the impact of family control on the performance and financial characteristics of family versus...

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Family Business Review

DOI: 10.1177/08944865080210040104 2008; 21; 315 Family Business Review

José Allouche, Bruno Amann, Jacques Jaussaud and Toshiki Kurashina Businesses in Japan: A Matched-Pair Investigation

The Impact of Family Control on the Performance and Financial Characteristics of Family Versus Nonfamily

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The Impact of Family Control on thePerformance and Financial Characteristics ofFamily Versus Nonfamily Businesses in Japan:A Matched-Pair InvestigationJosé Allouche, Bruno Amann, Jacques Jaussaud, Toshiki Kurashina

Research on family businesses has undergone rapid development in the past two decades.Broadly speaking, such companies perform better than nonfamily businesses, as recentinvestigations in Japan support. To obtain a more precise result, this research has appliedto the Japanese context a research methodology that has proven its worth in Westerncases. On the basis of data covering the years 1998 and 2003, we found better perfor-mance among family businesses in Japan.

Academic research explicitly recognizes theprevalence and better performance of family busi-nesses (FBs) around the world (e.g., Allouche &Amann, 2000; Astrachan & Shanker, 2003; Heck &Stafford, 2001; Sharma, 2004) yet rarely addressesthe case of Japan in this context (Kurashina, 2003;Morikawa, 1996; Okocho & Yasuoka, 1984). Priorstudies clearly indicate that differences betweenFBs and nonfamily businesses (NFBs) may existbecause of their corporate environment (Smith,2008). Therefore, Japan should be of great interestbecause of its long tradition of FBs, beginningeven before the country opened its borders to therest of the world at the end of the 19th century. Forexample, Japan contains two of the most ancientFBs in the world: Kongo Gumi, founded in 578 andtaken over by Takamatsu Corporation in 2006, fol-lowing the decline in the real estate industryduring the 1990s, and Houshi, founded in 718.Furthermore, during the first decades of the20th century, prior to World War II, the Japaneseeconomy remained structured around Zaibatsu,which refers to FBs that function under the wingof family-owned holding companies.

During the second half of the 20th century, thedominant position of FBs in Japan began to falter.First, Allied forces dismantled Zaibatsu, and whenKeiretsu emerged in the 1950s and 1960s as a newform of interfirm cooperation, companies had lostthe family dimension (Miyashita & Russel,1994).Inaddition,according to Morikawa (1996) and Morckand Yeung (2003), Japanese enterprise ownershipunderwent dramatic changes in recent decades,mostlyat theexpenseof FBs.Sowhat is thesituationtoday? Do FBs remain a significant force in theJapanese economy? How do they perform andfinancially structure themselves compared withnonfamily businesses (NFBs)? Do they compare asin Western countries or differently?

Kurashina (2003), on the basis of a Western-based definition of FBs, finds that 42.68% ofJapanese-listed companies in 2003 were FBs. Onthe basis of a widely used classification of Japa-nese industries, he finds that for 21 of the 33classes, FBs perform better than NFBs, whereas inonly 7 of the 33 do they perform worse. At firstsight and broadly speaking, FBs in Japan appear toperform better than NFBs.

FAMILY BUSINESS REVIEW, vol. XXI, no. 4, December 2008 © Family Firm Institute, Inc. 315



This research therefore undertakes a closerinvestigation of the question of FB versus NFBperformance in Japan. We apply a paired-samplemethod, developed and verified with Westernfirms, to Japanese companies. As its core argu-ment, this article posits that despite the huge andradical changes in the Japanese economy, FBs inJapan, as in Western economies, globally outper-form NFBs. We also argue, in reference to aneglected but important question, that this advan-tage is not absolute; rather, it relates to the level offamily control, such that when this level is weak,the “advantage” vanishes, similar to Anderson andReeb’s (2003) distinction between active andpassive family control.

The remainder of this article is organized asfollows. First, we consider theoretical and empiri-cal literature, both Western and Asian, related tothe topic. Second, we describe the methodology,data collection, and hypothesis. Third, in present-ing the results and discussion, we confirm theimproved performance associated with FBs inJapan.

Background

As in every emerging field of research, some fun-damental questions, both theoretical and practi-cal, remain unresolved. One of these questionspertaining to FBs involves the very definition ofthe term and the extent to which FBs differ fromNFBs.

Defining FBs and Assessing Performance

To date, no clear consensus has emerged concern-ing the definition of FBs.

Defining FBs. Westhead and Cowling (1998)consider how definitions of FBs affect compara-tive studies of family versus NFBs; when they splita sample into FBs and NFBs on the basis of sevendifferent definitions, they obtain very differentresults. Although several definitions are availableand no consensus exists about any one in particu-lar, Villalonga and Amit (2004) argue that most

definitions include at least three dimensions: oneor several families hold a significant part of thecapital; family members retain significant controlover the company, which depends on the distri-bution of capital and voting rights among non-family shareholders, with possible statutory orlegal restrictions; and family members hold topmanagement positions. In addition, Chrisman,Chua, and Sharma (2005) differentiate betweendefinitions that focus on components of familybusiness, such as ownership, governance, manage-ment, and transgenerational succession, and thosefocused on what is a family business, including theintent of the family to keep control, firm behavior,and idiosyncratic resources that arise from familyinvolvement.

