is indeed constrained by internal finance. Didier
and Schmukler (2013) investigate listed companies in China and India and find that firms that
raise capital in bond and equity markets are larger and can grow faster. However, listed
6
companies with access to capital markets are only a small proportion of the corporate sector,
even in countries with developed financial institutions such as the United States and the
United Kingdom (Brav, 2009; Nagar, Petroni and Wolfenzon, 2011; Michaely and Roberts,
2012). Moreover, asymmetric information problems, which are one of the main reasons that
explain firms’ reliance on internal funds, are less severe in listed firms. Beck, Demirgüç-Kunt
and Maksimovic (2005) examine whether firm size determines the extent to which
institutional factors, including financial, legal and corruption characteristics, can constrain
business growth. They conclude that all obstacles adversely affect the smallest firms the most.
Along the same lines, Beck, Demirgüç-Kunt, Laeven and Levine (2008) show that the
positive effect of financial development on growth is especially pronounced in small-firm
industries. More recently, Mortal and Reisel (2013) investigate whether public firms allocate
capital more efficiently than private firms. They conclude that listed companies are better
positioned to take advantage of growth opportunities. Mortal and Reisel’s findings support the
view that the benefits that can be derived from being part of a stock market outweigh the costs
of ownership dispersion. Taking into account this line of reasoning, an argument can be made
that overall the growth of unlisted companies is most likely to depend on internal funds.
2.2. Growth patterns of private family firms
Private firms in general are subject to asymmetric information problems that explain their
reliance on internally generated resources to grow. But the constraints implied by scarce
internal funds are likely to be more severe for private firms with specific ownership
structures. In this regard, Guariglia, Liu and Song (2011) empirically investigate the growth
patterns of Chinese firms by using a sample which mainly comprises unlisted businesses and
conclude that the growth of state-owned firms in China is less reliant on internal finance.
However, the type of control that is most prevalent worldwide is family control. Indeed, as
documented in several studies, families own a significant proportion of publicly listed
corporations in Western Europe (Faccio and Lang, 2002; Barontini and Caprio, 2006) and
East Asia (Claessens, Djankov and Lang, 2000; Carney and Child, 2013). Even a large
fraction of public U.S. firms are family controlled (Holderness, 2009). Therefore, the
evolution of this type of business can influence the level of economic growth in many
countries. One of the main concerns for all family businesses is their survival, which will be
determined to a large extent by the growth of the business and the type of financing available.
In this respect, Anderson, Mansi and Reeb (2003) show that among U.S. public firms family
ownership is associated with a lower cost of debt financing. And more recently, Stacchini and
7
Degasperi (2015) conclude that, in areas where the potential for agency conflicts is higher,
family firms benefit from a loan interest-rate discount compared with non-family firms.
Meanwhile, Lin, Ma, Malatesta and Xuan (2011) investigate the relation between a firm’s
ownership structure and the cost of corporate borrowing among listed firms from 22
countries. They find that excess control rights increase the cost of debt and that this effect is
more pronounced in family firms. The higher cost of external financing in companies with
these ownership structures will in turn affect the type of resources to which they can resort to
fund their growth opportunities.
However, there is to date scarce research on the growth patterns of private family
businesses. A strand of the family business literature has focused on the performance of
family firms as compared to their non-family counterparts in an attempt to disentangle
whether family control is beneficial or detrimental to minority investors (see, e.g., Anderson
and Reeb, 2003; Villalonga and Amit, 2006; Maury, 2006; Andres, 2008). Most studies in this
field analyze publicly listed corporations and use market value measures to assess the
performance of the firm (Pindado and Requejo, 2015). Business growth can indeed be
regarded as a measure of the performance or success of private companies (Giannetti and
Ongena, 2009; Hamelin, 2013), given that no market value is available for this type of firm.
Another way of assessing the performance of these businesses is using accounting measures
(Nagar, Petroni and Wolfenzon, 2011). But this is a backward-looking measure, whereas firm
growth can be regarded as a proxy for the economic prospects of the firm. An important
objective for any company, and particularly for private firms, should be to assure the
sustainability of the business, which can be achieved by pursuing sustainable growth rates.
Therefore, it is possible to draw some conclusions on the performance difference that exists
between private family and non-family companies by focusing on their growth patterns and
analyzing the extent to which their growth potential depends on their generated cash flow.
Despite the importance of family control and the predominance of unlisted firms in
general, few studies examine the specificities of private family firms and the implications of
family ownership for business growth. As Khanna and Yafeh (2007) highlight in their review
of the business group literature, research on how considerations affecting family firms impact
on business growth is scarce. Private family companies are unlikely to share the same
characteristics of publicly listed family firms. In listed corporations, high levels of family
ownership can create severe information asymmetries between the family and external
providers of funds, who do not usually have a close relationship with the owners and
managers given the size of the business. However, in private family firms, tight family control
8
can contribute to strengthen the links between family owners and external stakeholders
because this type of company cannot resort to financial markets to obtain the funds that they
need. Close relationships between the family and external providers of funds in unlisted
companies can alleviate information asymmetries, which will help family firms to prosper.
The effect of such close links could be similar to the impact of disclosure on firm growth
among listed corporations (Khurana, Pereira and Martin, 2006). Family owners could get
access to non-traditional sources of external finance using intangible assets such as the family
reputation as collateral. This argument is in line with the finding that, backed by alternative
mechanisms such as reputation, relationships and trust, alternative finance is the most
important form of external finance in an emerging economy like India, which is characterized
by weak investor protection (Allen, Chakrabarti, De, Qian and Qian, 2012). Supporting the
important role of soft information in facilitating family firms’ access to external financing,
D’Aurizio, Oliviero and Romano (2015) find that during the 2007-2009 financial crisis the
credit contraction experienced by family firms was less pronounced than in the case of nonfamily firms.
In terms of agency problems, both listed and unlisted family firms are less severely
affected by agency conflicts between owners and managers due to their concentrated
ownership structures. However, this type of control can create conflicts of interest between
controlling owners and minority investors, as previous research supports (Villalonga and
Amit, 2006; Pindado, Requejo and de la Torre, 2014). This type of problem can be more
severe in listed family firms, in which the reference shareholder and the rest of investors do
not have any direct contact. But in private companies, the owner family has the possibility of
establishing closer relationships with other investors as the remaining shares of the company
are frequently less dispersed. In fact, an ownership structure with multiple large shareholders
contributes to solve the governance problem between large and minority shareholders in
private firms (Nagar, Petroni and Wolfenzon, 2011). Consistent with these arguments, we
pose our first hypothesis:
H1. The dependence of private firms’ growth on internal finance is lower in family firms.
2.3. Does the growth of private family firms depend on firm age?
By their nature, private firms are less known and more opaque to potential providers of
external funds. The more severe information asymmetries between private firms and external
stakeholders are one of the main reasons for these companies’ higher dependence on
9
internally generated funds when looking for financial resources to grow. However, companies
that have been operating in the market for a relatively longer period of time could enjoy
higher visibility and should be less severely affected by information asymmetries. Meanwhile,
the higher financing obstacles of young firms (Beck, Demirgüç-Kunt, Laeven and
Maksimovic, 2006) could make them more dependent on their own generated profits. Young
entrepreneurial firms are also expected to have more financing needs due to their higher
growth rates and at the same time they are more likely to face credit rationing problems as a
result of their fewer years of existence (Giannetti and Ongena, 2009). Chavis, Klapper and
Love (2011) document that the age of the company determines the type of financing used.
Young firms are more dependent on informal finance. As firms age and build a longer credit
history, they get access to formal sources of funds, such as bank finance. Chavis, Klapper and
Love’s findings support that asymmetric information is a serious concern for young firms’
financing.
Another reason for young firms’ reliance on internal finance could be their reluctance to let
new investors buy a large stake of the company due to founders’ and existing shareholders’
aversion to losing control of the firm (Berger and Udell, 1998). Scarce internal resources also
represent a more serious obstacle for the growth of young private firms due to the higher
financing needs of these businesses, which frequently have more investment opportunities
than established companies. Prior research shows that firm age affects business growth
negatively (Nguyen and Van Dijk, 2012; Hamelin, 2013), thus supporting the idea that young
firms grow faster. These arguments suggest that the growth of young private firms should
depend more strongly on the availability of internal funds, thus implying that firm age indeed
affects the growth patterns of unlisted companies. What remains unclear is whether the
expected different growth patterns between private family and non-family firms also depend
on the age of the company. Chavis, Klapper and Love (2011) content that firm age can be
regarded as a useful proxy for entrepreneurial firms. Consequently, it seems imperative to
differentiate between mature and young entrepreneurial firms when investigating how
business growth is constrained by lack of internal funds.
On the one hand, prior research on public family firms suggests that companies managed
by the founder, which are more likely to be young entrepreneurial firms, are less severely
affected by agency problems between large and minority investors (Villalonga and Amit,
2006; Barontini and Caprio, 2006). Conversely, when descendants take the reins of the
business, which usually happens in more mature corporations, firm value is destroyed (PerezGonzalez, 2006; Bennedsen, Nielsen, Perez-Gonzalez and Wolfenzon, 2007). The succession
10
process is one of the most controversial decisions that family firms have to face. This process
could have negative consequences for the business if it is not properly planned. For these
reasons, most empirical family business studies that analyze the performance consequences of
family control among publicly listed corporations suggest that family firms only outperform
their non-family counterparts when they are still under the influence of the founder generation
or when a professional unrelated to the family manages second- or later-generation family
firms (see, e.g., Villalonga and Amit, 2006; Miller, Le Breton-Miller, Lester and Cannella,
2007). Following this line of reasoning, one could expect that the lower dependence of private
family firms on cash flow is mainly driven by young entrepreneurial family firms.
