Corporate Governance and Investment Performance

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Family Business on the French Stock Market

Our definition of a family firm is very close to the one used by Amit and Villalonga (2006). We report a firm as a family firm when the founder or a member of the founder’s family is a blockholder of the company. We also impose as an additional condition that this block represents more than 20% of the voting rights.5 We refer to Appendix A.1.2 for more detailed explanations on the construction of our family firm variable.
Following Anderson and Reeb (2003), we then break down our sample of firms into four categories. All firms that are not family firms are called widely held firms. The listed firms that are controlled by widely held firms also belong to this category.6 When a family firm is still managed by its founder, we refer to it as a founder-managed family firm. As is detailed in A.1, this category also entails firms owned and managed by a successful raider.7 Heirmanaged family firms are family firms where the current CEO is a descendant of the company’s founder. Finally, when a family firm is run by an outside, professional CEO, we refer to it as a professionally managed family firm. To be able to compute accounting profitability measures properly, we restrict our study to non financial, non real estate companies. There are 2,973 observations in our panel (some 420 firms each year), for which we were able to retrieve the firm’s family status.8 Table 1 reports the fractions of the various types of firms in our panel. These fractions are computed without weight (line 1), weighted with book value of assets (line 2) and weighted using total employment, as reported in the accounting data (line 3). As is apparent from Table 1.1, 70% of all firms present in the sample are family firms. This is a very large number, compared to what previous studies found for English-speaking countries. Looking at US listed firms from the S&P500, Anderson and Reeb (2003) find 35% of family-controlled companies, although they use a slightly different definition of family ownership. Looking at the largest 500 listed Canadian firms, Morck, Strangeland and Yeung (1998) find a share of 50% of family firms. Our sample is more consistent with the investigations of Faccio and Lang (2002), who look at the ultimate ownership of listed firms in continental European countries: using various data sources, they find in 1997, for France, 64% of family firms. Thus, family ownership appears much more pervasive in France than in English-speaking countries, even Canada. The surprising fact is, however, that the bulk of these family firms is still founder-controlled, since these account for 31% of the total. In contrast, only 18% of all firms investigated by Morck et al. (1998) in Canada are still managed by the initial entrepreneur. It seems that the French stock market may display more mobility than the sheer fraction of family firms might suggest. But the family status is also very persistent: heir-managed firms account for a large share of the total (24%) in the same proportion as widely held firms. Last, less than a fourth of all family firms are managed by a professional CEO: hence, even after the founder retires, the norm seems to be that an heir takes over control. Of course, the real importance of family firms is overstated by these figures. Lines 2 and 3 of Table 1.1 highlight the relative small size of family firms. In weighted terms, widely held firms account for almost two thirds of all firms. Founder-controlled corporations are especially small and only account for 10% of total employment. different definition of family ownership. Looking at the largest 500 listed Canadian firms, Morck, Strangeland and Yeung (1998) find a share of 50% of family firms. Our sample is more consistent with the investigations of Faccio and Lang (2002), who look at the ultimate ownership of listed firms in continental European countries: using various data sources, they find in 1997, for France, 64% of family firms. Thus, family ownership appears much more pervasive in France than in English-speaking countries, even Canada. The surprising fact is, however, that the bulk of these family firms is still founder-controlled, since these account for 31% of the total. In contrast, only 18% of all firms investigated by Morck et al. (1998) in Canada are still managed by the initial entrepreneur. It seems that the French stock market may display more mobility than the sheer fraction of family firms might suggest. But the family status is also very persistent: heir-managed firms account for a large share of the total (24%) in the same proportion as widely held firms. Last, less than a fourth of all family firms are managed by a professional CEO:
hence, even after the founder retires, the norm seems to be that an heir takes over control. Of course, the real importance of family firms is overstated by these figures. Lines 2 and 3 of Table 1.1 highlight the relative small size of family firms. In weighted terms, widely held firms account for almost two thirds of all firms. Founder-controlled corporations are especially small and only account for 10% of total employment.

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Multivariate Evidence

Given that family firms tend to have a different age and size than widely held firms, it is necessary to conduct a multivariate analysis. Our empirical strategy follows the approach taken by Anderson and Reeb (2003) in their cross-sectional analysis of US family firms.

Do Family Firms Differ from Other Firms?

