Family Owned Businesses Performance, Investments and Capital Structure

Family Businesses

by Shamsul
Family Business
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Family Owned Businesses Performance, Investments and Capital Structure


A very high percentage of businesses in the world are family businesses or owned by families and have vast variations in business operations compared to businesses owned otherwise. Previous researchers have found family and non-family-owned businesses to differ in many aspects such as HR management, strategic orientation, competitiveness, financing, etc. 

This essay, in particular, will analyze 4 different articles that explore family owned businesses in terms of performance, investments and capital structure compared to non-family businesses. The essay will explore the operations and actions of family owned businesses in the wake of the financial crisis and analyze how family businesses differ in these aspects compared to publicly owned businesses.  

Family firms or large enterprises controlled majorly by families despite going public for more than a decade constitute almost half of the top US large industrial firms (Anderson, Duru, & Reeb, 2012). Despite the high ratio of family run businesses, studies have revealed that family owned organizations do not engage in long term investments and seek low risk projects and divert from activities that constitute high risks (Anderson,, 2012).  

Another study suggests that in the wake of the financial crisis, ‘family controlled’ businesses around the world underperform, as liquidity shocks are dealt through cutting project investments of the business (Lins, Volpin, & Wagner, 2013). Another finding reveals that businesses controlled by families avoid investments or taking risk in order to secure their greater stake in the business. Businesses where families have more control over a firm enjoy much more authority and carry a larger stake compared to non-family controllers, thus interests automatically divert towards raising finance through debts, rather than through equity which will mean diluting of control (Keasey, Martinez, & Pindado, 2015). Attig, Boubakri, El Ghoul, & Guedhami (2015) add on through claiming that family control businesses do not only refrain from large investments, rather they are also found to be negatively associated with dividend policies that favor shareholders.

This essay aims to explore the financial performance, investments, and capital structure of family owned businesses, which, despite being in the majority, are better performing organizations in terms of financial investment and capital structure compared to non-family owned businesses.  


Family Firms’ Literature Findings 

Family owned significant shares in a firm are one of the major types of ownership type for any single organization. Such families with large shares enjoy a strong influence on the business, firm or organization, with the power to mitigate the risk to the organization, ultimately affecting the long term investment decisions. An earlier study noted that if the shares of a large public organization are undiversified and within the hands of a few related individuals (family) the organization will adopt a low risk strategy for projects while avoiding activities that are considered to be high risk (Anderson,, 2012).

In addition to the above findings, Anderson, (2012) also define the reason behind this behavior, stating that financial performances of family firms indicate two components that stand out compared to non-family firms. These components include the level of R&D total spending being lower and the level of resources committed to capital expenditure being higher in family firms compared to non-family firms. This states that according to common findings, family firms follow the risk aversion hypothesis and do not engage in high risk long term investment. However, some researches claim that this lower commitment of long-term financing by family firm is a result of investment efficiency; however, the majority of analyses in this regard speak otherwise (Anderson, et. Al., 2012).

Lins (2013) further add on to Anderson, (2012) findings and attempt to prove the point through evaluating the performance of family and non-family firms from 35 countries after the financial crisis of 2008-2009, stating the findings as family firms underperforming through the period. The findings clearly stated that in times of financial crisis, there is no difference in terms of financing decisions in family and non-family firms. All actions regarding dividend policy, cash holdings, debt maturity, leverage, equity issues and credit lines were similar in family and non-family firms. Thus family firms enjoy no access to any form of great finance availability in the wake of any liquidity shock (Lins,, 2013). In terms of investment, however, out of 8,500 firms, family firms were seen to reduce capital expenditures compared to non-family firms (Lins,, 2013).  

Lins, (2013) study further stressed that even though family firms can provide more finance through other firms under their control since the family enjoyed more significant control over investment decisions, their personal benefits were a greater priority than the prosperity of the firm itself.

Another similar study by Keasey, (2015) take the discussion a step forward by stating that young family firms’ willingness related to dilute the firm’s control impacts the financial and capital structure of the firm. The study concludes that the stake of the main shareholder (family) and the leverage of the young firm are positively related, and the greater the stake, the more involvement and the lesser willingness to dilute control.

Furthermore, as mentioned in earlier discussed studies as well, the inherent characteristic of being risk aversive, family firms are more attached to their business and more able to issue debt, are also aversive to diluting control. Another common finding related to family firms states that the maturity level of the family firm affect the ownership and leverage relationship. While mature business experience a positive leverage, reviving firms experience neutral leverage and growing firms experience negative leverage, thus diluting of control being a factor less common in young family firms (Keasey,, 2015).

Besides presenting similar views as discussed above according to other articles, Attig,, (2015) further added that family firms in terms of ownership structure and imparting of dividends in the wake of a financial crisis (2008 – 09 specifically) show a negative relationship between dividend payout and family firms.

Analysis of the selected articles thus reveals that family-owned firms underperform in terms of financial decisions compared to non-family firms, with a main focus on reserving capital at hand rather than investing it in any business operations for the long time.



The review of selected literature articles on the topic of family owned business, performance, investment and capital structure clearly defines that family firms follow the risk aversion policy and, specifically during financial crisis stages, will refrain from involving in high risk projects and high risk activities.

It was also found that family firms were less willing to dilute their control over the firm, which meant losing leverage. These firms also highly restrict the level of investment in the wake of a financial crisis, resulting in underperformance of these firms compared to non-family firms.

After a detailed analysis of the selected articles and the research findings related to family owned businesses in terms of performance, investments and capital structure, it is evident that family businesses, since they own large shares of an organization and enjoy being part of the decision making process, consider the outcome of every finance related decision in personal and business terms. For example, a non-family business will take decision pertaining strictly to the benefit of the company. As there is no personal interest involved and loss owed to any financial decision will be strictly limited to business loss only.

In terms of family owned businesses, any financial loss is not just limited to the business loss but rather personal loss. as well, whether in terms of capital loss, decision making capability loss, or any other type that would alter the current position of the owner negatively. This affects the finance related decision making in a family owned company, leading to their refraining from any decision that is high risk prone, ultimately leading to family owned business underperforming in the wake of a crisis, compared to non-family businesses.

It is clear that since personal interests are involved, whenever a family firm faces a financial crisis, the owners’ priority will be to safeguard their personal interest and only after that will any decision be taken in favor of the firm.


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