How does Family Control Influence Firm Strategy and Performance? A Meta‐Analysis of US Publicly Listed Firms

• Author: Pursey P. M. A. R. Heugens,Michael Carney,Marc Essen,Eric R. Gedajlovic
• Published date: 01 January 2015
• Date: 01 January 2015
• DOI: http://doi.org/10.1111/corg.12080

How does Family Control Influence Firm

Strategy and Performance? A Meta-Analysis of

US Publicly Listed Firms

Marc van Essen*, Michael Carney, Eric R. Gedajlovic, and

Pursey P. M. A. R. Heugens

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: A contentious and prominent research question in the managementliterature is whether publicly

listed family firms (FFs) outperform other types of corporations. Through a research synthesis of all available studies on the

performance of US FFs, we address this question directly. We also extend the debate by raising three salient follow-up

questions. First, is the performance differential between FFs and non-FFs attributable to a unique set of strategic choices?

Second, do FF performance effects persist across generational transitions in FF control? Third, are performance differentials

across generations attributable to intergenerational shifts in corporate governance and strategy?

Research Findings/Insights: With respect to our primary research question, we find that the balance of evidence indicates

that (US) FFs outperform other types of public corporations. We also evaluate competing narratives regarding which

strategies are characteristic of FFs, and demonstrate that their diversification, internationalization, and financing strategies

mediate the FF-performance relationship in manners consistent with the narratives advanced by certain leading FF scholars,

but not others. Further, we find that the performance of (US) FFs drops dramatically after the first generation and show that

this negative performance differential is due to the much more conservative patterns of strategic decision making enacted

by successor generations.

Theoretical/Academic Implications: In addition to providing the most comprehensive evidence to date regarding the

performance attributes of FFs, we nuance several theoretical debates concerning the propensity of FFs to diversify, inter-

nationalize, and leverage their equity capital.

Practitioner/Policy Implications: We identify value-creating strategic choices of FFs related to internationalization, diver-

sification, and capital structure. We also identify strategic choices often made in successor-led FFs which reduce value. Both

sets of findings are relevant to FF executives and consultants. The policy implications of the study are that in advanced

liberal market economies high-quality capital market institutions are likely to contribute to FF outperformance vis-à-vis

other types of publicly listed firms, but these findings may not hold in other types of national governance systems or in

emerging markets.

Keywords: Corporate Governance, Family Firms, Performance, Generation, Meta-Analysis

INTRODUCTION

Alfred Chandler (1977) famously characterizedthe US as

the seedbed of managerial capitalism. In Chandler’s

view, a professionally managed firm accountable to external

capital markets represents a preeminent and modern

organizational form and one that is best able to compete

successfully in technologically advanced market economies.

In documenting the emergence and domination in the US of

the managerial enterprise and the concomitantdecline of the

“traditional family firm as the primary instrument for man-

aging production and distribution” (1977: 1), Chandler

established a lasting narrative in the management literature,

namely: that in advanced market economies, family firms

(FFs) are plagued by managerial inefficiencies that compro-

mise their competitive capabilities.

*Address for correspondence: Marc van Essen,Darla Moore School of Business, Uni-

versity of South Carolina, Columbia, SC 29208, USA. Tel: 803777-5669; E-mail:

marc.vanessen@moore.sc.edu

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Corporate Governance: An International Review, 2015, 23(1): 3–24

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12080

Yet, while Chandler was confidently proclaiming the

demise of the FF, his contemporaries Jensen and Meckling

(1976) produced a scathing critique of managerial enterprise.

Their agency-theoretic analysis, which identified profes-

sional managers’ self-serving behaviors as a source of

principal-agency costs, still constitutes the dominant theo-

retical paradigm in the mainstream corporate governance

literature. Interestingly, Jensen and Meckling (1976) believed

that owner-managers, typical of family firms, could mitigate

many of the agency problems of the managerial firm due to

their monitoring capacity and their high-powered incentives

to maximize firm value. In so doing, Jensen and Meckling’s

(1976) agency theory launched a potent counter-narrative to

the Chandlerian position that has also become central to the

analysis of effective corporate governance in FFs (Raelin &

Bondy, 2013).

Contrary to Chandler’s prediction, FFs have not disap-

peared from the ranks of leading publicly listed US firms

(Miller, Le Breton-Miller, Lester, & Cannella, 2007), but after

four decades of research on the relative efficiency of mana-

gerially and family controlled firms, the polarized narratives

articulated by Chandler and Jensen and Meckling are not yet

settled. Scholars argue that FF research remains in a pre-

paradigmatic state that is cluttered by conflicting theories

and findings, as well as by significant open questions

regarding the characteristic strategies and performance attri-

butes of FFs (Schulze & Gedajlovic, 2010). On no point is the

field more conflicted than over the question whether FFs

outperform other types of organizations, and Le

Breton-Miller, Miller, and Lester (2011: 704) characterize the

field as bifurcated into “two contradictory family business

perspectives.” Indeed, much of the subsequent theoretical

literature on FFs’ advantages and disadvantages can be read

as a debate, gathering into two opposing camps, fueled by

Chandler’s and Jensen and Meckling’s competing

narratives.