However, a consensus definition may not repre-sent a pertinent research goal because, by nature,FBs are contingent on the institutional legalcontext, which differs from country to country.Legal and fiscal frameworks for the transmissionof assets to descendants differ strongly evenbetween France and Italy, two neighboring coun-tries within the European Union. Furthermore, theshare of capital needed for effective control andthe rules that dissociate ownership and votingrights differ from country to country. Therefore,a unique or universal definition of FBs may bemisleading, because it cannot take into accountfundamental differences in various legal andinstitutional frameworks (Carney, 2005; Dyer,2006). This question makes sense in the case ofJapan, with its strong, specific institutional fea-tures (Aoki, 1988; Gerlach, 1992).

Performance differences between familyand NFBs. In most countries, FBs account for amajor share of business (Astrachan & Kolenko,1994 (United States); Gallo & Estape, 1992, 1994(Spain); Martinez, 1994 (Chile); Maury, 2005(western Europe); Owens, 1994 (Australia); Reidel,1994 (Germany)). They employ a significantportion of total employees and record significantamounts of turnover, added value, investments,and accumulated capital.

Most empirical investigations find superior per-formance by FBs compared with NFBs. Of these

11

Allouche, Amann, Jaussaud, Kurashina

316



studies, the majority focus on financial perfor-mance (Anderson & Reeb, 2003; Charreaux, 1991;Dibrell & Craig, 2006; Gallo & Vilaseca, 1996;Monsen, 1969; Monsen, Chiu, & Cooley, 1968),though others investigate both financial and non-financial dimensions, such as growth or alterna-tive qualitative indicators.

Interpretations of performance by familybusinesses. These results are often interpretedas demonstrations of more effective managementresulting from the familial nature of the com-panies. The arguments put forward are numerousand mainly turn on five main themes, which arethemselves closely linked: the reduction of costs,the long-term orientation of the shareholders’family, the consistency of the system of values, theintricate connection between the family and thebusiness, and a reduced recourse to debt.

The first stresses the reduction of agency costswithin family companies, which results from theminimal separation among the functions of prop-erty, control, and management (Hill & Snell, 1989).A family structure leads in particular to moreeffective control by managers and reduced diver-gences of interest between managers and theshareholders (Fama & Jensen, 1983). However,some limits to the agency theory approach exist(Arrègle, Durand, & Very, 2004). For example,listed companies may suffer a premium to balancethe risk borne by minority investors if ownersengage in improper controls to increase theirprofit (La Porta, Lopez-de-Silanes, & Shleifer,1999; Shleifer & Vishny, 1997). In Spain, Gomez-Mejia, Nunez-Nickel, and Gutierrez (2001) findthat family businesses bear higher agency costsbecause the family is unwilling to fire managerswho are members of that family. That is, agencycosts are not always lower in the case of FBs.Agency costs differ and therefore must be speci-fied precisely in each case (Morck & Yeung, 2003).Carney (2005) notes that the family governancesystem comprises three dominant propensities,which may mitigate agency costs: parsimony(capital deployed sparingly and used intensively),personalism (unification of ownership and

control in the owner), and particularism (familiesmay employ alternative decision criteria thanthose based on pure economic rationality).

The second theme refers to the long-term ori-entation of the shareholders’ family, which isanxious to preserve the family inheritance forits transmission to following generations. Thisorientation can support in particular the imple-mentation of an optimal investment policy in thelong run (James, 1999; Stein, 1989). This argu-ment stems from Porter’s (1998) theory that pres-sure from financial markets leads to short-termmanagement of listed companies, which mayresult in “managerial myopia” (Stein, 1988, 1989).Moreover, FBs may perform better as a form ofbusiness organization because family managerssee further ahead than do managers in nonfamilycompanies (Anderson & Reeb, 2003; Harvey,1999). Le Breton-Miller and Miller (2006) pre-cisely note that the long-term orientations of FBs“engender . . . organizational qualities that arehard for other firms to copy” and lead to strongerlong-term investment policies. This argumentmirrors one of the four Cs—continuity—that LeBreton-Miller and Miller (2006) highlight as oneof the “potent priorities” of great family-controlled businesses.

A third theme refers to the system of values thatmanagement team members share with the share-holders’ family on the one hand and with employ-ees, suppliers, and customers on the other hand.The neoinstitutional perspective, which considersan enterprise a social construction, suggeststhat the set of values shared by managers andfamily shareholders, such as trust (Chami, 1999;Fukuyama, 1995) or altruism (Van den Berghe& Carchon, 2003), can enhance performance.However, Schulze, Lubatkin, Dino, and Buchholtz(2001) suggest that altruism among familymembers may harm performance and, to someextent, shareholder value.

The fourth theme stresses the organizationalefficiency induced by the intricate connectionbetween the family and the business (or “famili-ness” in the words of Habbershon and Williams,1999). This efficiency makes sense from theresource-based view, which shows that the

A Matched-Pair Investigation of Family Versus Nonfamily Businesses in Japan

317



network of interactions between the familyand productive activities can generate strategicresources, which are themselves sources of com-petitive advantages (Arrègle et al., 2004; Habbers-hon & Williams, 1999; Habbershon, Williams, &MacMillan, 2003).

