Threshold effect in the relationship between family ownership and firm performance: A panel smooth transition regression analysis

Abstract

This paper examines the relationship between family ownership and firm performance over the period 2009–2017 for a large sample of French-listed firms. Previous research showed that family ownership can bring both benefits and costs to firms. Empirical results in whether it enhances or undermines firm performance are inconclusive. This paper aims to further our understanding of the complex relationship between family ownership and firm performance. It clarifies how family owners influence on firm performance depends on their ownership levels. By performing Panel Smooth Transition Regression model (PSTR), we find that the relationship between family ownership and firm performance is non-linear. The model has one threshold at the 37.62% of family ownership and two extreme regimes. The results show that below the threshold, the relation is negative. Family members have fewer incentives to bear the cost of effective monitoring. However, above the estimated threshold, family ownership has a positive impact on firm performance. This paper supports the view that family owners are more motivated to enhance performance when they hold large stake of capital in the firm as family wealth is closely related to firm profitability. These findings provide useful insights for investors seeking investment opportunities in firms with family ownership as the latter constitute a large proportion of publicly listed firms in the world.

Keywords:

• Firm performance
• family ownership
• agency theory
• PSTR model
• Threshold effect

JEL Codes:

• G34

PUBLIC INTEREST STATEMENT

This paper examines the relationship between family ownership and firm performance in France. The presence of families in the firm ownership can bring both benefits and costs. Family ownership is associated with long-term commitment, less conflicts with managers and sustainable links with stakeholders that enhance the firm performance. Conversely, family owners are prone to take actions that benefit only to the family which adversely affect the whole firm performance. This study supports that the behaviour of family owners depends on the importance of the stakes they hold on the firm. Below the threshold of 37.62% of family ownership the relationship is a negative as family owners do not have enough incentives to bear the costs of monitoring. Above the threshold level, family ownership has a positive effect on firm performance. Family members are provided substantial incentives to supervise managers as the family wealth is closely related to firm performance.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Sami Gharbi

Sami Gharbi holds a PhD in Finance from University of Poitiers in France. He is assistant professor at the University of Jendouba. His research activities concern R&D, entrepreneurship, family business, microfinance, corporate governance, corporate social responsibility and stock volatility.