The Company You Keep: The Effect of Other Large Shareholders in Family Firms

• Author: Laura Cabeza‐García,María Sacristán‐Navarro,Silvia Gómez‐Ansón
• Published date: 01 May 2015
• DOI: http://doi.org/10.1111/corg.12107
• Date: 01 May 2015

The Company You Keep: The Effect of Other Large

Shareholders in Family Firms

María Sacristán-Navarro*, Laura Cabeza-García and

Silvia Gómez-Ansón

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Using a panel of non-f‌inancial listed f‌irms over a seven-year period, the authors analyse how the

value of family f‌irmsis potentially affected by the existence of multiple shareholders,by other large shareholders’voting rights

in relation to the family’s, by the f‌inal power distribution (thatis, whether the family’s voting rightsexceed those of other share-

holders), by the identity of the blockholders, and the existence of shareholder agreements.

Research Findings/Insights: After controlling for possible self-selection bias and for endogeneity issues, the results of a

Heckman two-stage method suggest that other large shareholders’voting rights in relation to the family’sdo not affect family

f‌irm value. The results indicate that what seems to matter is who controls the company in terms of voting power, i.e., whether

there is just onelarge shareholder or other major blockholders as well, and whetherthey have more or fewer voting rightsthan

the largest owner. The market favors a f‌irm that has multiple large shareholders provided that the family retains control by

holding most of thevoting rights. However,when there is just one family owner or whenother blockholders have more voting

power than the family, industry-adjusted family f‌irm value is negatively affected. The existence of shareholder agreements and

families andnon-f‌inancial f‌irms as other blockholders has no impacton company performance, whileforeign shareholders tend

to increase family f‌irm value.

Theoretical/Academic Implications: Academics should take the presence of multiple large shareholders into account as this

can affect familypower. It is not a question of collusionor contestability per se. The marketseems to value other large investors’

ability to balancefamily power only if families retain control by holdingthe majority of the votes. Thepreferred model therefore

resembles that of a k ing amid nobility, a “primus inter pares”, with other large blockholders ( nobility) providing a credible a nd

strong but not overwhelming opposition that benef‌its minority owners.

Practitioner/Pol icy Implications: When multiple large owners exist, f‌irm value is increased if the family retains power. Own-

ership structure matters and the effect of otherlarge shareholders’voting rightson minority investors’wealth has to be consid-

ered. New variables to describe particular situations in family f‌irms are needed.

Keywords: Corporate Governance, Family Firms, Other Large Shareholders, Firm Value

INTRODUCTION

Family businessesare a common organizational form now-

adays in every economy and industry, whether they are

private or listed. They are characterized, among other things,

by ownership concentration, with many particularities that

stem from the identity of the largest owner: the family.

Ownership distribution can range from a single large share-

holder to a great numberof small investors, with many differ-

ent situations in between. Given their signif‌icance and the

globalized economy, family companies are expected to be

increasinglytargeted by foreign and other arm’s-length inves-

tors. That is one reason why continuing research into family

f‌irm performance and blockholder relationships is needed.

The existence of other large shareholders with signif‌icant

stakes is common in family f‌irms around the world

(Claessens, Djankov, & Lang, 2000; Faccio & Lang, 2002). Var-

ious studies outline possible interactions and behaviors

among multiple largeshareholders (Bennedsen & Wolfenzon,

2000; Bloch & Hege, 2003; Zwiebel, 1995), but these aspects

have not had subsequent def‌initive exploration for either

listed f‌irms in general or for family businesses. In this vein,

different authors call for further research into the corporate

governance characteristics of companies that have multiple

shareholders (Jara-Bertín, López-Iturriaga, & López de

Foronda, 2008; Laeven & Levine, 2008). These situations are

extremely interesting in family f‌irms as other large

*Address for correspondence: María Sacristán-Navarro, Rey Juan Carlos University, Pª

Artilleross/n, 28032 Madrid, Spain. Phone:00 34 91 4887541; Fax: 0034914887780;

E-mail: maria.sacristan@urjc.es

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12107

216

Corporate Governance: An International Review, 2015, 23(3 ): 216–233

shareholdersmay collude with or challenge the family, protect

their own interests, or act as stewards, increasing or reducing

family conf‌licts and/or benef‌its.

Research intofamily businesses has focused mainlyon how

the existence and identity of the second-largest shareholder

may inf‌luence f‌irm performance (Maury & Pajuste, 2005;

Nieto Sánchez, Fernández Rodríguez, Casasola Martínez, &

Usero Sánchez, 2009; Pindado, Requejo, & de la Torre, 2011;

Sacristán-Navarro, Gómez-Ansón, & Cabeza-García, 2011,

2013); less attention has been paid to the rest of the share-

holders and how they may affect f‌irm value. Worth mention-

ing in this regard, however, is the work of Jara-Bertín et al.

(2008). Considering up to the three largest shareholders, that

study explores how contestability of the majority family

owner emanating from other large blockholders affects the

value of family and non-family f‌irms and shows the possible

effect of identity when the second and third largest share-

holders are also families.

