Family Ownership and Firm Performance:Evidence From Public Companies in ChileJon I. Martínez, Bernhard S. Stöhr, Bernardo F. Quiroga

We studied the impact of family ownership on firm performance by using a set of data onChilean firms. From a sample of 175 firms listed on the stock market, the group of 100family-controlled firms performed significantly better than the group of 75 nonfamilycompanies over the 10-year period under study (1995–2004). Three distinct measures ofperformance—ROA, ROE, and a proxy of Tobin’s Q—were employed to test the differ-ences of means between the two groups of firms. These results were in line with ourmultiple regression model. All these findings support our conceptual framework andhypothesis, which states that public family firms perform better than public nonfamilyfirms.

Introduction

Several authors sustain that the primary costs offamily ownership are the potential to expropriateresources from other stakeholders in the firm andto appoint incompetent family members to posi-tions in the company. Other scholars assert thatthe primary benefits of family ownership are long-term commitment, stewardship of the firm, andability to monitor managers.

Recent studies reflect these differing perspec-tives between academics. Anderson and Reeb(2003), using a sample of U.S. firms to examineperformance differences between family and non-family firms, found evidence to support the ideathat benefits provided by family ownership out-weigh their costs. In contrast, Faccio, Lang, andYoung (2001) concluded that family firms studiedin East Asian countries suffer from severe expro-priation by the family, suggesting that the costsoffset the benefits of family ownership in thissetting. However, Anderson and Reeb (2004) arguethat what separates good family firms practices

from less-good family firms practices is the degreeto which there are effective corporate governancemechanisms to limit family opportunism.

We decided to investigate the impact of familyownership on firm performance in Chilean firms,mainly because Chile provides an interesting labo-ratory to examine the importance of family influ-ence in a setting with governance safeguards thatdiffer from those of the United States and East Asia.

We worked with a sample of 175 firms thatregularly operate in the Bolsa de Comercio deSantiago, the main Chilean stock exchange. Thissample was obtained from the whole list of nearly400 entities listed on that stock market, afterexcluding all firms that were not relevant for thepurpose of this study (i.e., sports and social clubs,schools) and companies whose performancemeasures were not comparable to the ones ofindustrial and service firms. One hundred firms(corresponding to 57% of the sample) were clas-sified as family-controlled firms (FCF); theremaining 75 companies (43%) were judged to benonfamily-controlled firms (NFF).

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Contrary to the notion that family ownership isless efficient and harmful for minority sharehold-ers, and in line with the study by Anderson andReeb (2003), we found stronger firm performanceamong FCF than in NFF. Controlling industry andfirm characteristics such as size, debt, and age, ouranalysis allows us to conclude that FCF exhibitsignificantly better performance than NFF.

Family Ownership andFirm Performance

The influence of family ownership over firm per-formance has been a controversial topic amongeconomists and business scholars during the lasttwo decades.

Some authors consider that family ownershipis detrimental to the economy as family owners,like other large undiversified shareholders, maypursue different objectives as compared to thoseof minority owners or atomistic shareholders(Fama & Jensen, 1985). Thus, rather than lookingfor maximizing profits and enhancing share-holder value, they could follow strategies thatprivilege firm growth, technological innovation,or firm survival.

Other authors go further and assert that con-trolling owners seek to extract private benefitsfrom the firm (Schleifer & Vishny, 1997). Thisexpropriation is usually done though excessivecompensation, related-party transactions, orspecial dividends (DeAngelo & DeAngelo, 2000).Some studies report that family control leads towealth expropriation in the presence of less thantransparent financial markets (e.g., Faccio et al.,2001).

Another group of scholars reports that familiestend to favor family members in filling manage-ment positions, which leads to competitivedisadvantages in relation to nonfamily firms(Gómez-Mejía, Nuñez-Nickel, & Gutiérrez, 2001).Moreover, Villalonga and Amit (2006) found thatfamily ownership creates value only whenthe founder serves as the CEO or chairman of thefamily firm, but when his or her descendants serveas CEOs, firm value is destroyed. As a result ofall these issues, Morck, Strangeland, and Yeung

(2000) state that family ownership and controltend to result in poor firm performance.

On the other hand, several scholars indicatethe benefits of family ownership; others haveprovided evidence that this type of ownershipleads to higher performance. Among the first,Demsetz and Lehn (1985) note that concentratedinvestors—like family owners—have substantialeconomic incentives to monitor managers closely,thus reducing agency conflicts and maximizingfirm value.