Table 1.2 allows to look for systematic differences between the four types of firms we have defined in the previous section. First, family firms grow, on average, much faster than non family firms, but this is mostly due to the contribution of founder-managed corporations. For these corporations, sales growth stands around 16%, instead of 9% for the average listed firm. A similar picture arises for the ratio of market to book value of assets.9 In contrast, when we look at accounting profitability, all types of family firms do better than widely held firms. Founder-managed firms are the most profitable ones. That founders do better in terms of profits, growth and valuation is consistent with the extensive literature documenting “Founder effects”(see, for a survey, Adams, Almeida and Ferreira (2005), Fahlenbrach (2005)). In a cross section, founders tend to run firms with outstanding
performance, the question being whether they are inherently good managers, or whether those founders who manage to keep control are only those who perform well. Using various instruments, Adams et al. (2005) suggest that selection issues are minor, and that almost all of the founder effect may be interpreted in a causal way. Using US data on listed firms, they find a founder effect on ROA of around 3 percentage points in OLS regressions and of around 2 points when using their instruments. Our cross tabulation suggests it might be even larger in the French context, although a multivariate analysis needs to be run to estimate such an effect.

Table of contents :

Remerciements
Introduction
1 Performance and Behavior of Family Firms:
Evidence from the French Stock Market
1.1 Introduction
1.2 Data Description
1.2.1 Family Business on the French Stock Market
1.2.2 Do Family Firms Differ from Other Firms?
1.3 Multivariate Evidence
1.3.1 Empirical Strategy
1.3.2 Family Firms Outperform widely held Firms
1.3.3 Discussion on Endogeneity Biases
1.4 Management Styles in Family Firms
1.4.1 Breaking down Corporate Performance
1.4.2 Family Firms Pay Lower Wages
1.4.3 Descendants Can Commit on Long Term Employment
1.4.4 Outside CEOs Are More Financially Literate
1.5 Summary and Leads for Future Research
2 Bottom-Up Corporate Governance 
2.1 Introduction
2.2 Data and Measurement Issues
2.2.1 Datasets
2.2.2 Constructing an Internal Governance Index
2.3 Internal Governance and Corporate Performance
2.3.1 Basic Results
2.3.2 Robustness Checks and Causality
2.4 Internal Governance and Acquisitions
2.5 External Versus Internal Governance
2.6 Conclusion
3 Optimal Independence in Organizations 
3.1 Introduction
3.2 The Model
3.2.1 Set-Up
3.2.2 Equilibrium Concept
3.3 Organizational Homogeneity affects Reactivity
3.3.1 Implementer’s Effort Choice
3.3.2 The Decision Maker’s Project Choice
3.3.3 Summary and Discussion
3.3.4 Organizational Design
3.4 Robustness
3.4.1 Delegation of Organizational Design to the Decision Maker
3.4.2 Allowing for Financial Incentives
3.5 Applications
3.5.1 Bottom-Up Corporate Governance
3.5.2 Public Administration and Ideological Bias
3.5.3 Organizing for Change
3.6 Conclusion
4 The Corporate Wealth Effect:
From Real Estate Shocks to Corporate Investment
4.1 Introduction
4.2 Data
4.2.1 Accounting and Governance Data
4.2.2 Real Estate Data
4.2.3 Loan Contracts
4.3 Real Estate Prices and Investment
4.3.1 Empirical Strategy
4.3.2 Main Results
4.3.3 City level results
4.4 Collateral and Debt
4.4.1 Debt Issuance
4.4.2 Debt Contracts
4.5 Corporate Governance and Investment Performance
4.6 Conclusion
A Performance and Behavior of Family Firms 
A.1 Data
A.1.1 Corporate Accounts
A.1.2 Family Ownership and Management
A.1.3 Employment Data
A.1.4 Stock Prices
A.1.5 Acquisitions
A.2 Additional Tables
A.3 Breaking down Performance
B Optimal Independence in Organizations 
B.1 Proofs
B.1.1 Proof of Proposition
B.1.2 Proof of Proposition
B.1.3 Proof of Proposition
B.1.4 Proof of Proposition
B.1.5 Proof of Proposition
B.1.6 Proof of Proposition
B.2 Proof of Proposition
B.3 The True Role of Uncertainty
C The Corporate Wealth Effect 
C.1 Construction of the ptLandi Variable

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