Finally, the last theme highlights the reducedrecourse to debt (Gallo & Vilaseca, 1996; McCon-aughy, Matthews, & Fialko, 2001). Indebtednessreinforces financial risk (Nam, Ottoo, & Thornton,2003), which correlates positively with the risks ofbankruptcy and loss of control (Gilson, 1990). Theaversion of FBs to debt is all the stronger forcurrent liabilities (Mishra & McConaughy, 1999),which are associated most strongly, of all the com-pany’s debts, with the risk of loss of control. Thereis a priori no reason for these five arguments notto be relevant in the case of Japan, too, despite itscultural and institutional specificities.

Family Business in Japan

The difficulties that well-known FBs, such as theretailing chain Daiei, experienced at the end ofthe 1990s tarnished the image of such enterprisesin Japan. Family businesses seem old-fashionedin Japan today, where family control representsa source of rigidity in both organization andstrategy. However, an investigation by the NihonKeizai Shimbun (2006), a leading economic news-paper, suggests that in Japan, as in Europe and theUnited States, listed FBs performed better duringthe 1990s than did listed NFBs in terms of share-holder value. Also according to that investigation,between December 29, 1989, and January 15, 2003,99 enterprises increased capitalization, and of thetop 10 firms, 8 were FBs, according to Kurashina’s(2003) definition. The contrast between the imageof FBs in Japan and these results demands a moreprecise investigation.

Kurashina (2003) bases his definition of FBs ontwo criteria: the share of capital in the hands of thefamily and the involvement of family members inmanaging the firm. Thus, he considers three typesof FBs (and nonfamily businesses, which he callsType A). In Type B, family members hold manage-ment positions or are on the board of directors

and are among the main shareholders; in Type C,family members do not hold top-ranking manage-ment positions but are among the main share-holders; and in Type D, they hold top managementpositions or are on the board of directors but arenot among the main shareholders. Accordingto this definition, Kurashina (2003) finds that42.68%, or 1,074, of Japanese listed companies in2003 were FBs, divided as follows: 925 Type B, 119Type C, and 30 Type D.

Kurashina’s (2003) definition has gained wideacceptance in Japan (i.e., used by Nihon KeizaiShimbun). Furthermore, because it uses multiplecriteria and is consistent with previous definitions(Allouche & Amann, 1998, 2000), we use it herein.On the basis of this definition, we considerhow previous research considers performance inJapan.

Kurashina (2003) bases his performancecomparison on a common distribution of econo-mic activities in 33 industries from the JapanCompany Handbook (Tôyô Keizai). He comparesaverage commercial profitability (consolidatedcurrent profit/consolidated sales) of FBs andNFBs for each industry and finds higher com-mercial profitability for FBs in 21 of them. Threeindustries reveal virtually equal profitability, andin two cases, no FBs exists. That is, only in sevenindustries do NFBs perform better on averagethan FBs.

Although counting the number of industries inwhich FBs perform better than NFBs appearssimple and attractive, such an approach may bemisleading because businesses likely differ inother characteristics (e.g., size, profile) in someindustries. In this case, how can we verify thatthe true determinant of performance is the com-pany’s nature—that is, FB or NFB? Failing tocontrol for industry or size leaves open alterna-tive hypotheses that might explain performanceresults or differences in financial structure,beyond the nature of ownership and/or the levelof control. A matched-pair design provides themost effective means of controlling for such vari-ables (Bowen, Noreen, & Lacey, 1981). Therefore,we apply an existing approach to the case ofJapan.


318



Methodology, Hypotheses,and Data

Methodology

To conduct our analysis, we employ a matched-pairs research design, as used previously in otherstudies on both the performance of FBs (McCon-aughy et al., 2001; Mishra, Randoy, & Jenssen,2001; Miller, Le Breton-Miller, Lester, & Cannella,2007) and the distinctive features of their financialpolicies (Allouche & Amann, 1995; McConaughyet al., 2001). Yet several academics complain thatfew studies use this method (Jorissen, Laveren,Martens, & Reheul, 2005; Westhead & Cowling,1998).

The methodology we adopt systematicallycompares FBs and NFBs that have the sameprofile, namely, the same industry and size. Wefirst establish pairs of businesses (one family, onenonfamily) that match in their industry and size.This approach helps neutralize two potentialfactors of performance variance and thus clarifiesthe influence of family control on performance.The pairs of businesses carry on similar industryactivities, according to their specific four-digitstandard industrial classification (SIC) codes,which provide a much clearer classification thanthe Japanese classification of 33 industries. Tomatch businesses in terms of size, we measuresales and number of employees. That is, we con-sider two companies in the same industry as thesame size if their sales or number of employees arewithin 20% of each other.

Student t tests conducted on paired samplesindicate the statistical significance of the meandifferences between the FB and NFB samples.With a sufficient number of such pairs, we can testthe assumption of better performance by FBs.Therefore, for each pair, we compute various per-formance indicators, such as return on assets(ROA), return on equity (ROE), and return oninvested capital (ROIC), and then compute thedifference between FBs and NFBs. Next, we testwhether the difference is significant at a 5%threshold for the entire population of listed com-panies in Japan. To gain a clearer picture of thepotential performance advantages of FBs, we

compute not only profitability indicators (e.g.,ROA, ROE, ROIC) but also financial structures(e.g., total debts/total capital, long-term debt/totalcapital, current ratios, quick ratio).