Family ownership tends to have a longer timehorizon, as families usually have longer invest-ment perspectives than other shareholders. Stein(1988, 1989) demonstrates that firms with longerinvestment horizons suffer less managerialmyopia and postpone uncertain short-term earn-ings so as to harvest long-term profits. Otherauthors state that family firms invest more effi-ciently than nonfamily firms because the familywants to transcend and pass the firm onto suc-ceeding generations (Casson, 1999; Chami, 1999;James, 1999).

Some scholars suggest that the reputation andlong-term presence of the family in ownership, asopposed to firms where ownership and manage-ment turn over on a relatively continuous basis,allow the family firm to enjoy a lower cost ofdebt financing compared to nonfamily firms(Anderson, Mansi, & Reeb, 2003).

Recent research has found that public familyfirms are significantly better performers thannonfamily firms. The most influential study isAnderson and Reeb’s (2003). Taking data fromS&P 500 firms over the period 1992 through 1999,these authors examine whether there is an effect offamily ownership on firm performance. Theauthors report that contrary to their conjecture,results show that family firms significantly outper-form nonfamily firms, thus destroying twoarguments against family firms: first, that familyownership and involvement are negative influ-ences on firm performance and, second, thatminority shareholders are adversely affected byfamily ownership.

Confirming the results of the above-mentionedstudy by Anderson and Reeb (2003), though in

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nonacademic venue, Business Week (2003) per-formed another study with S&P 500 data from1993–2003 provided by the consulting firmSpencer Stuart. In a similar vein, an analysis doneby Thomson Financial for Newsweek (2005) on themain six stock indexes in Europe, from London’sFTSE to Madrid’s IBEX, showed that family com-panies outperformed nonfamily firms.

Prior to those studies and taking data fromCOMPUSTAT for the years 1986 through 1988,McConaughy, Walker, Henderson, and Chandra(1998) and McConaughy, Matthews, and Fialko(2001) found that family-controlled firms weremore efficient and valuable than nonfamily firms.These authors only included family-controlledfirms whose CEOs were either the founder or adescendant of the founder, and contrary to Villa-longa and Amit (2006), they discovered thatdescendant-controlled firms were more efficientthan founder-controlled firms.

It is interesting to note that those studies thatonly include public firms report significantlybetter results in favor of family firms as comparedto nonfamily ones than those that have a mixtureof public and private firms, or include only thelatter. Two recent studies validate this statement.Jaskiewicz (2005) found strong evidence with datafrom 293 listed companies from Germany and 419public firms from France. However, Menéndez-Requejo (2005) worked with a mixed database ofmore than 6,000 firms from Spain, most of themprivate companies.Although she found significantdifferences in some performance indicators infavor of family firms, other indicators did notshow such clear results.

Previous studies developed in different coun-tries tend to confirm this idea. Martínez (2003)reports a study performed in Chile in the mid1990s with 424 private firms—276 family-ownedand 148 nonfamily firms. He discovered a slightbut not significant difference in favor of familycompanies. Although Gallo and Estapé (1992)found that family firms had a higher ROE thannonfamily ones among the top 1,000 Spanishcompanies, Gallo and colleagues (Gallo, Tapies,& Cappuyns, 2004) discovered the opposite inanother study with a sample of 305 Spanish

companies, a great majority of which were privatefirms. However, again, the difference in perfor-mance was not significant.

Jaskiewicz and Klein (2005) report that out ofthe 66 studies known by them that deal with thedifference in performance between family andnonfamily firms, only in about 42% of thosestudies did family-owned companies significantlyoutperform the others. Presumably, most of thesestudies include private firms only.

Conceptual Frameworkand Hypothesis

After reviewing these studies, we need to answer afundamental question: Why do family-controlledfirms that are listed on the stock market performbetter than nonfamily firms?

We have developed a simple model to addressthis question. Most of the literature on familybusiness has stated that family firms benefit froman important number of advantages or strengths,but that they also have the burden of many disad-vantages or weaknesses (e.g., Lansberg, 1983;Tagiuri & Davis, 1992; Ward, 1987).

Among these advantages or strengths we canidentify a closer monitoring, an essentially long-run perspective, higher unity of goals amongshareholders, quicker decision making, strongerculture that come from family values, and so forth.On the other side, some of those weaknesses ordisadvantages are related to the overlap of familyand business issues, lack of succession planning,nepotism, resistance to change and to profession-alization, agency issues, and others.