Recent research gathering in the Chandlerian camp holds

that FF inefficiencies arise from conflict between controlling

and minority shareholders (Claessens, Djankov, Fan, &

Lang, 2002), from value-destroying tensions within the con-

trolling family and between family and non-family employ-

ees (Schulze, Lubatkin, Dino, & Buchholtz, 2001), and the

excessive valuation given to socio-emotional wealth by

family members (Gómez-Mejía, Cruz, Berrone, & De Castro,

2011a). These recent perspectives portray FFs as relatively

inefficient organizations that survivein niche markets where

they face little competition. Set against these arguments are

the theoretical perspectives reflecting the positive agency

theory narrative, which suggest that FFs outperform public

corporations operated by salaried executives, due to various

inefficiencies in the latter that are attributable to the separa-

tion of ownership and control (Jensen & Meckling, 1976).

More recent expressions of this perspective suggest that FFs

themselves benefit from the relative advantages of favorable

stakeholder management (Miller, Le Breton-Miller, &

Scholnick, 2008) or capacities for developing certain rent-

generating capabilities (Sirmon & Hitt, 2003). Thus, contro-

versy continues to surround the question as to which of

these views is supported by the body of empirical evidence.

In a departure from research that focuses upon the inter-

nal dynamics of the FF, new comparative research has

begun to address the problem of mixed findings by incor-

porating institutional theory. Potential insights from insti-

tutional theory lay in the possibility that the relative

efficiency of FFs may be attributable to factors external to

the firm, such as the quality of the legal environment, pro-

tection for property rights, and the availability of external

finance (Gedajlovic et al., 2012; Van Essen, Heugens, Van

Oosterhout, & Otten, 2012). One institutional perspective

based on the logic of institutional complementarity sug-

gests that in advanced market economies high-quality insti-

tutions can mitigate the negative tendencies often ascribed

to FFs (García-Castro, Aguilera, & Ariño, 2013; Yoshikawa,

Zhu, & Wang, 2014). Complementarity exists if the pres-

ence or efficiency of an institution increases the returns to

a particular organizational practice or strategy (Hall &

Soskice, 2001). One study pointing to institutional comple-

mentarity concludes that “in well-regulated and transpar-

ent markets, family ownership in public firms reduces

agency problems without leading to severe losses in

decision-making efficiency” (Anderson & Reeb, 2003b:

680). Hence, the logic of institutional complementarity sug-

gests that FF efficiency can be attained through the inter-

action and alignment of external and internal governance

mechanisms. Specifically, public FFs perform well when (i)

large blockholding family members have strong incentives

to monitor professional executives, and (ii) the existence of

transparent and liquid capital markets assures effective

monitoring of family owners.

In marked contrast, there is also an institutional perspec-

tive based upon the logic of institutional substitutability,

which suggests that FF attributes such as a reputation for

honesty (Gilson, 2007) can compensate for under-developed

institutions or “institutional voids” (Miller, Lee, Chang, &

Le Breton-Miller, 2009). Institutional substitutability exists if

the absence or inefficiency of an institution (i.e., an institu-

tional void) increases the returns of a particular organiza-

tional practice or strategy (Hall & Soskice, 2001). In this

view, FFs’ attributes allow them to substitute for missing

institutions, such as inefficient legal processes and insuffi-

cient sources of external finance – conditions common to

emerging and less developed economies. Hence, the analy-

sis of FF performance under conditions of weak institutional

development is based on very different theoretical precepts

than those applied in more advanced economic settings, and

extends beyond the scope of the hypotheses we develop and

test in this paper.

Thus, based on the assumption of complementarity,

focusing upon the performance of publicly listed FFs rela-

tive to other publicly listed firms in the US, a characteris-

tically advanced economy with well-developed

institutions, the performance differences that arise between

firms operating in this context are explained by their inter-

nal dynamics reflecting their corporate governance and

strategic choices. To test hypotheses based upon the com-

peting narratives, we use Hedges and Olkin-type meta-

analytical techniques (HOMA: Hedges & Olkin, 1985) to

synthesize data from multiple studies and bring it to bear

on the open question of whether FFs outperform other

types of business enterprise. In contrast with a recent meta-

analysis using a similar methodology synthesizing interna-

tional studies of unlisted private FFs (Carney, Van Essen,

4CORPORATE GOVERNANCE

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