On the other hand, a long track record could be regarded as a valuable intangible asset in
private family companies when looking for financial resources outside the business. Private
family firms that are at a later stage of their business cycle are more likely to have created a
reputation that they can use as collateral when other tangible assets are scarce. Moreover,
once the family business culture becomes strongly rooted within the organization, which is
more likely to occur in mature family firms, concerns over losing the family identity should
be mitigated. As a consequence, family firms’ aversion towards external finance sources
should be lower in older businesses. This argument is more applicable to private than to
public family firms because by not being listed in a stock exchange family control cannot be
easily diluted in the former companies. Hence, whereas public family firms are particularly
concerned about the dilution of control of the owner family (King and Santor, 2008; Croci,
Doukas and Gonenc, 2011; Schmid, 2013; Keasey, Martinez and Pindado, 2015), private
family businesses should be less affected by such dilution effect. Relationship lending (Berger
and Udell, 1995), which also serves to alleviate small firms’ reliance on their own generated
funds, can play a more important role in mature private family firms than in their non-family
counterparts. Family owners may indeed establish close links with financial institutions not
only on behalf of the company, but also at a personal level, even pledging personal assets as
collateral to back corporate loans (Berger and Udell, 1998). As a result, owners of mature
family firms are well positioned to obtain better conditions from external providers of funds.
If family reputation explains the weaker association between internal finance and growth in
family firms, the growth of family businesses that have been able to build such reputation,
which are generally mature companies (Chavis, Klapper and Love, 2011), should be less
dependent on internally generated funds. For these reasons, we formulate the second
hypothesis of the study as follows:
11
H2. The lower sensitivity of private family firms’ growth to internal finance is more
pronounced among mature companies.
2.4. The institutional environment and growth patterns of private family firms
The context in which companies operate can also play an important role in facilitating their
growth. Initial studies that explore the effect of the institutional environment on firm growth
focus on the level of development of the financial and banking sectors. In regions with more
developed financial systems, business growth should be promoted due to firms’ easier access
to external financing (e.g., Demirgüç-Kunt and Maksimovic, 1998). Protection of private
property rights also has an effect on the growth of firms by enabling more efficient allocation
of resources (Claessens and Laeven, 2003). Beck, Demirgüç-Kunt and Maksimovic (2005)
conclude that financial, legal and corruption obstacles constrain a firm’s growth. Furthermore,
they show that smaller firms are the ones more seriously affected by such obstacles.
Subsequent research also confirms that higher levels of corruption can be detrimental to the
growth of the private sector (Nguyen and Van Dijk, 2012). Ferrando and Mulier (2013) show
that the sensitivity of firm growth to trade credit is lower in countries in which the supply of
bank loans or debt securities is larger. Regarding agency conflicts, the more concentrated
ownership structures of private firms should lead to overall less severe agency problems.
Nevertheless, by the same token, conflicts of interests and the potential for expropriation
could increase because unlisted firms are not subject to the disciplining role of external
governance mechanisms, such as capital markets. Most prior research that analyzes the impact
of institutional characteristics on corporate dimensions proposes and tests direct relations. For
instance, better protection of minority investors’ rights leads to higher firm valuation (La
Porta, Lopez-de-Silanes, Shleifer and Vishny, 2002) and to payout policies more favorable to
minority shareholders (La Porta, Lopez-de-Silanes, Shleifer and Vishny, 2000).
But the institutional setting also determines the type of financing used by firms and in turn
their growth patterns. An active stock market and well-developed legal systems allow firms to
obtain external funds and grow faster (Demirgüç-Kunt and Maksimovic, 1998). Giannetti
(2003) shows that better protection of creditors’ rights is not only associated with higher debt
levels, but also with greater availability of long-term debt. Along the same line, Beck,
Demirgüç-Kunt and Maksimovic (2008) examine whether institutional factors determine
financing patters around the world. These authors find that small firms and firms from
countries with weak institutions use less external finance, especially bank finance. However,
better protection of property rights facilitates a firm’s access to bank finance and this
12
beneficial effect is more pronounced for small firms. As regards equity financing, it is more
severely affected than debt finance by asymmetric information and agency problems,
especially among private companies. The finding that an extensive use of equity (be it
through issue of public or private equity) is less likely in countries with more financially
constrained firms could be explained by the high cost of private information acquisition or
insufficiently strong protection of equityholders’ rights (Beck, Demirgüç-Kunt and
Maksimovic, 2008). As Brav (2009) points out, equity financing is more expensive for private
firms due to the poorer disclosure and weaker protections that they offer to minority
shareholders in comparison with public corporations. Consequently, regulation aimed at
protecting the interests of outside investors should play a particularly important role in terms
of facilitating the development and growth of businesses. Agrawal (2013) shows that firms
raise equity and grow in size after the adoption of investor protection laws. This finding
supports the argument that stronger protection should facilitate business growth by easing
firms’ access to external sources of funds. The possibility of agency costs within banks (Beck,
Demirgüç-Kunt and Maksimovic, 2005) and the existence of corruption in bank lending
(Barth, Lin, Lin and Song, 2009) question the monitoring role of financial intermediaries and
reinforce the importance of the institutional environment when it comes to fostering business
growth by reducing firms’ dependence on internal funds.
The indirect effect of better governance institutions on the evolution of companies should
be even more pronounced in private firms, for which the disciplining role of other external
governance mechanisms is almost non-existent. As a result of the lower outside scrutiny to
which they are subject, private firms could adopt weaker governance systems (Joh, 2003). As
Loderer and Waelchi (2010) show, firms care more for minority shareholders when they are
publicly listed. Michaely and Roberts (2012) also highlight that private firms with a relatively
large number of shareholders suffer from asymmetric information and agency problems. In
this context, legal traditions that evolve more rapidly to meet the contracting needs of the
economy (Beck, Demirgüç-Kunt and Levine, 2003) should offer better protection to external
providers of funds. Focusing on the growth of the firm, better creditor and investor protection
should contribute to reduce the dependence of companies on their own generated funds to
expand the business. The rationale is that it will be easier for private firms to obtain external
financing in a setting in which, absent other disciplining forces, the regulation in-place
protects the rights of creditors and outside investors. Consistent with this line of reasoning but
analyzing public corporations, Mclean, Zhang and Zhao (2012) show that investment and
external finance are more strongly associated with Tobin’s q in countries with strong investor
13
protection. Furthermore, in countries with higher q sensitivities, investment predicts growth.
The findings of Mclean, Zhang and Zhao are consistent with investor protection reducing
financial constraints and promoting efficient investment.
More developed and protective institutions should contribute to reduce firms’ dependence
on internal finance by facilitating the access to external sources of funds. Although he does
not focus on the institutional environment, Rahaman (2011) reports that as external financing
constraints are alleviated, firms (especially unlisted ones) are less reliant on internal financing
and switch to external sources of funds. Legal origins that favor more efficient and protective
institutions should contribute to reduce external financing constraints. However, the effect of
a country’s legal origin in combination with family control on business growth is not clear. In
environments with sufficiently weak investor protection, keeping control and ownership in the
hands of the family can be a second best solution (Burkart, Panunzi and Shleifer, 2003). A
strand of research suggests that the beneficial effect of family control could be more
pronounced in the absence of developed and strong institutions at a country level (Gedajlovic,
Carney, Chrisman and Kellermanns, 2012). Family ownership, especially of large business
groups, may be an adequate substitute for institutional voids under specific circumstances
(Khanna and Palepu, 2000; Luo and Chung, 2013). Using a sample of 18 emerging markets,
Lins (2003) shows that the positive impact of large non-management blockholdings on firm
value is more pronounced in countries with lower investor protection levels. In a similar vein,
Attig, Guedhami and Mishra (2008) conclude that the beneficial effect of multiple large
shareholders structures in terms of lower implied cost of equity is more pronounced in regions
with weaker institutional protection. These conclusions support the view that concentrated
ownership structures, which include family ownership, and having multiple large shareholders
in the firm could substitute for missing institutional governance mechanisms.
However, the expropriating incentives of family owners are a more serious concern to
external stakeholders when regulation does not protect their interests. Overall, incentives for
and the risk of expropriation could be higher in family-controlled firms (see, for instance,
Faccio, Lang and Young, 2001; Claessens, Djankov, Fan and Lang, 2002). In addition, family
owners’ ability to extract resources from the company for their private benefit should increase
when the institutional environment does not prevent this type of behavior (La Porta, Lopezde-Silanes, Shleifer and Vishny, 2002). Prior research indeed supports that the positive effect
of family control on performance is primarily attributable to family firms that operate in
countries with stronger investor protection laws (Maury, 2006). More recently, Amit, Ding,
Villalonga and Zhang (2015) show that the positive impact of family ownership on firm
14
performance in China is driven by companies that operate in region with high institutional
efficiency. Supporting the view that a favorable regulatory environment and family ownership
complement each other and that family ownership is not a substitute for weak macrogovernance institutions, Chen, Hou, Li, Wilson and Wu (2014) report that the negative effect
of regulatory obstacles on entrepreneurial growth is more pronounced in family than in nonfamily firms. If weaker institutions enable family owners to tunnel corporate resources out of
the company for their own personal benefit (Bertrand, Mehta and Mullainathan, 2002), it will
be more difficult for family firms to get external finance in such institutional context and
consequently they will be more dependent on their internally generated funds. The fact that
family business groups are created for financing motives (e.g., Almeida and Wolfenzon,
2006; Masulis, Pham and Zein, 2011) also explains a stronger association between internal
finance and family business growth in regions with weaker protections. Adopting a business
group structure allows family owners to transfer internally generated profits across companies
within the group (Shin and Park, 1999), hence reducing their dependence on external finance
and increasing their reliance on funds from the group. In light of these arguments, more
effective and protective institutions should be especially beneficial to private family firms by
facilitating them better access to external financing. Consequently, the third hypothesis of the
study proposes that:
H3. Private family firms’ growth is less sensitive to internal finance especially in countries
with more efficient and protective legal institutions.
