Performance, investment, and financing patterns of family firms after going public

• Published date: 01 November 2022
• Author: Ettore Croci,Silvia Rigamonti,Andrea Signori
• Date: 01 November 2022
• DOI: http://doi.org/10.1111/corg.12446

SPECIAL ISSUE ARTICLE

Performance, investment, and financing patterns of family

firms after going public

Ettore Croci | Silvia Rigamonti | Andrea Signori

Università Cattolica del Sacro Cuore, Milan,

Italy

Correspondence

Silvia Rigamonti, Università Cattolica del Sacro

Cuore, Largo Gemelli 1, Milan 20123, Italy.

Email: silvia.rigamonti@unicatt.it

Funding information

Università Cattolica del Sacro Cuore

Abstract

Research Question/Issue: This study investigates the performance, investment, and

financing patterns of family firms after they go public.

Research Findings/Insights: Despite the common claim that most initial public offer-

ings (IPOs) are motivated by growth considerations, we find that the operating per-

formance of family firms declines after going public relative to non-family issuers and

comparable private firms. This effect is long-lasting and not due to earnings manage-

ment before the IPO. We also document that family firms do not differ from other

firms in terms of investment activities, but they experience a smaller decrease in

leverage.

Theoretical/Academic Implications: The contributions of this study are threefold.

First, it delves into the incentives of controlling families when facing the IPO deci-

sion. Second, while financial investors' ability to effectively time IPO decisions has

been previously documented, this study shows that families, despite peculiar incen-

tives, take their firms public before a performance decline. Third, it examines the

behavior of family firms concerning the usage of IPO proceeds.

Practitioner/Policy Implications: Families accept diluting their stake in an IPO

when they know that firm performance is about to deteriorate. This increases the

relative attractiveness of the non-pecuniary benefits of control, most of which

remain with the family, over financial wealth, whose future value is expected

to decrease.

KEYWORDS

corporate governance, family firm, IPO, performance

1|INTRODUCTION

The decision to go public is one of the most widely studied in empiri-

cal corporate finance.

1

Surprisingly, the role of non-financial firm

owners in this decision has not been adequately explored, even

though a firm's ownership structure is known to shape corporate deci-

sions (e.g., Cronqvist & Fahlenbrach, 2009; Mullins & Schoar, 2016).

Among the types of owners, families have attracted considerable

attention because of the predominance of family ownership world-

wide (e.g., Anderson & Reeb, 2003, for the United States; Barontini &

Caprio, 2006, for Europe; Claessens et al., 2000 for Asia; Masulis

et al., 2011; Lins et al., 2013 for worldwide analyses), among publicly

listed and private firms (e.g., Aminadav & Papaioannou, 2020; Che &

Langli, 2015; Faccio & Lang, 2002; La Porta et al., 1999).

Going public entails costs and benefits that are common to all

firms,

2

however, family owners share peculiar traits that alter their

trade-off. First, unlike most other shareholders, families desire to pass

the firm to future generations and are concerned about long-term

survival (Anderson & Reeb, 2003; Bertrand & Schoar, 2006; Ding

et al., 2021). They are also more likely to embrace a stakeholder view

of management (Mullins & Schoar, 2016; Neckebrouck et al., 2018)

and provide greater employment stability when public unemployment

Received: 30 November 2020 Revised: 23 March 2022 Accepted: 25 March 2022

DOI: 10.1111/corg.12446

686 © 2022 John Wiley & Sons Ltd. Corp Govern Int Rev. 2022;30:686–712.wileyonlinelibrary.com/journal/corg

insurance is poor (Ellul et al., 2018). Their long-term orientation

generates an incentive to uphold their reputation (Stein, 1989) and

maintain firm control. Second, family owners assess strategic

decisions regarding financial wealth and their non-pecuniary benefits

in the company (G

omez-Mejía et al., 2007,2011; Leitterstorf &

Rau, 2014). For a family firm, the decision to go public implies

accepting the increased influence and role of non-family shareholders,

thereby limiting family members' power and discretion (Berrone

et al., 2012). It also enhances family managers' accountability by

exposing them to employment and compensation risks (G

omez-Mejía

et al., 2001) and may weaken the identity linkage between the family

and the firm (Deephouse & Jaskiewicz, 2013). Going public leads to

the immediate constraining of private benefits of control (Benninga

et al., 2005; Pástor et al., 2009). Therefore, we expect financial wealth

and non-pecuniary benefits of control to affect the decision to go

public and, consequently, the performance and behavior of the family

firm once listed.