Hypotheses

We test four hypotheses, which we developed onthe basis of prior literature. Academic literaturepertaining to agency theory (Fama & Jensen,1983), which stresses the reduced agency costs forFBs and the concept of reduced “managerialmyopia” (Stein, 1988, 1989), predicts stronger per-formances for FBs (i.e., first interpretive theme).Reduced agency costs should lead to increasedprofitability, and if FB managers have longer-termperspectives than managers in nonfamily compa-nies (Harvey, 1999), investment policies should beless affected by short-term economic circum-stances. This trend also should provide a basis forimproved performance in terms of profitability, asmeasured by ROA, ROE, and ROIC. On this basis,we formulate Hypothesis 1.

Hypothesis 1. In Japan, FBs enjoy better perfor-mance than do NFBs.

Furthermore, academic literature emphasizesdifferences in the financial structure between FBsand NFBs, such that FBs tend to take more cau-tious attitudes toward debt (fifth interpretivetheme). The main challenge of family companiesis to promote growth without calling into questionthe permanence of family control (Goffee, 1996).Such an approach is consistent with the theory oflonger-term perspectives by FBs (second theme).On this basis, we formulate Hypothesis 2.

Hypothesis 2. In Japan, FBs have stronger financialstructures than do NFBs.

Although most empirical investigations findimproved performance among FBs, as we noted,few studies consider the influence of the degree offamily control. However, existing arguments in theacademic literature (i.e., careful attitude towardfinancing, long-term orientation of family share-


319



holders and FB managers) imply that strongerfamily control should lead to stronger outcomeswith regard to both performance and financialstructure. Therefore, we formulate Hypothesis 3(profitability) and Hypothesis 4 (financial struc-tures) as follows.

Hypothesis 3. In Japan, the level of family controlstrongly influences business performance in termsof profitability.

Hypothesis 4. In Japan, the level of family controlstrongly influences the financial structure.

For these hypotheses, we adopt Kurashina’s(2003) classifications and distinguish three levelsof family control (B, C, D). The set of hypotheses ispresented in Figure 1.

The dependent variables in our research relateto performance (ROA, ROE, ROIC) and financialstructure (e.g., total debt/total capital, long-termdebt/total capital). The qualitative independentvariable is the nature of a business, family or non-family, and the degree of family control among theformer. The independent variable is categorical:NFBs (Type A), FBs with strong control (Type B),and FBs with weak control (Types C and D).

Data Selection

We collected data from two different sources,including the well-known Worldscope database(2003) for the financial indicators and Kurashina’s(2003) identification of family and NFBs amonglisted companies in Japan. Kurashina relies on

various published materials, including severaldirectories, and contacts with many financialinstitutions, such as brokerage firms, to establishhis classifications. Worldscope (2003) provides awide range of financial and nonfinancial data,including SIC codes, for 3,194 Japanese compa-nies. The definitions of the ratios we use in thisstudy appear in the Appendix.

By cross-referencing the data from Worldscope(2003) and Kurashina’s (2003) list, a major under-taking, we create the study sample pairs. We thusbegan with firms in the first section, whichconsists of the largest companies listed on theJapanese Stock Exchange, and compare theperformance of different types of FBs (B, C, andD). From the 1,638 companies listed in the firstsection in 2003, we exclude purely financial firmsand some companies with too many missingvalues in the Worldscope database, for a totalsample of 1,271 companies, 491 of which are FBs(Table 1). In most cases (416, or 84.72%), familycontrol exists in terms of both capital (familymembers among the largest shareholders) andmanagement (family members hold managementpositions or are on the board of directors). On thebasis of this sample, we create 156 pairs of familyand nonfamily companies.

To avoid overdependence on a single year ofdata, which might be subject to specific effects,we base our comparison on both 2003 and 1998,the latter of which represents the Asian crisisera that had a significant effect on the Japaneseeconomy. By contrast, 2003 represents a timewhen the Japanese economy had recovered. Thus,comparisons of FBs and NFBs during these twovery different economic contexts should provevery fruitful. Furthermore, we consider two dif-ferent sample types.

• The 2003 sample consists of 156 pairs with alltypes of family control (B, C, and D), 127 ofwhich indicate strong family control (Type B).The subsample of weak family control pairs(29) is too small to allow for statistical analy-sis.

• The 1998 sample consists of 87 pairs that donot necessarily represent the same companies

H1

H2

H3H4

Non FBs

FBs

Strong control

Weak control

Performance

Financial structure

Figure 1 Theoretical Model.


320



as the 2003 pairs. That is, we ensure the FBsare the same for both years but often use dif-ferent NFBs.

Results and Discussion

Performance and Financial Structure ofFBs Versus NFBs

As mentioned previously, most empirical investi-gations find better performance and strongerfinancial structures in FBs compared with NFBs.In Table 2, we compare sharply contrasted types ofbusinesses, that is, NFBs (Type A) versus strongcontrol FBs (Type B). The results and testsreported in this table clearly support Hypothesis 1regarding profitability and Hypothesis 2 regard-ing financial structure in both periods (2003 and1998), though we note the less significant differ-ences in 1998 compared with 2003.