3. Data and estimation method
3.1. Data sources and sample
The main source of information that we use to empirically test the hypotheses proposed in
the previous section is the Orbis database. This database is provided by Bureau van Dijk
(BvD) and, among other data, it contains standardized accounting and financial information
on unlisted companies worldwide for up to ten years. Orbis also includes information on the
ownership structure of corporations, which is vital for us to classify firms in the family and
non-family categories. We focus on Western European and East Asian countries because
these two regions are characterized by concentrated ownership structures and the
predominance of family control in the corporate sector. But at the same time there is enough
heterogeneity across countries in their institutional environments to enable our analysis of the
role of legal institutions in facilitating business growth.
15
From the Orbis database, we obtain the accounting and financial information that is
necessary to compute the dependent and explanatory financial variables in the growth model.
Additionally, we use the date of incorporation of the company to compute firm age, the BvD
independence indicator to capture the level of ownership concentration and the type of
ultimate owner to classify firms into family and non-family. A unique feature of the
ownership module included in the Orbis database is that it provides information on the
ultimate owner of the company. To identify the ultimate owner, the chains of control are
investigated using a 25% control threshold. This threshold is indeed consistent with the family
business definition proposed by the European Commission (2009) and has already been used
in prior family business studies (see, e.g., Andres, 2008; Franks, Mayer, Volpin and Wagner,
2012; Lins, Volpin and Wagner, 2013). The Orbis database classifies ultimate owners in
several categories, one of which is “one or more named individuals or families”. Companies
whose ultimate owner falls in this category are then considered family controlled. One minor
limitation is that Orbis only provides the most updated information on the ownership structure
of firms. Therefore, following John, Litov and Yeung (2008) and Michaely and Roberts
(2012), who also use BvD databases in their works to get ownership data, information on the
firms’ ultimate owners in our study refers to the end of the sample period. 2 We follow La
Porta, Lopez-de-Silanes, Shleifer and Vishny (1998) to determine whether countries have a
common law or civil law origin. We use this classification to test the third hypothesis of the
study because, as Beck, Demirgüç-Kunt and Levine (2003) discuss, the legal origin on which
a country’s commercial or company law is based is important for explaining the laws on
creditor rights, shareholder rights and private property rights, as well as the level of financial
development. Indeed, creditors’ and shareholders’ rights are better protected in common law
than in civil law countries (La Porta, Lopez‐de‐Silanes, Shleifer and Vishny, 1998). More
recently, Marcelin and Mathur (2015) contend that the common law tradition promotes better
institutions and is more suitable for economic development and growth.
We exclude from the analyses regulated utilities (SIC 4900–4999), financial companies
(SIC 6000–6999) and public administration institutions (SIC 9100–9999). The sample of
firms for which we can get the financial and ownership information needed for our empirical
analyses comprises 17 different countries. Of these countries, 12 are Western European
2
This approach does not pose a problem for our research as we only use ownership structure information to
classify companies into family and non-family. Furthermore, we can assume that ownership patterns remain
stable over time, as highlighted in prior research (e.g., La Porta, Lopez-de-Silanes and Shleifer, 1999; Zhou,
2001). The assumption of ownership stability is especially valid in our study due to our focus on private firms, in
which changes of control are less likely.
16
countries (Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Norway, Portugal,
Sweden, Switzerland and United Kingdom) and the remaining five are East Asian (Malaysia,
Republic of Korea, Singapore, Taiwan and Thailand). 3 The time period of the study is also
restricted by the availability of the information needed to test our hypotheses. Specifically,
our study period covers eight years, from 2004 until 2011. As Panel A of Table 1 shows, our
final sample includes 39,918 firms (289,537 observations) for which we can get at least six
consecutive years of data. This requirement is necessary to address the endogeneity problem
using distant lagged values of the explanatory variables as instruments in the models, as
detailed in the next sub-section. Using an unbalanced panel to test the developed hypotheses
enables us to alleviate the survivorship bias, while controlling for the unobservable
heterogeneity problem (Carpenter and Petersen, 2002). About one third of the sample
(33.40%) is comprised of family firms (see Panel B). Considering that the control threshold
used to identify ultimate owners (i.e., 25%) is more restrictive than the thresholds used in
previous studies, this is a reasonable percentage of family businesses to enable our
comparative analyses. 4
(Insert Table 1 about here)
3.2. Estimation method
We use the panel data methodology in the regression analyses to alleviate the problem of
unobservable heterogeneity. In our study, the individual effect can represent the specific
management style that is reflected in the growth strategy of every company. Some managers
are more aggressive than others when it comes to expanding the scale and scope of the firm
activities. Although the management style and corporate culture remain constant over time,
they cannot be observed and measured by the researcher. And it is necessary to control for
these individual effects because they can have a significant impact on the growth of the
business. For this reason, we include unobservable individual effects in the specification and
use a panel data method that removes such heterogeneity in the estimation process. Moreover,
3
We were unable to consider the three largest economies by GDP (i.e., the United States, China and Japan)
due to lack of enough data on unlisted firms from these countries. In the case of Japan, the percentage of family
firms was too low (less than 1% of firms with data). Therefore, we decided not to include this country in the
sample to avoid obtaining biased results. Regarding the United States and China, it is worth noting that Lins,
Volpin and Wagner (2013), who also use a BvD database in their study, do not consider them either.
4
The proportion of family companies in our sample is comparable to the percentage of family firms in the
work by Lins, Volpin and Wagner (2013), who also rely on a 25% control threshold to identify ultimate owners.
In Lins, Volpin and Wagner’s study, about 11% of companies are family controlled. Their focus on publicly
listed corporations explains the lower proportion of family firms in their sample as compared to ours.
17
accounting for unobservable heterogeneity enables us to alleviate the omitted variable bias
(Chi, 2005; Mura, 2007).
Endogeneity is another problem that we need to take into consideration when estimating
our growth model to mitigate the risk of drawing biased conclusions. In our context, this
econometrical problem exists because, although we posit that an increase in internal cash flow
should facilitate business growth, it could also be the case that firms that exhibit higher
growth rates generate more funds internally. Consequently, causality could run in both
directions. Regarding a firm’s ownership structure, it should be noted that the type of control
(i.e., the family vs. non-family dichotomy) is only used as firm-level characteristic that
enables us to split the full sample in subsamples to test our hypotheses. Therefore, strictly
speaking family control is not an explanatory variable in our empirical model, but rather a
firm characteristic that moderates the effect of internal funds on business growth, hence
mitigating potential endogeneity on the control structure of the company. 5 Although our main
concern is the endogenous nature of the main variable of interest (i.e., cash flow), all righthand side variables in the growth model can be affected by endogeneity. To address this
problem, we need to find instruments that are closely correlated with the endogenous
regressors, but that are uncorrelated with the error term in the structural equation (Larcker and
Rusticus, 2010). Finding such instruments outside the model is extremely complicated
because, although factors external to the company may be uncorrelated with the error term,
their correlation with the endogenous regressors is also likely to be very low. In this context,
we use the system GMM, which is an instrumental variable method that relies on a set of
internal instruments contained within the panel itself (Wintoki, Linck and Netter, 2012). That
is, suitable lagged values of the endogenous regressors are used as instruments following the
approach proposed by Blundell and Bond (1998) when deriving the system estimator. This
estimation method has the additional advantage of enabling us to control for the endogeneity
of all explanatory variables in the model. More importantly, such internal instruments are
highly correlated with the variables that they instrument. In particular, we use lags from t–6 to
t–7 as instruments for the right-hand side variables in the equations in differences and only
one instrument in the equations in levels. 6 The use of a subset of all possible lags as
instruments enables us to assure their validity. Specifically, the Hansen J statistic of
overidentifying restrictions allows us to test for the correct specification of the model and for
5
The fact that ownership data refer to the end of the sample period, as explained in Sub-section 3.1, further
mitigates endogeneity concerns on firms’ control structures.
6
Following Ferrando and Mulier (2013), we choose the lag structure that best fits the Hansen and m2 tests.
We use identical instruments in all regressions to be able to compare the results from different estimations.
18
the absence of correlation between the instruments and the error term. Moreover, the m2
statistic, developed by Arellano and Bond (1991), is used to check for the lack of secondorder serial correlation in the first-difference residual. We also compute a Wald test to check
for the joint significance of the reported coefficients (z).
4. Results
4.1. Descriptive analysis
Panels A and B of Table 2 provide the main summary statistics of the variables considered
in the subsequent analyses and the correlations between them. As expected, business growth
is positively correlated with cash flow, debt and investment opportunities. On the one hand,
cash flow and debt are alternative ways of financing the growth of the firm. On the other
hand, companies with more investment opportunities should exhibit higher growth rates. By
contrast, growth is negatively correlated with firm size and age. These negative correlations
are in line with the argument that small and young firms have more opportunities and higher
scope to expand the business activities.
(Insert Table 2 about here)
To get a preliminary overview on the differences that exist between private family and
non-family firms in Western Europe and East Asia, we carry out several difference-of-means
tests for the main variables used in the study. The results of our univariate analyses, which are
reported in Panel C of Table 2, highlight that private family and non-family firms are different
from each other along several dimensions. In particular, the results suggest that the growth of
family firms is higher, despite the fact that they have lower cash flow than their non-family
counterparts at their disposal. In addition, family firms have more investment opportunities
and higher levels of debt, which could contribute to explain the growth differences across
firm categories. Another reason for the different growth patterns of family and non-family
firms is the fact that family businesses are smaller and younger.
4.2. Baseline specification and regression results
The business growth model that we develop to test our hypotheses is based on the
specification proposed by Carpenter and Petersen (2002) in their seminal work. In Carpenter
and Petersen’s model, the dependent variable is asset growth (Growthit) and the explanatory
19
variables are the funds internally generated by the company (Cash flowit) and a proxy
measure for growth opportunities (Tobin’s qit):
Growthit = α0 + α1Cash flowit + α2Tobin’s qit + εit.