We believe that the strengths help to compen-sate for the weaknesses, so family firms not onlydo survive but also become very successful. Inother words, most of the weaknesses are related tolack of the three following elements: effectivenessand professionalization of management andgovernance bodies; accountability; and “marketpressure” to obtain a superior performance.

However, when family firms are public compa-nies and have to be responsive to investors, marketanalysts, and minority shareholders, they feel thepressure the market imposes on them to excel in

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their performance, and are thus forced to adopt amuch more disciplined behavior than many oftheir private counterparts.

Graphically speaking, Figure 1 shows that allcompanies have a certain amount of strengths (S)and weaknesses (W). The difference between thetwo is what determines their success (high perfor-mance) or failure (low performance). Family firms(FF) have strengths and weaknesses just like anyother company, but they add another set ofstrengths and weaknesses from the fact that theyare family owned and managed. As explainedbefore, if their strengths exceed their weaknesses,they succeed; if otherwise, they fail. However,when FF go public, they are compelled by themarket to “discipline” themselves and so to reducemost of their weaknesses. Therefore, as they main-tain most of their strengths, the resulting gapexplains the difference in performance.

Our experience in Chile indicates that FF thatare preparing for an IPO clearly reduce theoverlap between family and business issues, getrid of nepotism, develop a succession plan thatmakes sense to market analysts and investors,show transparency and accountability, and dem-onstrate innovation and professionalization.

Furthermost, we believe that this effect not onlyoccurs in FF that go public, but also in private FFthat behave as if they were public companies, pro-fessionalizing their management and governance,and assuming an accountable attitude.

Consequently, when the family firm becomes apublic company, a highly professional manage-

ment as well as modern and effective governancepractices seem to be mandatory. Therefore, tra-ditional weaknesses are mitigated and as itsusual strengths remain mostly the same, thesefirms can become more successful than their non-family counterparts, which lack most of thoseadvantages.

Thus:

Hypothesis 1. Family-controlled firms listed on thestock market in Chile present a stronger financialperformance than nonfamily firms in the long run.

The Institutional Context in Chile

Chile is in a position of privilege in Latin America.The country has a high diversity of naturalresources and, for the last couple of decades,has adopted public policies that aim for stability,transparency, and regulatory steadiness. Despitebeing a physically remote and relatively smalleconomy, Chile has become a very trade-dependent nation, more open and market driventhan most developed countries. Market perfor-mance in recent years suggests that continuingliberalization will make Chile an increasinglyattractive target for all kinds of investment.

The Chilean stock market is relatively welldeveloped. The trading volume of stocks as apercentage of GDP is one of the highest in LatinAmerica, although still smaller than moreadvanced economies. Many institutional investorshave emerged during the last 20 years, mainly

Advantages or Strenghts (S)

Advantages or Strenghts

Disadvantages or Weaknesses (W)

Disadvantages or Weaknesses

Market scrutiny helps to discipline in order to avoid inefficiencies andweaknesses

This gap leads to superior performance

“Average” Private Family-Owned Firm “Average” Public Family-Controlled Firm

Going public

Standard S and W of all companies

Additional Sand W offamily firms

Figure 1 Conceptual Framework.

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because of the success of the Chilean PrivatePension System, which has been recognizedworldwide. There is also a high mobility of capitalflows in and outside the country.

Chile exhibits practices of corporate gover-nance similar to those of most developingcountries, with a fulfillment of 65% of the Corpo-rate Governance Good Practice Standards asdefined by the OECD. This score is similar toresults from South Korea and Malaysia, and betterthan those of Brazil, Argentina, and Mexico. Inregard to shareholder participation and rights,and information and transparency diffusion,Chile scores as high as 71% and 88%, respectively(McKinsey & Company, 2004).

A governmental agency, Superintendencia deValores y Seguros (the Chilean Securities andExchange Commission; SVS), is in charge of regu-lating public companies and the stock market.This entity classifies most public firms into busi-ness groups or the conglomerates that controlthose firms. Each “classifiable” public firm isassigned to only one group. Some public firms donot belong to any group. As of December 2004,there were 106 business groups.A great number ofthese groups are controlled by business families.