In terms of profitability (Table 2), Hypothesis 1is valid for both periods. Almost all related ratiosshow significant differences between FBs andNFBs. Return on equity from a shareholder per-spective and ROA and ROIC from a wider per-spective all clearly show significant differences in1998 and 2003. Only earnings before interests andtaxes (EBIT) are not significant in 1998, thoughthey still indicate that FBs perform better. Theseresults are consistent with most empirical studiesin the field. Broadly speaking, they indicate that interms of financial profitability, FBs are compara-tively more profitable from the point of view ofboth shareholders (ROE) and other stakeholders(i.e., providers of funds, ROA and ROIC). Greaterprofitability of sales (cash flow/sales—a measure

of how well a company is able to generate cashfrom its current operations—and net income/sales) suggests that FBs use their resources moreefficiently. The sales/employee (significant in2003) and cost of goods/sales ratios imply thesame conclusion. The ratio of sales/employeefavors NFBs, but the ratios of cash flow/sales andEBIT/sales clearly indicate that for lower sales, FBsenjoy greater profitability. These results can beinterpreted from the perspective of the parsimonyargument (Carney, 2005) because the ratios makeapparent the strong incentive to assure capital isdeployed sparingly and used intensively.

Regarding financial structures (Hypothesis 2),most ratios show significant differences in favor ofFBs. In terms of liquidity, the differences in thecurrent and quick ratios are significant at a 5%threshold in both 1998 and 2003. Thus, the resultsprovide global evidence of the greater ability ofFBs to meet their short-term financial commit-ments and survive in adverse economic circum-stances, consistent with Mishra and McConaughy(1999), who note the careful management ofcurrent liabilities associated with the risk of lossof control.

In addition, the difference in the total debt/totalcapital ratios significantly favors FBs (5%) in both1998 and 2003, but the difference in the total debt/total equity ratio is significant only in 2003. Thesedifferences indicate that FBs are less dependent onlenders than are nonfamily companies, consistentwith existing academic findings (Agrawal & Naga-rajan, 1990; Gallo & Vilaseca, 1996; McConaughyet al., 2001; Mishra & McConaughy, 1999) that notereduced recourse to debt and a stronger reserveagainst debt on the part of FBs.

Table 1 Sample Structure

Type A Type B Type C Type D

Family members hold top-ranking management positions No Yes No YesFamily members are among the main shareholders No Yes Yes NoN 780 416 51 24Percentage 61.36 32.73 4.01 1.89

Note: Type B: family members hold top management positions and are among the main shareholders. Type C:family members do not hold top management positions but are among the main shareholders. Type D: familymembers hold top management positions but are not among the main shareholders.


321



Tab

le2

Co

mp

arat

ive

Perf

orm

ance

and

Fin

anci

alC

har

acte

rist

ics:

Stro

ng

Fam

ilyC

on

tro

lV

ersu

sN

FBs

Ind

icat

ors

1998

2003

NM

ean

sSi

gn

ifica

nce

NM

ean

sSi

gn

ifica

nce

NFB

sFB

sD

iffe

ren

ceN

FBs

FBs

Dif

fere

nce

Ret

urn

on

asse

ts72

1.46

2.14

0.67

0.08

*12

51.

522.

270.

740.

062*

Ret

urn

on

equ

ity

74-0

.03

2.66

2.69

0.03

9**

118

1.86

3.58

1.72

0.07

8*R

etu

rno

nin

vest

edca

pit

al74

1.66

2.85

1.19

0.04

2**

124

2.03

3.19

1.16

0.04

8**

EBIT

(US$

)74

942,

077.

9511

,071

,971

.410

,129

,893

.45

0.22

411

32,

868,

300

3,78

6,60

591

8,30

50.

086*

Net

inco

me

(US$

)75

12,4

52.6

431

,984

.58

19,5

31.9

40.

067*

123

1,60

1,29

0.88

1,75

8,52

6.51

157,

235.

630.

791

Pret

axm

arg

in75

2.96

4.81

1.84

0.04

2**

127

3.08

4.80

1.72

0.07

4*To

tal

deb

ts/t

ota

lca

pit

al68

34.1

528

.01

-6.1

40.

088*

123

31.4

326

.43

-5.0

00.

074*

Lon

g-t

erm

deb

t/to

tal

cap

ital

7132

.72

28.4

8-4

.24

0.24

312

318

.28

15.1

9-3

.09

0.17

1

Tota

ld

ebts

/to

tal

com

mo

neq

uit

y73

85.2

367

.04

-18.

190.

266

123

100.

9057

.77

-43.

130.

034*

*

Cu

rren

tra

tio

741.

652.

060.

400.

035*

*12

71.

702.

100.

40.

021*

*Q

uic

kra

tio

731.

291.

660.

360.

047*

*12

51.

301.

670.

370.

024*

*EB

IT/s

ales

759.

4311

.36

1.9

0.08

3*12

73.

876.

072.

200.

04**

Net

inco

me/

sale

s74

0.01

10.

019

0.00

80.

2212

41.

262.

301.

040.

099*

Sale

sp

erem

plo

yee

7175

.02

69.7

5-5

.26

0.41

812

771

.56

59.4

1-1

2.15

0.07

4*

Ass

ets

per

emp

loye

e74

83.0

578

.63

-4.4

20.