(1)
We improve Carpenter and Petersen’s specification by including in the right-hand side of
the model the lagged value of the dependent variable (see Guariglia, Liu and Song, 2011) to
capture the dynamic nature of business growth. Given that we examine unlisted firms, for
which market value is not available, we cannot compute Tobin’s q as a proxy measure for
future prospects. Therefore, we include the growth of revenues in the right-hand side of the
model to control for growth opportunities (Growth opportunitiesit). Additionally, we include
the ratio of total debt to total assets (Leverageit) and firm size (Sizeit) as control variables in
the model. Debt can be regarded as one of the main sources of external finance for private
firms and companies with different size are likely to exhibit different growth patterns.
Therefore, it is important to control for these firm-level characteristics in the regression
analyses. All variables are defined in the Appendix. Time (dt) and country dummies (ci) also
enter the right-hand side of the model to capture the impact of the economic cycle and
country-specific effects on business growth, respectively. Finally, the error term (εit) includes
the unobservable heterogeneity (ηi), which is eliminated in the estimation process to reduce
the risk of obtaining biased results, and the random disturbance (vit). Therefore, the final
empirical growth model that we estimate is as follows:
Growthit = β0 + β1Growthi,t–1 + β2Cash flowit + β3Growth opportunitiesit +
β4Leverageit + β5Sizeit + ωdt + δci + ηi + vit.
(2)
Before testing the first hypothesis of the study, we estimate the growth model in Eq. (2)
using the full sample of private companies to check the correct specification of the model and
the validity of the estimation strategy. The estimated coefficients presented in column 1 of
Table 3 show a positive and statistically significant effect of cash flow on firm growth.
Therefore, we confirm that privately owned companies in Western Europe and East Asia rely
on internal funds to grow. This result advances the empirical evidence provided by Carpenter
and Petersen (2002) for small publicly listed firms in the United States and by Guariglia, Liu
and Song (2011) for the Chinese case. Our results have been obtained by using an estimation
method (i.e., the system GMM) that enables us to address the endogeneity problem that
20
affects the relation between cash flow and firm growth and by including firm size and
leverage as additional control variables in the model. In this respect, it is worth noting that the
result of the Hansen test presented in column 1 of Table 3 supports the validity of the
instruments and the correct specification of the growth model. 7
(Insert Table 3 about here)
Having confirmed that private firms are dependent on their internally generate funds to
grow, the next step is to investigate whether such dependence varies across firm categories. In
line with Hypothesis 1, we find that family and non-family firms differ from each other in
their reliance on cash flow. The estimated coefficients on the cash flow variable presented in
columns 2 (for family firms) and 3 (for non-family firms) highlight that the impact of internal
finance on growth is stronger in the case of non-family companies. The lower reliance of
family firms’ growth on cash flow indicates that having a family as the ultimate owner helps
to reduce information asymmetries and agency problems between the firm and external
providers of funds. Private family firms suffer from less severe problems of this type thanks
to the long-term and enduring relationships that the controlling family can establish with
stakeholders external to the business. However, the findings provided in columns 2 and 3 of
Table 3 could be simply driven by an ownership concentration effect, rather than by the
family effect that we aim to capture. This possibility exists because the sample of non-family
companies used to estimate the model in column 3 includes private firms with a non-family
ultimate owner and private firms with dispersed ownership.
To rule out the possibility that ownership concentration explains the lower sensitivity of
family firms’ growth to cash flow, our next step is to restrict the non-family firm sample to
non-family businesses with concentrated ownership structures. These non-family firms are
comparable to family firms in terms of their ownership concentration levels. If we now
compare the estimated coefficients on cash flow in columns 2 (for family firms) and 4 (for
non-family firms with concentrated ownership), we conclude that, even when we control for
the level of ownership concentration (by requiring that companies in both subsamples have an
ultimate owner), the dependence of private firms’ growth on internal finance is lower when
the company is family controlled, in line with the first hypothesis of the study.
7
In light of this finding, we can conclude that the strategy of using the lags of the explanatory variables as
instruments is an adequate approach to address endogeneity when examining the relation between internal
finance and business growth.
21
One could also argue that the weaker impact of cash flow on growth in family firms’ case
is attributable to mature family businesses with a long history and consolidated reputation.
Indeed, older family firms that have been able to survive for several generations are more
likely to be well known to the public, which could offer them the opportunity to establish
connections with potential creditors and investors. These connections will in turn alleviate
their reliance on internally generated funds. Overall, these arguments point to the need of
accounting for the age of the business when investigating the type of financing to which
private firms resort to grow (Chavis, Klapper and Love, 2011). To this aim, we now estimate
the growth model differentiating between mature and young firms. 8 Consistent with our line
of reasoning, columns 1 (for mature firms) and 2 (for young firms) of Table 4 highlight that
young private companies rely more strongly on their cash flow than their mature counterparts
to grow. These differences across mature and young unlisted companies corroborate that firm
age could play an important role when comparing the growth patterns of family and nonfamily businesses, as formulated in Hypothesis 2.
(Insert Table 4 about here)
Accordingly and to test the second hypothesis of the study, we compare family and nonfamily firms after splitting the full sample in the mature and young categories. The results
presented in columns 3 (for mature family firms) and 4 (for mature non-family firms) of
Table 4 indicate that mature family companies do not depend on their internally generated
funds to grow, whereas their non-family counterparts exhibit a positive and statistically
significant relation between cash flow and growth. When we compare young family (see
column 5) and young non-family firms (see column 6), the different impact of cash flow on
growth across the two firm categories is less pronounced. In light of these findings, we can
conclude that the lower reliance of family firms on internal finance is primarily attributable to
well-established mature family firms. This result differs from previous empirical evidence on
public family firms that supports that the beneficial effect of family control is primarily
attributable to the founder generation (see, e.g., Villalonga and Amit, 2006; Miller, Le
Breton-Miller, Lester and Cannella, 2007; Adams, Almeida and Ferreira, 2009) and hence
8
Firms are classified as mature if their age is in the upper tercile of the sample (i.e., they were established
more than 26 years ago); otherwise, they are included in the category of young companies. It should be noted
that, as Chavis, Klapper and Love (2011) highlight, firm age is a useful proxy for entrepreneurial firms and
hence this firm characteristic allows us to capture whether companies are already well established and
consolidated in their sector.
22
among younger family firms. 9 In the context of private family firms, we find that having a
long track record is beneficial in terms of lower reliance on internal funds to finance business
growth. Consistent with our second hypothesis, we confirm that the family reputation is
indeed a valuable intangible asset that reduces private family firms’ dependence on internal
finance. Within the family business category, the credibility and value of the family
reputation should be higher among mature family firms due to the longer history of the
company and the strengthening of links with external providers of funds over time.
The institutional environment in which companies operate can also affect their growth
patterns and the type of resources used to finance growth (Demirgüç-Kunt and Maksimovic,
1998; Beck, Demirgüç-Kunt and Maksimovic, 2005; 2008). In particular, given that external
financing suffers from information asymmetries and agency conflicts, we analyze to what
extent a more protective regulatory framework mitigates the positive effect of cash flow on
business growth. Specifically, we follow the law and finance literature and differentiate
between common law and civil law countries. As prior research highlights, the rights of
external providers of funds (i.e., creditors and outside shareholders) are better protected in
common law countries (La Porta, Lopez‐de‐Silanes, Shleifer and Vishny, 1998) and the
common law tradition promotes better institutions and fosters economic development and
growth (Marcelin and Mathur, 2015). As can be seen in columns 1 (for common law
countries) and 2 (for civil law countries) of Table 5, operating in a region with more efficient
and protective institutions, as captured by a country’s legal origin, facilitates firms’ access to
external finance and leads to lower dependence on internally generated funds.
(Insert Table 5 about here)
A question raised by these differences in business growth patterns across countries is
whether the lower dependence of family firms on internal funds is only present in some
institutional contexts, as argued in the third hypothesis of the study. On the one hand, given
that family control has been associated with higher risk of expropriation when external
stakeholders are poorly protected by the law, we expect that family firms only enjoy lower
dependence on internal finance when existing institutions prevent this type of expropriating
behavior. On the other hand, consistent with a substitution effect between internal and
external governance mechanisms, ownership concentration in the hands of a family could
9
In family business research, firm age can be used as a suitable proxy for the generation that controls the
business (see, e.g., Fiss and Zajac, 2004; Fernández and Nieto, 2005).
23
emerge as a disciplining device that alleviates agency conflicts and information asymmetries
when more protective regulation is lacking. To disentangle whether family firms that operate
in a specific institutional environment are the ones responsible for the weaker negative impact
of cash flow on growth we now compare family and non-family firms from regions with the
same legal tradition. The estimated coefficients presented in columns 3 (for family firms from
common law countries) and 4 (for non-family firms from common law countries) of Table 5
indicate that, when the rights of external providers of funds are better protected by legal
institutions, family control reduces the reliance of business growth on internal funds. Indeed,
the effect of cash flow on business growth is not statistically significant in family firms from
common law countries (see column 3 of Table 5). Conversely, if we focus on companies that
operate in a civil law environment, we observe that, although the sensitivity of growth to cash
flow is lower in family firms’ case (see columns 5 and 6 of Table 5), both family and nonfamily firms depend on their cash flow level to grow. These findings lend support to our third
hypothesis and enable us to conclude that family control primarily alleviates the dependence
of business growth on internal finance when legal institutions prevent opportunistic behavior
by the controlling family. Therefore, a firm’s ownership structure and the institutional
environment complement each other to alleviate the constraints imposed by scarce internal
finance and to facilitate business growth. 10
The estimated coefficients on the control variables are in line with expectations. The
negative effect of past growth on current growth is consistent with prior research (Guariglia,
Liu and Song, 2011; Ferrando and Mulier, 2013) and suggests that firms that experienced a
higher growth rate in the previous year tend to grow more slowly in the current period. In
most regressions, firm size also affects business growth negatively. This result confirms that
small private firms grow faster than large private companies, which could be in part explained
by the entrepreneurial spirit and the availability of more profitable investment opportunities in
small businesses. As first documented by Carpenter and Petersen (2002), growth
opportunities and business growth are positively related. Leverage also has a positive effect
on growth. Therefore, we conclude that private firms with more growth opportunities and
with access to debt financing are able to increase their scale at a faster pace.