New regulatory reforms have been released inrecent years, such as the MK1 reform (capital andstock market first reform) and the OPA law (law oftender offers and corporate governance). Thisimproved regulatory framework was designed toincrease both transparency and flexibility for thedifferent investors. The OPA law, in particular, pro-vides and guarantees a number of new protectionmechanisms for minority shareholders, an issue ofspecial relevance given the fact that the dominantproperty structure in Chilean firms is that of acontrolling shareholder: 60 of the largest publiclytraded companies have a shareholder controlling68% of the shares (Lefort & Walker, 2000).

Finally, Chilean corporations are also tradingtheir stock in foreign markets. About 8% of thepublicly traded companies in Chile have ADRs inthe NYSE (and 7% have bonds under 144A, too).1

Foreign shareholders are increasing the demandfor transparency and information upon manage-ment and the board. The ADR companies mustreport audit committee activities and their legalliabilities go way beyond those exclusive to thelocal market.

Defining Family-Controlled Firms

One of the main difficulties in a study of this kindis the definition of family and nonfamily firms.Different authors have used different definitions.For example, Anderson and Reeb (2003) use thefractional equity ownership of the foundingfamily and (or) the presence of family memberson the board of directors. However, for some com-panies in their study the ownership of foundingfamilies is very low. These authors report that theaverage outstanding equity owned by families is18%.

We define a “family-controlled firm” as acompany that falls into one of the followingcriteria:1. A firm whose ownership is clearly controlled(electing over half the board members) by afamily, where family members participate asmembers in the board of directors and/or topmanagement.2. A firm whose ownership is clearly controlled(electing over half the board members) by a groupof two to four families, where members of thesefamilies are also members of the board ofdirectors.3. A firm that is included in a specific businessgroup, as explicitly and unambiguously classifiedby the SVS,2 and this group is clearly associatedwith a business family.4. A firm that is included in a specific businessgroup, as explicitly and unambiguously classifiedby the SVS, and this group is clearly associatedwith an entrepreneur or businessperson who doesnot have any direct descendants, but has desig-nated his or her family successors, and/or themarket has internalized a continuity in time as an

1 Source: Central Bank of Chile.

2 Classification available at the official SVS website: http://www.svs.cl/.

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FCF through his or her nondirect descendants(i.e., siblings, cousins, nephews, nieces, or others).

Conversely, “nonfamily firms” are companiesthat do not fall into the above-mentioned catego-ries, such as firms that belong to individuals orgroups of partners without a plan for continuitywithin their families. We also considered as “non-family firms” all state-owned firms and affiliates ofmultinational companies that operate in Chile.

The control we are talking about is exerted byappointing the majority of members on the boardof directors. This majority could be obtainedthrough: (1) a majority stake (over 50%) in own-ership or (2) influence over other shareholders,due to the family knowledge of the business, tra-dition, confidence or trust, friendship, and soforth.

Research Design

Sampling and Data Collection

Out of the 390 companies registered in Bolsa deComercio de Santiago’s database, the mainChilean stock market, we considered only com-panies that reported results for at least threeconsecutive years out of the 10-year period understudy (from 1995 to 2004). We excluded nonprofitentities such as social clubs, sports clubs, and

schools. Holding companies, whose financialstatements were a composite of their also publicsubsidiaries, were also excluded. Besides this, wediscarded financial institutions (i.e., banks,insurance companies, pension funds, etc.) as per-formance measures are not directly comparable toindustrial and other service firms. In conclusion,our sample was built with data from 175 publicfirms.

Figure 2 shows the years of data frequency dis-tribution provided by firms. Seventy-two percentof the sample (126 firms) reported results forthe whole 10-year period, while only 1.1% of thesample (two firms) reported only three years. Aseach year of reported results in our sample istreated as one independent data unit, the 175 firmsyielded 1,608 data samples, or company-yearpairs. This means 9.19 years of data per companyin average.

Using our definition of family and nonfamilyfirms as described above, we classified 100companies as family-controlled firms, and 75 asnonfamily firms. Two experts from the financialsector and stock market and a journalist special-izing in business matters gave their insight inorder to correctly classify each of the firms in thesample. Finally, the classification rendered 957company-years for family-controlled firms (aver-

SampleComposition(n=175)

FCF10057%

NFF75

43%

Yearsof Data

2 28 5 8 8

16

126

0

20

40

60

80

100

120

140

3 4 5 6 7 8 9 10Years

Yearsof Data

2 28 5 8 8

16

126

0

20

40

60

80

100

120

140

3 4 5 6 7 8 9 10Years

# ofFirms

SampleComposition(n=175)

FCF10057%

NFF75

43%

SampleComposition(n=175)

FCF10057%

NFF75

43%

Figure 2 Frequency Distribution of Data Years Available, and Sample Composition.