587

125

58.8

756

.77

-2.0

90.

595

Cas

hfl

ow

/sal

es74

5.00

6.69

1.69

0.04

4**

127

5.36

6.98

1.61

0.04

0**

R&

D/s

ales

Sho

rtag

eo

fd

ata

010

92.

082.

610.

530.

076*

Cap

ital

exp

end

itu

res/

tota

las

sets

Sho

rtag

eo

fd

ata

011

12.

73.

280.

540.

052*

Cas

h/c

urr

ent

asse

ts0

127

27.3

833

.56

6.17

0.00

6***

Co

sto

fg

oo

ds/

sale

s70

70.6

070

.58

-0.0

290.

988

127

69.7

765

.61

-4.1

50.

015*

*Fo

reig

nas

sets

/to

tal

asse

tsSh

ort

age

of

dat

a0

688.

3111

.54

3.23

0.03

4**

Fore

ign

sale

s/to

tal

sale

sSh

ort

age

of

dat

a0

7210

.79

15.2

64.

460.

033*

*

Div

iden

dp

ayo

ut

Sho

rtag

eo

fd

ata

072

23.6

928

.83

5.14

0.09

3*

Inve

nto

rytu

rno

ver

687.

138.

691.

550.

086*

121

10.0

68.

50-1

.55

0.08

5*

***

Sig

nifi

can

tat

1%le

vel.

**Si

gn

ifica

nt

at5%

leve

l.*

Sig

nifi

can

tat

10%

leve

l.


322



We further note that R&D/sales, foreign assets/total assets, and foreign sales/total sales are sig-nificantly higher for FBs in 2003 (we lack sufficientdata for these measures for 1998). These resultsimply a greater impetus for innovation and inter-nationalization by FBs. Two indicators also requirediscussion, namely, the R&D/sales and new infra-structure expenditures with the ratio of capitalexpenditure/total assets (which reflect the fundsused to acquire fixed assets). Both support thelong-term orientations of FBs (Le Breton-Miller &Miller, 2006). Compared with NFBs, family firms“invest for the future or undertake initiatives withsignificant short-term costs” (Le Breton-Miller &Miller, 2006).

Influence of Family Control

Despite significant existing literature pertainingto FBs’ performance, empirical investigations ofthe influence of the level of family control remainssparse. Therefore, we pose Hypothesis 3 to deter-mine whether the level of family control affectscompany performance: Does an FB in which thefamily maintains both capital and managementcontrol enjoy better performance than an FB inwhich the family has only one form of control?

We find only a few cases of weakly controlledFBs paired with NFBs in the main sample (Types Cand D, 29 and 12 pairs in 2003 and 1998, respec-tively). Therefore, a direct comparison withstrongly controlled FBs, even with appropriatepairs, would not provide reliable statistical results.For the same reason, tests of Hypothesis 3 thatcompare differences between NFBs and stronglycontrolled FBs on the one hand with NFBs andweakly controlled FBs on the other will notprovide significant enough results. Therefore, wecompare differences between NFBs and stronglycontrolled FBs on the one hand with NFBs and allkinds of FBs (strongly and weakly controlled) onthe other. We observe different results in the com-parative performance of the two subsamples as aresult of the influence of the level of family controlon company performance.

Consideration of Tables 2 and 3 clearly revealsthat when we compare all FBs with NFBs, the prof-

itability advantage weakens. Almost all relatedratios whose differences are significant in com-parison with strongly controlled FBs becomeinsignificant in 2003 for the whole sample. In 1998,only ROE, ROA, and ROIC indicate statisticaldifferences. Consistent with Maury (2005), whodifferentiates between active and passive familycontrol, we argue that this weakening is due to thepresence of weakly controlled FBs.

In the same sense, the parsimony reasoning weuse for the strong control sample no longer appliesin a sample with weakly controlled FBs. Theadvantage in sales profitability vanishes. In addi-tion, the reasoning pertaining to the long-termorientation of FBs is no longer valid when weintroduce weakly controlled FBs into the sample.Both parsimony and the long-term orientations ofFBs thus seem linked to the level of control.

We draw several different conclusions aboutfinancial structures (Hypothesis 4). In terms ofliquidity, the differences in the current and quickratios are significant, at various levels, in both 2003and 1998 (Tables 2 and 3). The improved abilityof family firms to meet their short-term financialcommitments, even in adverse economic circum-stances, may reflect an intrinsic characteristic ofFBs, regardless of the level of family control.However, even if the differences are statisticallysignificant in both tables (strong family control vs.any family control),the difference between FBs andNFBs increases in the strong control sample,whichprovides some support for Hypothesis 4.

Finally, the difference in the total debt/totalcapital ratios remains significant in both 1998 and2003 in Table 2 but not in 1998 in Table 3, whichalso supports Hypothesis 4. The picture becomesless clear with regard to ratios related to financialindependence (e.g., long-term debts/total capital,total debts/total common equity). Thus, FBsappear less dependent on lenders than NFBs, butthe difference remains minimal as a result of thevarying levels of family control, in contrast withHypothesis 4.