10
The different magnitude and statistical significance of the cash flow coefficients in the regressions that
enable us to test the three hypotheses of the study show that the effect of internal finance on business growth is
different across subsamples. Nevertheless, in Sub-section 4.3, we estimate several growth models with
interaction terms and conduct linear restriction tests that allow us to confirm that the impact of cash flow on
growth differs across firm categories.
24
4.3. Business growth models with interaction terms
In the main regression analyses, we investigate whether the positive effect of cash flow on
business growth differs across family and non-family firms estimating our growth model
separately for the family and non-family firm categories. The same empirical strategy is used
to check whether the impact of cash flow on growth also depends on the age of the company,
as a proxy to disentangle between mature and entrepreneurial firms, and on the institutional
environment, as captured by a country’s legal origin. This is the approach proposed by
Carpenter and Petersen (2002) and subsequently used in research that also investigates the
determinants of business growth across firm categories and countries (see, e.g., Guariglia, Liu
and Song, 2011; Ferrando and Mulier, 2013). To analyze the efficiency in capital allocation
across public and private firms, Mortal and Reisel (2013) also estimate an investment model
separately for each type of firm. An alternative strategy to test the hypotheses developed in
the study is to use the full sample in the same regression and extend our baseline growth
model by including interaction terms that enable us to capture the differential effect of cash
flow on growth for specific firm categories. 11 More precisely, the growth model in Eq. (2) can
be extended as follows:
Growthit = β0 + β1Growthi,t–1 + β2Cash flowit + γ2Cash flowit*Family dummyi +
β3 Family dummyi + β4Growth opportunitiesit + β5Leverageit + β6Sizeit +
ωdt + δci + ηi + vit.
(3)
The model in Eq. (3), which is estimated using the full sample, enables us to test the first
hypothesis of the study. The coefficient on the interaction term between cash flow and the
family dummy captures the differential impact of internal finance on business growth in the
case of family businesses. 12 If Hypothesis 1 and the empirical results obtained in the previous
section are to be confirmed, the value of the estimated coefficient γ2 should be negative. The
regression results presented in column 1 of Table 6 support that the positive relation between
cash flow and growth is weaker in family firms’ case, in line with our initial empirical
evidence. As can be seen in this column, the estimated coefficient on the interaction term
between cash flow and the family dummy variable is negative and statistically significant,
11
An advantage of this alternative approach is the better comparability of estimated coefficients from the
same regression.
12
By conducting linear restriction tests on the sums of the cash flow coefficients that are statistically
significant, we can check whether the effect of cash flow on business growth is different across subsamples. The
results of the linear restriction tests are reported at the bottom of the corresponding tables.
25
thus corroborating our expectations. Moreover, we also estimate an extended version of Eq.
(3) to check that the influence of family control in the relation between cash flow and growth
is not due to an ownership concentration effect. In particular, we add an interaction term
between cash flow and an ownership concentration dummy to the right hand-side of the
empirical model. The regression results presented in column 2 show that family control still
mitigates the impact of cash flow on growth when we control for the ownership concentration
effect. To test Hypotheses 2 and 3 of the study with this empirical approach, we extend the
new specification with additional interaction terms that enable us to disentangle whether the
relation between internal finance and business growth, and the role of family control in this
relation, also depends on firm age and the institutional environment.
(Insert Table 6 about here)
Specifically, to test the second hypothesis of the study, we create an interaction term
between cash flow and a dummy variable that equals one for mature businesses, and zero
otherwise. 13 We first estimate an extension of the growth model which only includes an
interaction term between the mature dummy and cash flow, in addition to the interaction with
the ownership concentration dummy, to check whether overall established firms with longer
history enjoy lower reliance on internally generated funds. The estimated coefficients
presented in column 3 of Table 6 suggest that firm age is an important factor that alleviates
the dependence of business growth on internal finance. Second, to test Hypothesis 2, the
empirical model in column 3 is extended with an additional interaction term between the
family dummy variable and cash flow. The coefficients from estimating such extended
specification are presented in column 4 and are consistent with the second hypothesis of the
work. As can be seen in this column, the estimated coefficients on both interaction terms of
interest (i.e., the terms that refer to the family and mature dummy variables) are negative and
statistically significant. We can thus conclude that mature family businesses are the ones least
constrained by lack of internally generated funds and that the family reputation effect
primarily facilitates closer links with external providers of funds when the company has a
longer track record.
The same two steps are taken to test Hypothesis 3 but replacing the mature dummy
variable with a common law dummy that equals one for companies that operate in countries
13
As in the initial empirical analyses, firms whose age is in the upper tercile of the sample are classified as
mature, whereas the remaining firms are included in the category of young entrepreneurial businesses.
26
with a common law legal origin, and zero otherwise. Column 5 of Table 6 highlights that,
regardless of whether they are family controlled or not, private firms that operate in an
environment with more efficient and protective legal institutions depend to a lower degree on
their internal finance to grow. This result is consistent with the view that in such countries
private companies have easier access to external sources of finance because the regulation and
institutions in place alleviate information asymmetries and agency conflicts between the
controlling owner and external providers of funds. We now consider the interaction effects of
cash flow with both the common law and family control dummy variables simultaneously in
the model. The regression results from estimating this extended specification, which are
presented in column 6, confirm that family firms that operate in countries with better
institutions and more flexible legal systems enjoy a weaker relation between internal finance
and growth, as proposed in Hypothesis 3. These findings show that both family control and a
common law origin contribute to alleviate asymmetric information and agency problems,
which in turn mitigates the positive impact of cash flow on business growth.
5. Robustness tests
5.1. Countries with higher family firm presence
Our results show that the dependence of business growth on internal finance is lower
among family firms. As explained above, to classify firms into family and non-family, we
take into account the identity of the ultimate owner using a control threshold of 25%, which is
the threshold used in the Orbis database and is consistent with prior research (see, e.g.,
Andres, 2008; Franks, Mayer, Volpin and Wagner, 2012; Lins, Volpin and Wagner, 2013).
Using this family firm definition, the percentage of family firms in the full sample is
approximately one third (see Panel B of Table 1). Overall, this percentage is reasonable for a
sample of large private firms, but the predominance of family control across countries varies
from 2.05% of family firms in Thailand to 52.34% in Italy. One possible reason for this
variation could be that the coverage and quality of ownership data available in the Orbis
database is not the same for all countries. Therefore, we check whether our conclusions hold
when we consider only those countries with a proportion of family firms that is above the
sample mean (i.e., one third). 14 As expected, the percentage of family firms is higher in this
subsample of countries and we get a more balanced distribution of firms across the family and
non-family categories. In particular, family firms represent 43.09% of the reduced sample.
14
The six countries considered in these additional regression analyses are: Germany, Italy, Norway, Portugal,
Republic of Korea and United Kingdom.
27
Initially, we estimate a model to check whether family control indeed reduces the
sensitivity of business growth to cash flow, as proposed in Hypothesis 1. As can be seen in
column 1 of Table 7, cash flow has a positive effect on business growth, but this positive
effect is mitigated in family firms. Note that the coefficient on the interaction term between
cash flow and the family dummy is negative and statistically significant. One could argue that
maybe the family effect is really capturing the effect of ownership concentration as in the
sample of non-family companies there are firms with dispersed ownership as well as firms
with non-family ultimate owners. Therefore, to control for the ownership concentration effect,
in column 2 of Table 7, we include an additional interaction term between cash flow and an
ownership concentration dummy. As can be seen, we still find that family control reduces the
positive impact of cash flow on business growth. Consequently, our findings are not due to
the effect of ownership concentration.
(Insert Table 7 about here)
Then, we want to check whether family firms’ lower dependence on internal sources of
funds to grow differ across family business categories. In particular, consistent with
Hypothesis 2, we first consider the age of the firm. To this aim, given our interest in analyzing
heterogeneity within the family business category, we focus on the subsample of family
companies. This strategy enables a better comparison of the two family business groups:
mature versus young family firms. The growth model estimated is presented in column 3 of
Table 7. In this case, as the sample used only includes family firms, the interaction term is
between cash flow and the mature firm dummy. Supporting Hypothesis 2, we find that mature
family firms are mainly responsible for the lower dependence of family firms on internal
funds. As can be noted, the interaction effect of cash flow and the mature firm dummy on
business growth is negative.
Second, we take into account the regulatory framework in which family firms operate by
differentiating between common law and civil law countries. We follow the same approach
and analyze the subsample of family firms to test whether family firms from more protective
countries are the ones that enjoy lower sensitivity between business growth and internal cash
flow. The only difference with the previous model is that now cash flow is interacted with a
common law dummy. As column 4 of Table 7 shows, we find that family firms from common
law countries exhibit lower dependence on internal sources of funds. It should be noted that
the coefficient on the interaction term is negative and statistically significant. This finding is
28
in line with Hypothesis 3. Therefore, the conclusions of the study hold when we focus on a
subsample of countries with more balanced representation of family firms.