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aging 9.29 years per company) and 651 for thenonfamily ones (average of 9.04 years per firm).

Regarding industries, Table 1 shows the total listof 175 firms grouped by two-digit SIC code.Family-controlled firms are present in 76% of theSIC codes, indicating that they operate in a broadarray of industries. Additionally, these firms arepredominant in almost every sector: forestry;fishing; manufacturing of food and beverages;textile and apparel; metal products, machinery,and equipment; retail trade; restaurants andhotels; and transport and storage. On the otherhand, family-controlled firms have lower re-presentation in basic metal industries; waterworks and supply; and communication. The high

number of firms that are self-classified as financialinstitutions are actually holding companies thatconsolidate results of nonpublic operational com-panies and perform mainly financial tasks. Bear inmind that we have excluded banks and insurance,factoring, and leasing companies, which properlyspeaking are financial institutions.

Performance Measures

Three indicators were constructed to measurefinancial performance. Two of them are profitabil-ity ratios that assess “accounting performance”:return on assets (ROA) and return on equity

Table 1 Two-Digit SIC Codes

SIC* Industry Description Total NFF FCF % of FCF

11 Agriculture and hunting 8 3 5 62.512 Forestry 2 0 2 100.013 Fishing 4 0 4 100.021 Coal mining 3 3 0 0.023 Metal ore mining 1 0 1 100.029 Other mining 2 1 1 50.031 Manufacture of food, beverages, and tobacco 14 2 12 85.732 Textile, wearing apparel, and leather industries 5 1 4 80.033 Manufacture of wood and wood products, including furniture 4 2 2 50.034 Manufacture of paper and paper products, printing, and

publishing2 1 1 50.0

35 Manufacture of chemicals and chemical, petroleum, coal,rubber, and plastic products

7 4 3 42.9

36 Manufacture of nonmetallic mineral products, except productsof petroleum and coal

7 4 3 42.9

37 Basic metal industries 4 3 1 25.038 Manufacture of fabricated metal products, machinery, and

equipment7 2 5 71.4

39 Other manufacturing industries 5 3 2 40.041 Electricity, gas, and steam 20 12 8 40.042 Water works and supply 4 4 0 0.050 Construction 1 0 1 100.061 Wholesale trade 2 1 1 50.062 Retail trade 8 1 7 87.563 Restaurants and hotels 2 0 2 100.071 Transport and storage 5 1 4 80.072 Communication 7 5 2 28.681 Financial institutions (holding companies in reality) 42 17 25 59.583 Real estate and business services 5 2 3 60.093 Social and related community services 3 3 0 0.094 Recreational and cultural services 1 0 1 100.0

* ISIC Codes Rev. 2, published by United Nations.

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(ROE), while the third is a proxy of Tobin’s Q thatmeasures value creation or “market performance.”

ROA was corrected to measure a firm’s successin employing assets to generate profits, indepen-dently of how it finances those assets (debt orequity). Therefore, the formula used to make thecalculations was:

ROANet Income Interests Tax

Total Assets=

+ ⋅ −( )1.

The formula to calculate ROE (book value ofshareholder equity) was the usual and simplestone:

ROENet Income

Total Equity= .

Finally, we constructed a proxy of Tobin’s Qfollowing the definition set out by Khanna andPalepu (2000), where market capitalization is cal-culated using the average daily closing price ofeach company’s stock. This proxy was used due tothe difficulty of calculating the value creationindex using the method employed by Yermack(1996):

Tobin s QMarket Capitalization Total Debt

Total Assets’ =

+.

Statistical Methods

Two statistical methods were employed to test thehypothesis of higher performance by family-controlled firms over nonfamily ones: (1)difference of means tests between the performance

indicators of the two groups (FCF and NFF) and (2)multivariate analysis, which included correlationdata and a multiple regression model.

Control Variables

Four variables were introduced to control forindustry and firm characteristics in the multipleregression model.• Industry (two-digit SIC Code).• Firm size (calculated as the natural log of totalassets).• Firm debt (estimated as long-term debt dividedby total assets).• Company age (years since foundation).