To provide a better test of Hypotheses 3 and 4,wereturn to original data (Kurashina, 2003; World-scope, 2003) to identify more weakly controlledFBs that we might compare directly to strongly


323



Tab

le3

Co

mp

arat

ive

Perf

orm

ance

and

Fin

anci

alC

har

acte

rist

ics:

Fam

ilyV

ersu

sN

FBs

Ind

icat

ors

1998

2003

NM

ean

sSi

gn

ifica

nce

NM

ean

sSi

gn

ifica

nce

NFB

sFB

sD

iffe

ren

ceN

FBs

FBs

Dif

fere

nce

Ret

urn

on

asse

ts86

1.07

1.68

0.60

0.08

9*15

61.

251.

730.

470.

299

Ret

urn

on

equ

ity

86-1

.62

2.57

4.19

0.04

9**

151

3.65

0.49

-3.1

50.

222

Ret

urn

on

inve

sted

cap

ital

871.

832.

800.

970.

081*

154

2.05

2.24

0.19

0.76

5

EBIT

(US$

)86

13,3

52,8

79.1

14,2

54,9

76.6

902,

097.

50.

487

155

6,16

7,72

96,

527,

748

360,

019

0.90

8N

etin

com

e(U

S$)

8720

,073

29,5

83.1

89,

510.

180.

455

156

1,40

1,68

4.59

1,89

3,60

0.06

491,

915.

470.

787

Pret

axm

arg

in86

3.41

4.43

1.02

0.30

315

22.

693.

841.

148

0.13

5To

tal

deb

t/to

tal

cap

ital

8639

.84

34.4

2-5

.41

0.10

415

636

.37

30.6

2-5

.74

0.02

5**

Lon

g-t

erm

deb

t/to

tal

cap

ital

8522

.36

19.9

1-2

.44

0.36

415

623

.90

18.9

7-4

.92

0.03

7**

Tota

ld

ebts

/to

tal

com

mo

neq

uit

y86

97.4

671

.36

-26.

090.

104

153

168.

7710

3.63

-65.

130.

101

Cu

rren

tra

tio

861.

591.

850.

260.

065*

156

1.62

2.02

0.39

0.00

6***

Qu

ick

rati

o86

1.22

1.48

0.25

0.05

13*

154

1.24

1.64

0.39

0.00

6***

EBIT

/sal

es86

9.61

11.2

61.

650.

088*

152

3.78

4.97

1.18

0.18

9N

etin

com

e/sa

les

870.

007

0.01

70.

009

0.09

3*15

60.

951.

700.

740.

247

Sale

sp

erem

plo

yee

8676

.06

75.6

0-0

.45

0.93

615

466

.97

56.9

4-1

0.02

0.07

2*A

sset

per

emp

loye

e86

80.5

679

.39

-1.1

670.

836

155

58.1

658

.16

-0.0

070.

998

Cas

hfl

ow

/sal

es87

4.56

5.96

1.39

0.07

5*15

65.

186.

311.

130.

091*

R&

D/s

ales

Sho

rtag

eo

fd

ata

013

62.

082.

560.

470.

055*

Cap

ital

exp

end

itu

res/

tota

las

sets

Sho

rtag

eo

fd

ata

015

63.

283.

16-0

.12

0.68

2

Cas

h/c

urr

ent

asse

ts0

156

26.1

531

.82

5.67

0.00

3***

Co

sto

fg

oo

ds/

sale

s86

70.9

569

.72

-1.2

20.

537

156

70.2

566

.55

-3.6

90.

009*

**Fo

reig

nas

sets

/to

tal

asse

tsSh

ort

age

of

dat

a0

8410

.10

11.0

90.

990.

511

Fore

ign

sale

s/to

tal

sale

sSh

ort

age

of

dat

a0

8511

.97

16.9

74.

990.

019*

*

Div

iden

dp

ayo

ut

Sho

rtag

eo

fd

ata

091

23.6

828

.12

4.44

0.09

8*

Inve

nto

rytu

rno

ver

827.

079.

292.

210.

097*

151

10.5

8.98

-1.1

690.

162

***

Sig

nifi

can

tat

1%le

vel.

**Si

gn

ifica

nt

at5%

leve

l.*

Sig

nifi

can

tat

10%

leve

l.


324



controlled ones in terms of performance and finan-cial structure. For 2003, we can identify 57 pairs ofstrongly versus weakly controlled FBs of the samesize and industries.Direct comparison shows again(Table 4) that with regard to both profitability(ROE,ROA)andfinancialstructure(totaldebt/totalcommon equity), strongly controlled FBs enjoybetter results than weakly controlled ones, insupport of both Hypotheses 3 and 4.

Our results further show that our findings arehighly sensitive to the way we define family busi-nesses (Miller et al., 2007). They also mirror priorfindings in the cases of Western companies.Although the approach we adopt is interestingbecause it helps measure the influence of the levelof family control on performance and financialstructure, the question remains whether Type Cand D companies should be regarded as familybusinesses. In their cases, family control and influ-ence are so weak that they have no perceptibleconsequences, similar to the distinction betweenfamily businesses and families in business.

Conclusion

Research on FBs in Japan reveals the same prob-lems, in terms of definitions, as research in Europeand North America. Kurashina (2003), by definingthem according to a combination of family controlover capital and management, suggests that inJapan, FBs achieve better average performancethan NFBs. His findings match results previouslyobtained by researchers studying firms in Europeand North America.