5.2. The role of the institutional environment
One of the main contributions of the study is to investigate whether the lower dependence
of family firms’ growth on internal funds depends on the institutional environment. More
precisely, we expect that the lower dependence of growth on internal finance among family
firms is mainly attributable to family businesses from common law countries. In fact, when
we consider the institutional context, we find that it is mainly family firms from regions with
more efficient and protective institutions that benefit from a weaker relation between internal
finance and growth. This result confirms that the family reputation effect is not enough to
reduce asymmetric information and agency problems and in turn alleviate the dependence of
growth on internal finance. Creditors and equityholders also require a degree of protection
from institutions external to the company due to the risk of expropriation by the controlling
family. To further check whether family firms’ lower reliance on internally generated funds in
common law countries is driven by the stronger protection afforded to external providers of
funds, we reestimate the growth model using alternative proxy measures of the extent to
which the rights of such external stakeholders are protected by the law.
First, we use the strength of creditor protection index obtained from the Doing Business
Report of The World Bank to capture the extent to which laws protect the rights of borrowers
and lenders. 15 A stronger level of creditor protection should facilitate a firm’s access to debt
financing and thus reduce the dependence of its growth on cash flow. Creditor protection
should indeed play an important role in alleviating private firms’ constraints due to scarce
internal funds because debt is the most common type of external financing for unlisted
companies (Giannetti, 2003; Chavis, Klapper and Love, 2011).
To check this role of collateral and bankruptcy laws, we define a dummy variable (Strong
creditor protection dummy) that equals 1 for firms that operate in countries with a level of
creditor protection in the upper tercile of the sample, and zero otherwise. This variable is then
interacted with cash flow and included in the right-hand side of the model. Column 1 of Table
8 presents the regression results. Although the estimated coefficient on the interaction term
has the expected negative sign, it is not statistically significant. However, when we consider
the level of creditor protection and the ownership structure of the company simultaneously,
15
The methodology followed to compute the index is based on the work by Djankov, McLiesh and Shleifer
(2007). More details can be obtained from the Doing Business website: http://www.doingbusiness.org/.
29
we corroborate our initial findings. That is, family firms that operate in an environment in
which creditors are strongly protected are the ones that enjoy lower dependence on internal
financing as compared to their non-family counterparts (see column 2).
(Insert Table 8 about here)
Second, we analyze whether the weaker effect of cash flow on business growth among
family firms from common law countries is driven by the stronger investor protection level
that characterizes these countries. As previous studies highlight (e.g., Brav, 2009; Loderer and
Waelchli, 2010; Nagar, Petroni and Wolfenzon, 2011), unlisted firms are more opaque, offer
less protection to minority investors and have serious governance problems. Therefore, the
ability to expropriate is higher in this type of company. Such expropriation risk is even more
pronounced in the case of family firms given that the main agency conflict that affects them is
the conflict between the controlling family and minority shareholders (e.g., Villalonga and
Amit, 2006; Pindado, Requejo and de la Torre, 2014). In addition to these arguments, it
should be noted that unlisted firms, unlike their listed counterparts, are not subject to the
disciplining force of other external governance mechanisms, such as capital markets. In this
context, the level of investor protection gains special importance as it could substitute for the
absence of other monitoring mechanisms. To capture the level of investor protection in each
country, we use the strength of minority shareholder protection index, also obtained from the
Doing Business Report. 16
Consistent with the previous regression analyses, we define a dummy variable (Strong
investor protection dummy) that takes the value of 1 for companies that operate in countries
with a level of shareholder protection in the upper tercile of the sample, and zero otherwise.
The interaction between this dummy variable and cash flow is then included as explanatory
variable. The results provided in column 3 of Table 8 confirm our previous results. Investor
protection mitigates the positive link between cash flow and growth. More importantly, the
estimated coefficients presented in column 4 show that the companies that exhibit the lowest
sensitivity to internal funds are family firms from more protective environments. As can be
noted, the coefficients on both interaction terms (i.e., of cash flow with the family dummy and
with the strong investor protection dummy) are negative and statistically significant.
Therefore, we confirm that family control at the corporate level is most effective to mitigate
16
This index is computed following the methodology of Djankov, La Porta, Lopez-de-Silanes and Shleifer
(2008). The Doing Business website (see footnote 15) contains more information on the index.
30
the dependence on internal funds to grow when combined with efficient and protective
institutions at the country level. This result could be explained by the expropriation risk
associated with family control when minority shareholders’ rights are weakly protected (see,
e.g., Faccio, Lang and Young, 2001; Boubakri, Guedhami and Mishra, 2010).
6. Conclusions
We investigate whether the financial constraints imposed by scarce internal finance affect
the growth of family and non-family firms differently. Moreover, we take into account
whether the reliance of private firms on their internally generated funds to grow varies with
the age of company. Making a distinction between entrepreneurial businesses and mature
firms is important because both types of companies have different growth potential and the
severity of asymmetric information problems changes during the business life cycle. In
addition, we exploit the cross-country nature of our sample of private firms by examining
whether the different sensitivity of growth to internal finance between family and non-family
firms depends on the legal origin of the country in which companies operate. These issues are
analyzed using a large sample of private firms from two regions in which family control is a
common ownership structure: namely, Western Europe and East Asia. Furthermore, countries
within these two regions are heterogeneous in terms of the protection level offered by their
institutions to external providers of funds as captured by their legal origin.
The empirical evidence provided highlights that family control reduces the sensitivity of
business growth to internal finance. This is a noteworthy finding because it indicates that
private firms with a family as the controlling shareholder are less severely affected by lack of
internal resources when they decide to increase the business scale. The long-term presence of
the owner family in the company and its concern for the business reputation can serve as
intangible assets that enable private family firms to get access to external finance and reduce
their dependence on internal resources. Overall, family control contributes to mitigate
asymmetric information and agency problems with external providers of funds. If the lower
reliance of family firms on cash flow is explained by the use of the family name and
reputation as collateral and as a signal of the family firm’s commitment to honor its
obligations, mature family firms should be the ones least financially constrained. This is
indeed what we find. The lower sensitivity of family firms’ growth on internal finance is more
pronounced among mature companies than when we focus on entrepreneurial businesses.
Young family firms have not had enough time to build a family reputation that facilitates
access to external finance. The evidence that mature private family firms benefit the most in
31
growth terms from having a family as controlling shareholder contrasts with prior studies on
public family firms that show that descendant-controlled companies, which are mature
businesses, usually experience lower firm value and performance. Therefore, our findings
contribute to prior family business research by showing that a longer track record seems to be
beneficial to the growth of private family firms and by emphasizing that results obtained for
public family companies might not be applicable to their private counterparts.
The institutional environment also determines the degree to which family firms’ growth is
affected by scarce internal finance. Given that countries from different legal traditions differ
from each other in the level of efficiency and protection that their regulations offer to
providers of external finance, we investigate whether the lower reliance of family firms’
growth on cash flow differs across common and civil law regions. We find that the legal
origin matters and that it is mainly private family firms from countries with more efficient and
protective institutions (i.e., common law countries) the ones that exhibit a weaker positive
relation between internal finance and growth. Our results highlight that the institutional
environment is relevant for private companies and that family control and developed
institutions need to complement each other to facilitate business growth. As the firms we
analyze are not subject to the disciplining role of equity markets due to their unlisted nature,
other external governance mechanisms, such as the protection of creditors’ and investors’
rights offered by the law, should be especially beneficial. Our additional tests support this line
of reasoning and confirm that family control is most beneficial when combined with strong
institutions at a country level.
Important policy implications can be derived from our findings. First, we complement
previous studies that investigate the effect of various country-level characteristics on
economic growth. The findings provided in our work suggest that the institutional
environment can also have an indirect effect on growth by facilitating companies’ access to
external sources of funds. This indirect impact is especially important because private firms
are the main source of employment and economic growth throughout the world. Therefore,
policy-makers should recognize the benefits of adopting laws and regulation that contribute to
mitigate the asymmetric information and agency problems that affect corporations if they aim
to create an environment suitable for the development of the corporate sector. Second, our
results show that young entrepreneurial businesses are the most severely affected by lack of
internal finance. Therefore, to enable the growth and survival of young promising companies,
alternative forms of financing, such as venture capital and business angels, could be
promoted. In addition, alternative equity and bond markets for small growing firms could be
32
created, similar to the Alternative Investment Market in the United Kingdom. It is necessary
that the rules applicable in such alternative markets encourage the participation of both small
firms that need external finance and individuals looking for investment opportunities. And
third, family owners should build and protect the family name and reputation because it can
be regarded as an intangible asset that serves as collateral to get additional funds from
creditors that maintain a long-term relationship with the company. Family firms should also
adopt governance practices aimed at preventing an expropriating behavior by the controlling
family, especially when external governance mechanisms are lacking or inefficient, so that the
family nature of the business becomes a valuable asset that generates trust between the
controlling family and the remaining stakeholders of the firm.
Appendix. Definition of variables and data sources
Dependent variable
Definition
Firm growth
Growth of firm total assets, as in Carpenter and
Petersen (2002) and Guariglia, Liu and Song
(2011).
Explanatory variables
Definition
Cash flow
Net income plus depreciation expenses scaled by
total assets.
Growth opportunities
Growth of firm operating revenues. We use
operating revenues instead of net sales due to
data availability.
Leverage
Total debt scaled by total assets.
Size
Natural logarithm of a firm’s total assets.
Dummy variables
Definition
Family dummy
Dummy variable that equals 1 if the ultimate
owner at the 25% control threshold is an
individual or family, and zero otherwise.
Ownership concentration
Dummy variable that equals 1 if the firm has an
dummy
ultimate owner at the 25% control threshold, and
zero otherwise.
Mature dummy
Dummy variable that equals 1 if the age of the
company is in the upper tercile of the sample
(i.e., it was established more than 26 years ago),
and zero otherwise.
Common law dummy
Dummy variable that equals 1 if the firm
operates in a common law country, and zero
otherwise.