Empirical Analysis and Findings

Difference of Means Test

Table 2 shows the difference of means tests resultsfor the two groups of the sample: FCF and NFF.The tests were conducted for the three perfor-mance indicators and yielded mixed results. ForROA, FCF show a stronger average performanceduring the 10-year period than NFF. Family-controlled firms show a mean ROA of 7.65% asopposed to 5.03% for NFF, with a t value of 3.042for that 2.62% difference, which is statistically sig-nificant at the 1% level.

ROE is also higher for FCF as compared to NFF(7.55% vs. 5.06%), but the difference’s low t value(1.471, significant only at 14%) impedes thisfinding from being generalized. ROE presenteddifficulties as a performance indicator for a smallset of companies, most of them state owned, thathad a negative equity level due to extended

Table 2 Difference of Means Tests (Complete Sample)

Means Statistics

FCF (N = 954) NFF (N = 654) t Significance

ROA 7.65% 5.03% 3.042 0.002ROE 7.55% 5.06% 1.471 0.141Tobin’s Q 1.030 1.214 -4.737 0.000

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periods of losses. When dividing negative incomeby negative equity, the outcome is a positive valueof ROE, which introduced some distortions inthe analysis. In these cases, the distorted ROEwas replaced by the average of the 50 worst-performing companies in the sample.

Tobin’s Q proxy was surprisingly higher forNFF than for FCF (1.214 vs. 1.030), showing highsignificance with a t value of -4.737. This resultwas quite intriguing to us. One potential explana-tion is that family firms have better managerialmonitoring and make better investment deci-sions, which leads to greater accounting perfor-mance. However, stock market participantsrecognize that while family firms can have greateraccounting performance, they do not trust/believethat the family will fairly share this wealth with theother stakeholders in the firm. Consequently, theymore heavily discount the family firm’s shareseven though the family firms are more profitable.This would imply that family ownership isincreasing firm performance but that there is aproblem with the governance system as the otherstakeholders in the firm are concerned aboutreceiving their share of these profits.

Another possible explanation, and the one wethink is more likely, is that Tobin’s Q is probablyhigher for NFF than for FCF because market capi-talization is undervalued for many FCF. In otherwords, these companies are punished with dis-counts in stock prices for their low marketpresence and liquidity due to high ownership con-centration in family hands.

To confirm this lower liquidity proposition, weconstructed a subsample, selecting the companiesthat compose the IPSA index (Índice de PreciosSelectivo de Acciones), which groups those firmswith higher market presence and liquidity. This is

the selective index of the 40 most traded stockseach year. Table 3 displays the results for this sub-sample, for which 37 firms were selected andsample composition ended up being the same asfor the full sample, with 21 FCF and 16 NFF. Thetable shows higher values for the three indicators,and all of them in favor of family-controlled firms.Although differences between means for ROA andROE of the two groups are remarkable, t values areless significant due to the small number of com-panies in this subsample. However, Table 3 revealswhat we were looking for: the value for Tobin’s Qis higher for FCF than for NFF (1.301 vs. 1.106) forcompanies belonging to the IPSA subset. Thedifference of means shows a t value of 3.242, sta-tistically significant at the 1% level. This confirmsour hypothesis that family-controlled firms out-perform nonfamily firms, and also create morevalue when compared in equal frameworks.

Multivariate Analysis: MultipleRegression and Correlation Matrix

Table 4 presents the correlation matrix calculatedwith full sample data. High correlations are shownbetween ROA and ROE, and between ROA anddebt. The first one is expected due to the similarityof both profitability ratios, which were usedindependently as dependent variables in theregression models. The second high correlation isinterpreted as a negative effect of debt on firmperformance. Finally, independent variables showlow correlation, in order to minimize distortionswith their inclusion in the regression models.

After estimating several models with bothprofitability ratios and the value creation indica-tor, models using ROA as a dependent variableshowed a better overall fit. The model presented in

Table 3 Difference of Means Tests (IPSA)

Means Statistics

FCF (N = 198) NFF (N = 152) t Significance

ROA 8.71% 6.40% 1.426 0.155ROE 12.12% 7.84% 1.165 0.245Tobin’s Q 1.301 1.106 3.242 0.001

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this article includes ROA as a dependent variableand the presence of family control as an indepen-dent variable (1 for FCF and 0 for NFF). Otherindependent variables were incorporated tocontrol for firm characteristics (size, age, anddebt), and industry (dummy variables for everytwo-digit SIC code). Table 5 shows the multipleregression model, with an excellent adjusted R2 ofalmost 40% and a high statistical significance forthe entire model, which is reflected by an F valueof 27.163, statistically significant at the 1% level.