Weaim to add empirical evidenceto this strand of literature

that examines how the performance of family f‌irms is poten-

tially affected by the presence of other shareholders. Specif‌i-

cally, we analyze how value is inf‌luenced by the existence of

multiple owners and by factors that can sway how

blockholders interact.

Our study focuses on a single country, Spain, and on fam-

ily f‌irms. However, we compare the results obtained for

family f‌irms with those for the whole sample of Spanish

listed companies and for the subsample of non-widely held

non-family f‌irms. Although using a database of only listed

companies from a single country could be seen as limiting

the signif‌icance of the results, we believe Spain is an interest-

ing country for studying the issues at hand because of its

high proportion of concentrated ownership and of family

owners at listed f‌irms. It also has a low percentage of institu-

tional investor shareholdings and its f‌inancial institutions

play a more prominent role than in the US (Mínguez-Vera

& Martín-Ugedo, 2007).

Moreover, using a database from a single market allows us

to obtain data for a large percentage of listed f‌irms (our initial

database includes almost 100 percent of the listed companies

in the Spanish stock market). We can also consider both large

and medium-sized f‌irms (and therefore, both old and young

f‌irms) and analyze some specif‌ic aspects, i.e., agreements

among largeshareholders that are described in the annual cor-

porate governance reports. A single-country database also al-

lows us to identify family f‌irms more accurately using the

ultimate owner methodology. Thus, we can avoid assump-

tions, such as the one described by Faccio and Lang (2002):

classifyingan owner as a family when it has not been possible

to identify the owner of an unlisted f‌irm, which can lead to

overclassif‌ication of sample companies as family f‌irms.

Using the ultimate ownership methodology, and, after con-

trolling for endogeneity issues and applying a two-step

Heckman modelthat avoids selection biases when we analyze

relationships separately for subsamples of f‌irms extracted

from the main sample,we examine how family company per-

formance is affected by factors that have been discussed in

previous research. These include the existence of multiple

shareholders and their voting rights relative to those of the

largest shareholder (as a proxy of the ability of other large

shareholders to challenge the largest one –the contestability

effect –see, for example, Gutiérrez, Tribó, & Mariano, 2012;

Jara-Bertín et al., 2008; Maury & Pajuste, 2005). However, we

also look at otheraspects than can inf‌luence family f‌irm value:

the f‌inal distribution of power, i.e., whether the familyhas the

most voting rights; blockholder identity, extending beyond

families and individuals to other non-f‌inancial f‌irms and for-

eign companies; and shareholder agreements.

Our study reinforces the argument that family businesses

should be analyzedas a separate group, becausethe inf‌luence

of blockholders on company value may differ for family and

non-family settings. In line with previous research, we

conclude that multiple large investors exist even in family

companies. They affect f‌irm value positively, with the most

frequent combination of shareholder being family owners

plus other non-f‌inancial f‌irms and/or other families and

individuals. However, our results do not support that f‌irm

performance is affected by the voting rights of other

blockholders relative to the voting rights of the family (as a

measure of contestability of the family from the block-

holders), or by their identity as families and individuals

and/or other non-f‌inancial f‌irms,or by the existence of share-

holder agreements (as a proxy of collusive behaviorswith the

family). Foreign investors as blockholders do inf‌luence f‌irm

value positively.

Our f‌indings suggest there are private benef‌its of control

and a family discount –that is, the market negatively values

afamilyf‌irm that has a unique large owner –and that the size

of the discount depends on the extent of the family owner’s

control, i.e., whether the family’svotingrightsexceedthose

of other large shareholders. In fact, we report that company

value increases if there are multiple shareholders that have

fewer control rights than the family or are foreign f‌irms; but

value decreases if the other shareholders’combined owner-

ship exceeds that of the family. Thus, our results suggest that

the inf‌luence of other blockholders on performance depends

on a delicate balance of power (control) between them and

the family, and on whether these blockholders are foreign

investors.

The paper is organized as follows: The next section sets out

our theoretical framework and hypotheses. We then describe

our databaseand methodologies. This is followed by a presen-

tation of the results of our analyses. The f‌inal section summa-

rizes our main conclusions.

THEORETICAL BACKGROUND AND

HYPOTHESES

The question of how f‌irms differ in terms of f‌inancial perfor-

mance is one of the most studied topics in family business re-

search (Gedajlovic, Carney, Chrisman, & Kellermanns, 2012).

Some authorspoint out the positive relationship between fam-

ily ownership and performance, while others demonstrate the

negative relationship. Issues such as ownership concentration

and distribution,shareholder identityand family involvement

are frequentlyintermingled in all the analyses, so it is diff‌icult

to interpretresults. The identityof the large owner –the family

–gives these companiessome specif‌ic characteristics(positive

and negative) that affect the relationship between ownership

concentration and f‌irm performance. As Aguilera and

Crespi-Cladera (2012) point out, this relationship is, and will

217THE COMPANY YOU KEEP

© 2015 JohnWiley & Sons Ltd Volume 23 Number 3 May 2015