33
Data source
Orbis
Data source
Orbis
Orbis
Orbis
Orbis
Data source
Orbis
Orbis
Orbis
La Porta, Lopez-de-Silanes,
Shleifer and Vishny (1998)
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39
Table 1. Distribution of the sample by country and ownership structure
This table shows the number and percentage of firms and observations by country and ownership structure. Data are
extracted for firms for which financial information is available for at least six consecutive years between 2004 and 2011 in
the Orbis database. Firms are classified as family controlled if the ultimate owner at the 25% control threshold is an
individual or family, as non-family controlled if they have other ultimate owner type, and as widely held if they do not have
an ultimate owner.
Panel A: Distribution of the sample by country
Country
Firms
n
Austria
251
Belgium
3,395
Finland
871
France
1,512
Germany
2,834
Italy
9,154
Malaysia
117
Netherlands
321
Norway
2,860
Portugal
1,102
Republic of Korea
5,210
Singapore
116
Sweden
4,547
Switzerland
77
Taiwan
61
Thailand
287
United Kingdom
7,203
Total
39,918
Panel B: Distribution of the sample by ownership structure
Country
Observations
%
0.63
8.50
2.18
3.79
7.10
22.93
0.29
0.80
7.16
2.76
13.05
0.29
11.39
0.19
0.15
0.72
18.04
100.00
Type of firm
Non-family &
concentrated
% over
n
country
total
967
60.55
16,630
64.42
2,871
44.53
4,673
40.90
10,721
54.93
16,023
25.33
491
65.21
1,939
85.19
8,923
41.61
2,784
42.11
5,734
14.74
165
22.54
25,786
74.28
261
47.54
237
58.23
710
34.60
27,353
51.57
126,268
43.61
Family
n
Austria
Belgium
Finland
France
Germany
Italy
Malaysia
Netherlands
Norway
Portugal
Republic of Korea
Singapore
Sweden
Switzerland
Taiwan
Thailand
United Kingdom
Total
485
1,813
1,674
3,107
6,745
33,111
32
98
9,170
2,262
16,348
51
1,922
71
27
42
19,739
96,697
n
1,597
25,814
6,447
11,425
19,517
63,266
753
2,276
21,445
6,612
38,889
732
34,713
549
407
2,052
53,043
289,537
% over
country
total
30.37
7.02
25.97
27.19
34.56
52.34
4.25
4.31
42.76
34.21
42.04
6.97
5.54
12.93
6.63
2.05
37.21
33.40
40
%
0.55
8.92
2.23
3.95
6.74
21.85
0.26
0.79
7.41
2.28
13.43
0.25
11.99
0.19
0.14
0.71
18.32
100.00
Widely held
n
145
7,371
1,902
3,645
2,051
14,132
230
239
3,352
1,566
16,807
516
7,005
217
143
1,300
5,951
66,572
% over
country
total
9.08
28.55
29.50
31.90
10.51
22.34
30.54
10.50
15.63
23.68
43.22
70.49
20.18
39.53
35.14
63.35
11.22
22.99
Table 2. Summary statistics and descriptive analyses
This table provides the means, standard deviations, minimums, medians and maximums of the variables used in the study as
well as the correlations between them; the table also shows the difference-of-means tests between family and non-family
firms in their financial characteristics. The full sample comprises 39,918 firms (289,537 firm-year observations) for which
financial data are available for at least six consecutive years between 2004 and 2011 in the Orbis database. 12 Western
European (Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Norway, Portugal, Sweden, Switzerland and
United Kingdom) and five East Asian (Malaysia, Republic of Korea, Singapore, Taiwan and Thailand) countries are
represented in the sample. The variables are defined in the Appendix. Firms are classified as family controlled if the ultimate
owner at the 25% control threshold is an individual or family. The *** indicates significance at the 1% level.
Panel A: Summary statistics
Standard
Variable
Mean
Minimum
Median
Maximum
deviation
Firm growth
0.121
0.290
-0.989
0.085
2.304
Cash flow
0.092
0.094
-0.993
0.075
0.996
Growth opportunities
0.118
0.362
-0.999
0.082
9.845
Leverage
0.625
0.216
0.000
0.659
0.999
Size
9.950
1.246
3.726
9.824
14.317
Age
3.026
0.703
0.000
2.996
6.917
Panel B: Correlation matrix
Variable
(1)
(2)
(3)
(4)
(5)
(6)
Firm growth
(1)
1.000
Cash flow
(2)
0.084
1.000
Growth opportunities
(3)
0.475
0.112
1.000
Leverage
(4)
0.116
-0.246
0.083
1.000
Size
(5)
-0.025
-0.078
-0.052
-0.108
1.000
Age
(6)
-0.145
-0.042
-0.143
-0.143
0.244
1.000
Panel C: Family firms versus non-family firms
Variable
All
Family
Non-family
Difference
(1)
(2)
(3)
(2)–(3)
Firm growth
0.121
0.128
0.117
0.011***
Cash flow
0.092
0.082
0.097
-0.015***
Growth opportunities
0.118
0.121
0.117
0.004***
Leverage
0.625
0.652
0.612
0.040***
Size
9.950
9.803
10.023
-0.220***
Age
3.026
2.984
3.048
-0.064***
41
Table 3. Effect of internal finance on business growth: Family versus non-family firms
This table presents the GMM regressions results from empirical model (2). The full sample comprises 39,918 firms (289,537
firm-year observations). The rest of the information needed to read this table is: (i) heteroskedasticity consistent asymptotic
standard error is in parentheses; (ii) the ***, ** and * indicate significance at the 1%, 5% and 10% levels, respectively; (iii) z
is a Wald test of the joint significance of the reported coefficients, asymptotically distributed as χ2 under the null of no
relation, degrees of freedom in parentheses; (iv) m2 is a serial correlation test of second order using residuals in first
differences, asymptotically distributed as N(0,1) under the null of no serial correlation; (v) Hansen is a test of the overidentifying restrictions, asymptotically distributed as χ2 under the null of no correlation between the instruments and the error
term, degrees of freedom in parentheses.
Dep. var.:
Concentrated
All
Family firms
Non-family firms
Firm growthit
& Non-family
(1)
(2)
(3)
(4)
β1 Firm growthi,t–1
-0.041
-0.052
-0.096
-0.226**
(0.045)
(0.052)
(0.065)
(0.089)
β2 Cash flowit
1.041***
0.626
1.390***
1.102***
(0.244)
(0.402)
(0.307)
(0.340)
β3 Growth opp.it
0.541***
0.481***
0.554***
0.569***
(0.058)
(0.076)
(0.074)
(0.106)
β4 Leverageit
0.389***
0.523***
0.316***
0.433***
(0.084)
(0.111)
(0.105)
(0.132)
β5 Sizeit
-0.053***
-0.023
-0.070***
-0.067***
(0.017)
(0.029)
(0.021)
(0.022)
β0 Constant
0.180
-0.146
0.370*
0.319
(0.159)
(0.286)
(0.202)
(0.215)
Time dum.
Yes
Yes
Yes
Yes
Country dum.
Yes
Yes
Yes
Yes
z
76.77 (5)
35.23 (5)
45.34 (5)
27.24 (5)
m2
1.09
0.20
0.25
-1.53
Hansen
11.57 (13)
15.95 (13)
9.97 (13)
12.80 (13)
Firms
39,918
13,407
26,511
17,292
Observations
249,619
83,290
166,329
108,976
42
Table 4. Effect of internal finance on business growth: Family control and firm age
This table presents the GMM regressions results from empirical model (2). The full sample comprises 39,918 firms (289,537
firm-year observations). For the rest of the information needed to read this table, see Table 3.
Dep. var.:
Mature
Mature nonYoung family
Young nonMature firms
Young firms
Firm growthit
family firms
family firms
firms
family firms
(1)
(2)
(3)
(4)
(5)
(6)
β1 Firm growthi,t–1
-0.051
-0.072
0.061
-0.193*
-0.144**
-0.083
(0.085)
(0.055)
(0.123)
(0.102)
(0.060)
(0.081)
β2 Cash flowit
0.592
1.138***
0.043
0.694*
0.894*
1.474***
(0.367)
(0.303)
(0.549)
(0.411)
(0.526)
(0.391)
β3 Growth opp.it
0.705***
0.509***
0.606***
0.575***
0.431***
0.551***
(0.104)
(0.062)
(0.167)
(0.111)
(0.072)
(0.091)
β4 Leverageit
-0.056
0.493***
-0.254
-0.005
0.654***
0.373***
(0.147)
(0.108)
(0.197)
(0.167)
(0.147)
(0.138)
β5 Sizeit
0.012
-0.069***
0.121***
-0.004
-0.051
-0.086***
(0.029)
(0.024)
(0.043)
(0.028)
(0.044)
(0.032)
β0 Constant
-0.127
0.259
-1.062***
0.003
0.036
0.465
(0.236)
(0.229)
(0.365)
(0.242)
(0.449)
(0.309)
Time dum.
Yes
Yes
Yes
Yes
Yes
Yes
Country dum.
Yes
Yes
Yes
Yes
Yes
Yes
z
18.20 (5)
53.95 (5)
7.51 (5)
13.55 (5)
27.86 (5)
29.99 (5)
m2
0.93
0.44
0.92
-0.64
-1.12
0.46
Hansen
14.63 (13)
13.09 (13)
19.89 (13)
9.99 (13)
13.67 (13)
12.26 (13)
Firms
13,546
26,372
4,290
9,256
9,117
17,255
Observations
84,868
164,751
26,562
58,306
56,728
108,023
43
Table 5. Effect of internal finance on business growth: Family control and legal origin
This table presents the GMM regressions results from empirical model (2). The full sample comprises 39,918 firms (289,537
firm-year observations). For the rest of the information needed to read this table, see Table 3.