The purpose of this study is to examine how the incentives and

motivations of family owners affect their firms' decisions to go public

by formulating and testing predictions on subsequent performance,

investment, and financing patterns. We formulate two views to

explain the decision of a family taking the company public, starting

from the following two well-documented stylized facts about IPOs.

First, the literature reports that controlling shareholders usually take

their firms public during a positive performance trajectory (Jain &

Kini, 1994; Kim et al., 2004; Mikkelson et al., 1997; Pagano

et al., 1998; Pástor et al., 2009). Second, theoretical and empirical ana-

lyses suggest that insiders controlling the firm possess private infor-

mation about its future profitability (Chemmanur, 1993;

Chemmanur & Fulghieri, 1999; Degeorge & Zeckhauser, 1993;

Maksimovic & Pichler, 2001).

The first view, labeled as the positive view, argues that families

list their firms to exploit promising growth opportunities and sustain

positive pre-IPO performance. The future gains arising from these

growth opportunities will compensate for the immediate loss of non-

pecuniary benefits associated with going public. This view predicts

improved performance and more investment in family firms following

listing. Additionally, their leverage is likely to decrease to a larger

extent than that of non-family firms because families issue a substan-

tial portion of equity in the IPO to fund these investment opportuni-

ties. Finally, because a performance improvement is expected, the

need for cash for precautionary savings is reduced. Most proceeds are

allocated to new investments, and cash balances are likely to be lower

in family firms' post-IPO.

The negative view argues that families know that their firms have

exhausted most growth opportunities, and therefore, they cannot

support the growth trajectory exhibited until the IPO. Such an adverse

expectation makes families less concerned about giving up a fraction

of cash flow rights in an IPO because the present value of these rights

decreases. Moreover, as performance deteriorates, non-pecuniary

benefits become more valuable to the controlling shareholder than

cash flow rights (Baek et al., 2004; Johnson et al., 2000), compensat-

ing for the initial IPO-induced loss. Under this view, family firms

perform worse than non-family firms following an IPO and are not

expected to exhibit abnormal levels of investment. Regarding

financing policy, the absence of new investment opportunities implies

that family firms are likely to issue a lower amount of equity in the

IPO, resulting in a modest reduction in leverage. At the same time,

family firms are likely to hold larger cash balances post-IPO than

non-family firms because of the precautionary motive induced by

expected negative performance (Bates et al., 2009; Denis &

McKeon, 2021).

Our empirical analysis of a sample of European firms

confirms that family owners remain involved in the firm after an IPO.

Unlike US-based evidence (Celikyurt et al., 2010; Helwege

et al., 2007), we find that 61.5% of firms are still family-controlled

5 years after the IPO. Thus, families tend to maintain control, and

IPOs do not appear to be the first step toward the sale of the firm.

The IPO motives declared by the family firms in the official prospectus

are consistent with this view. The most frequent reason cited to

justify the IPO decision is firm growth (84.4%), while cashing out is

relatively uncommon (8.8%). Consistently, family-owned IPO firms

are characterized by a smaller fraction of secondary shares (24.96%

of offered shares, 29.5% of total assets) than those conducted by

firms controlled by other owners (34.6% of offered shares, 50% of

total assets).

Although firms often state in official filings that most IPOs are

motivated by growth considerations, we document that the

performance of family firms deteriorates significantly in the years

following the IPO compared to non-family firms going public and

comparable firms that remain private throughout the same period.

This is a long-lasting effect, as performance decline does not

attenuate over the five years following an IPO. Unlike the evidence

documented in most previous studies (e.g., Pástor et al., 2009), we

find that non-family IPOs are not associated with declining perfor-

mance. We also analyze the post-IPO dynamic performance pattern

by comparing the dynamics of family firms going public with the con-

temporaneous dynamics of both non-family firms going public and

comparable firms that remain private throughout and find that the

above findings are confirmed.

Finally, we investigate investment and financing policies. As

suggested by the negative view, family firms invest in capital expendi-

ture (CAPEX) and net working capital (NWC) similar to other IPO firms

and comparable private companies. Regarding financing policies, we

show that, while the average firm exhibits a leverage decrease after

becoming public, this effect vanishes among family firms. This is con-

sistent with our negative view and family firms' greater reliance on

debt, as documented in previous studies (Brav, 2009; Croci

et al., 2011). We find no evidence that family firms hold more cash.

Overall, our results are broadly consistent with the negative view that

families take their firms public in correspondence with a

performance peak.

Several additional tests are conducted to corroborate and extend

our findings. First, we explore alternative explanations and rule out

that performance decline is a by-product of managerial opportunism

at the time of the IPO. We find no evidence to support the idea that

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