This article more closely investigates the com-parative performance and financial structures ofFBs and NFBs in Japan by applying a metho-dology that Allouche and Amann (1995) andAllouche, Amann, and Garaudel (2007) used withsome success in France. The comparison of pairsof companies provides highly reliable results, in acontext that has seldom been investigated empiri-cally. Using this method, we confirm that FBs inJapan achieve better performance than NFBs, forboth profitability and financial structures. Wefurther confirm that the level of family controlstrongly influences performance, at least in termsof profitability (though the results are not as clearfor financial structures). Thus, our results clearlymirror the predominant findings of academic lit-erature in this field.

This research also has several theoreticaland managerial implications. First, it providesan in-depth investigation of FBs versus NFBsin another non-U.S. context, namely, Japan, asrequested by Lussier and Sonfield (2006). Extend-ing the national and institutional contexts inwhich we determine that FBs perform better thanNFBs offers a useful contribution (Popper, [1934]1959). However, we also note the need for furtherreassessments of this performance differential,given the unique Japanese cultural and institu-tional context. In addition, we find that the levelof family control has consequences for perfor-mance; this finding requires confirmation inother national and institutional contexts. Second,because FBs do not enjoy a clear positive imagein Japan, some have recently reshuffled their

Table 4 Comparative Performance and Financial Characteristics: Strong Control FBs Versus Weak Control FBs

Indicators 2003

N Means Significance

Strong Control Weak Control Difference

Return on assets 55 2.3507 1.1404 1.2103 0.092*Return on equity 58 3.07 -2.139 5.209 0.079*Total debts/total capital 55 30.7223 34.4182 -5.00 0.447Total debts/total common equity 54 73.1228 129.82 -56.6972 0.08*

*** Significant at 1% level.** Significant at 5% level.* Significant at 10% level.


325



governance structure (e.g., Hoya, Omron) tostrengthen the confidence of nonfamily share-holders. Although this method makes sense, ourresearch shows that communication about thespecific advantages of FBs might be better thangovernance reforms. This insight may benefit bothFB owner-managers and consultants. Third, ourresearch suggests that when looking for a partneror potential investment in Japan, companiesshould take into account whether the Japanesecompany is family owned. International alliancesand investments are more complex than domesticones. Asymmetric information and differences ininstitutional environments greatly complicate theprocess. Thus, considering an FB could provide arational criteria.

The dynamics of family control justify the pos-sibility of an inversion of the direction of thecausal relation between structure of property andperformance (Anderson & Reeb, 2003). To furtherthe theory offered by Demsetz and Lehn (1985),the structure of the capital could be considered anendogenous variable. In the case of FBs, the evo-lution of past performance may constitute anexplanation for the permanence of control. In theevent of bad performance or negative anticipationabout the evolution of performance, family share-holders likely disengage and sell their shares.Insufficient profitability thus can lead to the take-over of the company by a more powerful group.In turn, sufficiently profitable companies may bebetter able to preserve family control. Such aninverse perspective demands specific empiricalinvestigation into the conditions in which busi-nesses lose family status.

Appendix 1: Ratio Definitions

All ratios are extracted from the Worldscope(2003) database.

Return on Assets(Net Income Before Preferred Dividends +((Interest Expense on Debt - InterestCapitalized) * (1 - Tax Rate)))/Last Year’s TotalAssets * 100

Return on Equity—Total (%)(Net Income Before Preferred Dividends -Preferred Dividend Requirement)/Last Year’sCommon Equity * 100

Return on Invested Capital(Net Income Before Preferred Dividends+ ((Interest Expense on Debt – InterestCapitalized) * (1 - Tax Rate)))/(Last Year’s TotalCapital + Last Year’s Short Term Debt & CurrentPortion of Long Term Debt) * 100

Earnings Before Interest and Taxes (EBIT)EBIT represents the earnings of a company beforeinterest expense and income taxes. It is calculatedby taking the pretax income and adding backinterest expense on debt and subtracting interestcapitalized.

Net Income (US$)US$ represent the net income of the company con-verted to U.S. dollars using the fiscal year endexchange rate.

Pretax MarginPretax Income/Net Sales or Revenues * 100

Total Debt % Total Capital(Long Term Debt + Short Term Debt & CurrentPortion of Long Term Debt)/(Total Capital +Short Term Debt & Current Portion of Long TermDebt) * 100

Long Term Debt % Total CapitalLong Term Debt/Total Capital * 100

Total Debt % Common Equity(Long Term Debt + Short Term Debt & CurrentPortion of Long Term Debt)/CommonEquity * 100

Current RatioCurrent Assets—Total/Current Liabilities—Total

Quick Ratio(Cash & Equivalents + Receivables (Net))/CurrentLiabilities—Total


326



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José Allouche, Professor in Management Sciences,IAE de Paris, Université Paris Sorbonne, France;[email protected] Amann, Professor in Management Sciences,Université de Toulouse, UPS, LGC, France; tel:+33680186736; [email protected].

Jacques Jaussaud, Professor in ManagementSciences, Université de Pau et des Pays de l’Adour,France, CREG; [email protected] Kurashina, Professor, Konan Daigaku,Japan; [email protected] authors thank two anonymous reviewers andthe editor for their helpful advice and comments.


329



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