Family &
Non-family &
Family &
Non-family &
Common law
Civil law
Dep. var.:
common law
common law
civil law
civil law
countries
countries
Firm growthit
countries
countries
countries
countries
(1)
(2)
(3)
(4)
(5)
(6)
β1 Firm growthi,t–1
0.039
-0.080*
-0.093
0.035
-0.096**
-0.147**
(0.107)
(0.043)
(0.139)
(0.122)
(0.047)
(0.063)
β2 Cash flowit
0.586*
1.080***
0.412
0.670*
1.032*
1.280***
(0.302)
(0.296)
(0.545)
(0.355)
(0.575)
(0.369)
β3 Growth opp.it
0.575***
0.564***
0.848***
0.440***
0.497***
0.631***
(0.116)
(0.057)
(0.123)
(0.141)
(0.070)
(0.072)
β4 Leverageit
0.250*
0.436***
0.131
0.288
0.574***
0.296***
(0.143)
(0.092)
(0.172)
(0.192)
(0.118)
(0.112)
β5 Sizeit
-0.029
-0.069***
0.005
-0.029
-0.005
-0.077***
(0.027)
(0.021)
(0.026)
(0.032)
(0.050)
(0.027)
β0 Constant
0.097
0.300
-0.136
0.072
-0.381
0.456*
(0.269)
(0.201)
(0.240)
(0.336)
(0.516)
(0.245)
Time dum.
Yes
Yes
Yes
Yes
Yes
Yes
Country dum.
Yes
Yes
Yes
Yes
Yes
Yes
z
15.51 (5)
63.48 (5)
16.19 (5)
7.57 (5)
33.74 (5)
39.46 (5)
m2
0.93
0.66
0.93
0.36
-0.39
0.06
Hansen
17.13 (13)
10.82 (13)
13.89 (13)
16.25 (13)
15.55 (13)
13.10 (13)
Firms
7,723
32,195
2,682
5,041
10,725
21,470
Observations
48,857
200,762
17,182
31,675
66,108
134,654
44
Table 6. Effect of internal finance on business growth: Empirical models with interaction terms
This table presents the GMM regressions results from several extensions of empirical model (3). The full sample comprises
39,918 firms (289,537 firm-year observations). For the rest of the information needed to read this table, see Table 3.
Family
Family
Family
Family
Legal
Dep. var.:
control &
Firm age
control &
control &
control
origin
Firm growthit
own. con.
firm age
leg. origin
(1)
(2)
(3)
(4)
(5)
(6)
β1 Firm growthi,t–1
-0.069
-0.075*
-0.086*
-0.093**
-0.037
-0.069*
(0.044)
(0.044)
(0.047)
(0.042)
(0.048)
(0.041)
β2 Cash flowit
1.513***
1.847***
1.936***
1.550***
1.876***
1.703***
(0.287)
(0.635)
(0.586)
(0.583)
(0.596)
(0.584)
γ2 Cash flowit*Family dumi
-1.644***
-1.718***
-1.930***
-1.529***
(0.470)
(0.490)
(0.478)
(0.478)
λ2 Cash flowit *Mature dumi
-1.093**
-0.590*
(0.452)
(0.310)
ω2 Cash flowit *Common law dumi
-1.108***
-1.380***
(0.270)
(0.187)
δ2 Cash flowit *Own. con. dumi
-0.274
-0.658
0.279
-0.449
0.205
(0.636)
(0.552)
(0.582)
(0.595)
(0.609)
β3 Family dumi
0.125***
0.138***
0.010
0.145***
-0.003
0.106***
(0.039)
(0.039)
(0.018)
(0.038)
(0.019)
(0.038)
β4 Growth opp.it
0.592***
0.583***
0.503***
0.566***
0.501***
0.553***
(0.056)
(0.055)
(0.056)
(0.052)
(0.056)
(0.052)
β5 Leverageit
0.335***
0.344***
0.308***
0.258***
0.396***
0.334***
(0.087)
(0.088)
(0.083)
(0.088)
(0.084)
(0.086)
β6 Sizeit
-0.060***
-0.065***
-0.040**
-0.055***
-0.052***
-0.064***
(0.018)
(0.019)
(0.017)
(0.019)
(0.017)
(0.018)
β0 Constant
0.256
0.279
0.114
0.255
0.149
0.287
(0.174)
(0.191)
(0.164)
(0.183)
(0.170)
(0.187)
t1 – H0: β2 + γ2 = 0
-0.33
0.16
-0.49
0.22
t2 – H0: β2 + λ2 = 0
1.34
1.61
t3 – H0: β2 + γ2 + λ2 = 0
-1.21
t4 – H0: β2 + ω2 = 0
1.14
0.54
t5 – H0: β2 + γ2 + ω2 = 0
-1.48
Time dum.
Yes
Yes
Yes
Yes
Yes
Yes
Country dum.
Yes
Yes
Yes
Yes
Yes
Yes
z
64.74 (7)
57.14 (8)
60.40 (8)
59.43 (9)
59.41 (8)
101.71 (9)
m2
0.90
0.73
0.11
0.33
0.91
0.69
Hansen
31.88 (19) 36.52 (22) 15.68 (19) 44.08 (28) 34.09 (19) 58.21 (28)
Firms
39,918
39,918
39,918
39,918
39,918
39,918
Observations
249,619
249,619
249,619
249,619
249,619
249,619
45
Table 7. Effect of internal finance on business growth: Countries with higher family firm presence
This table presents the GMM regressions results from different versions of empirical model (3). The sample comprises only
countries with a percentage of family firms above the sample mean (i.e., 28,363 firms, which constitute 202,772 firm-year
observations). For the rest of the information needed to read this table, see Table 3.
Dep. var.:
Firm growthit
β1 Firm growthi,t–1
β2 Cash flowit
γ2 Cash flowit*Family dumi
Family control
Family control &
own. con.
Firm age
(Family firms)
Legal origin
(Family firms)
(2)
-0.072*
(0.043)
1.942***
(0.697)
-2.163***
(0.576)
-0.360
(0.713)
(3)
-0.081
(0.053)
0.802*
(0.477)
(4)
-0.046
(0.045)
1.208**
(0.583)
(1)
-0.069
(0.043)
1.626***
(0.362)
-2.196***
(0.541)
δ2 Cash flowit *Own. con. dumi
λ2 Cash flowit *Mature dumi
-1.905**
(0.932)
ω2 Cash flowit *Common law dumi
β3 Family dumi
β4 Growth opp.it
β5 Leverageit
β6 Sizeit
β0 Constant
t1 – H0: β2 + γ2 = 0
t2 – H0: β2 + λ2 = 0
t3 – H0: β2 + ω2 = 0
Time dum.
Country dum.
z
m2
Hansen
Firms
Observations
-1.401**
(0.704)
0.148***
(0.043)
0.568***
(0.056)
0.419***
(0.095)
-0.073***
(0.021)
0.347*
(0.202)
-1.49
0.155***
(0.042)
0.570***
(0.055)
0.422***
(0.095)
-0.075***
(0.022)
0.351
(0.221)
-0.24
0.476***
(0.075)
0.407***
(0.115)
-0.028
(0.032)
0.015
(0.286)
0.463***
(0.077)
0.506***
(0.102)
-0.012
(0.029)
-0.266
(0.287)
-1.43
Yes
Yes
51.74 (7)
0.77
33.90 (19)
28,363
174,409
Yes
Yes
47.87 (8)
0.75
36.46 (22)
28,363
174,409
46
Yes
Yes
34.42 (6)
-0.27
16.27 (14)
12,163
75,212
-0.41
Yes
Yes
41.45 (6)
0.25
15.51 (14)
12,163
75,212
Table 8. Effect of internal finance on business growth: The institutional environment
This table presents the GMM regressions results from different versions of empirical model (3). The full sample comprises
39,918 firms (289,537 firm-year observations). For the rest of the information needed to read this table, see Table 3.
Dep. var.:
Firm growthit
β1 Firm growthi,t–1
β2 Cash flowit
λ2 Cash flowit *Strong creditor
protection dumi
ω2 Cash flowit *Strong investor
protection dumi
γ2 Cash flowit*Family dumi
δ2 Cash flowit *Own. con. dumi
β3 Family dumi
β4 Growth opp.it
β5 Leverageit
β6 Sizeit
β0 Constant
t1 – H0: β2 + λ2 = 0
t2 – H0: β2 + γ2 = 0
t3 – H0: β2 + λ2 + γ2 = 0
t4 – H0: β2 + ω2 = 0
t5 – H0: β2 + ω2 + γ2 = 0
Time dum.
Country dum.
z
m2
Hansen
Firms
Observations
Creditor
protection
Family control &
cred. protection
Investor
protection
Family control &
inv. protection
(1)
-0.059
(0.045)
1.998***
(0.628)
-0.214
(0.175)
(2)
-0.106**
(0.043)
1.706***
(0.609)
-0.433***
(0.140)
(3)
-0.090**
(0.046)
2.072***
(0.591)
(4)
-0.093**
(0.043)
2.121***
(0.608)
-1.253***
(0.229)
-1.003***
(0.174)
-2.031***
(0.510)
0.055
(0.627)
0.151***
(0.040)
0.514***
(0.048)
0.376***
(0.084)
-0.070***
(0.018)
0.299
(0.190)
-1.668***
(0.506)
0.033
(0.646)
0.108***
(0.040)
0.558***
(0.051)
0.461***
(0.089)
-0.111***
(0.017)
0.662***
(0.180)
2.05
0.05
-0.47
-0.685
(0.632)
-0.004
(0.021)
0.493***
(0.053)
0.470***
(0.086)
-0.079***
(0.017)
0.349**
(0.175)
-0.336
(0.585)
-0.007
(0.018)
0.464***
(0.049)
0.445***
(0.080)
-0.051***
(0.017)
0.103
(0.174)
0.11
1.31
Yes
Yes
59.34 (8)
0.49
28.21 (19)
39,918
249,619
Yes
Yes
72.43 (9)
-0.11
62.67 (28)
39,918
249,619
47
Yes
Yes
70.29 (8)
-0.31
26.12 (19)
39,918
249,619
1.84
-1.07
Yes
Yes
74.25 (9)
-0.11
49.56 (28)
39,918
249,619