Analyzing the relevant regression coefficients,the main finding is that the family control coeffi-cient shows a positive value, which confirms therelation between FCF and higher firm perfor-mance. This coefficient shows a t value of 2.196,which is significant at 5% level. All control vari-ables are significant at the 1% level, with a notablet value for debt. This variable shows a negativecoefficient, which again strongly implies that

indebted firms are less profitable. The coefficientfor age is also negative, implying that youngercompanies are more profitable. Nevertheless, thecoefficient is extremely low, having a negligibleimpact on performance. Firm size, on the otherhand, shows a positive coefficient, thus indicatingthat larger companies outperform small ones.This is a very intuitive result, especially for thesmall Chilean market where economies of scaleand scope are relevant. This is consistent with theresults shown by the IPSA subsample.

Conclusions and Implications

From a sample of 175 firms listed on the Chileanstock market, we can conclude that family-controlled firms are better performers thannonfamily-controlled ones. The group of 100family-controlled firms performed significantlybetter than the group of 75 nonfamily companies

Table 4 Correlation Matrix

ROA ROE Tobin’s Q FCF Size Debt

ROE 0.748*Tobin’s Q -0.153* -0.007FCF 0.076* 0.037 -0.117*Size 0.074* 0.084* 0.018 -0.030Debt -0.494* -0.270* 0.347* -0.099* 0.113*Age -0.163* -0.153* 0.166* 0.070* 0.238* 0.142*

* Correlation is significant at the 0.05 level (two-tailed).

Table 5 Multiple Regression Model With ROA as Dependent Variable

Coefficient Std. Error t Statistic p Value

Intercept -0.054 0.045 -1.212 0.226Family-controlled firm 0.017 0.008 2.196 0.028Size 0.008 0.003 3.175 0.002Debt -0.302 0.019 -15.581 0.000Age -0.000 0.000 -4.024 0.000Volatility 0.013 0.010 1.389 0.165Year dummies (9) YesIndustries dummies (26) YesNumber of independent variables 40R2 0.409Adjusted R2 0.394Global significance F test 27.163 0.000Sample size 1608Std. error of the estimate 0.132

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over the 10-year period under study, 1995–2004.Three distinct performance indicators wereemployed to test the differences: ROA, ROE (bothmeasures of profitability), and Tobin’s Q (valuecreation). Two of them showed significant results.

The results obtained in Chile are in line withthe ones reported in other studies throughout theworld, and especially with the work done byAnderson and Reeb (2003) with the S&P 500 onthe U.S. stock exchange.

These findings tend to confirm the hypothesisthat when family-controlled firms professionalizetheir management and governance bodies, feel thepressure of market scrutiny, and have to beaccountable to minority shareholders, they canovercome most of their traditional weaknessesand take advantage of their strengths tosucceed.

All the above allow us to suggest that familyfirms under the pressure of “public market condi-tions” (i.e., market scrutiny, accountability) areable to behave as efficient performers. Regretfully,the great majority of family firms throughout theworld do not operate under such conditions due tothe fact that they are private companies, and manyof them are “below-average” performers. There-fore, these firms would have plenty of room toimprove their performance if they operated as ifthey were under “public market conditions,” evenif they do not go public.

References

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Jon I. Martínez, ESE Graduate Business School,Universidad de los Andes, Santiago, Chile; office tel:56-2-4129514; home tel: 56-2-2115862; office fax:56-2-4129486; jmartinez.ese@uandes.cl.Bernhard S. Stöhr, School of Engineering, PontificiaUniversidad Católica, Santiago, Chile; home tel:56-2-3349435; bstohr@puc.cl.Bernardo F. Quiroga, ESE Graduate BusinessSchool, Universidad de los Andes, Santiago, Chile;office tel: 56-2-4129544; home tel: 56-2-2265601;office fax: 56-2-4129555; bquiroga.ese@uandes.cl.Valuable inputs and comments by AlbertoGimeno, Nicolás Majluf, Alfredo Enrione, LeónCohen, Guillermo Tagle, Cristián Moreno, andJosé Manuel Silva are gratefully acknowledged. Allerrors remain our own. The financial supportgiven by the Jorge Yarur B. Chair on Familiesin Business at ESE Graduate Business School,Universidad de los Andes, is also gratefullyacknowledged.

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