Founding family ownership, stock market performance and agency problems

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This paper explores the relationship between founding family ownership and stock market performance. Using a comprehensive sample of firms listed on the Swiss stock market over the period 2003-2013, we find that stock returns of family firms are significantly higher than those of non-family firms after adjusting returns for different risk factors and firm characteristics. They generate an annual abnormal returns of 4% to 7%. Since families hold a large fraction of their firms’ voting rights, we relate this result to the risk of potential expropriation faced by investors. This assumption is confirmed by the data as we find that the outperformance of family firms is related to the level of family ownership. We also document that family firms tend to surprise the market more positively than other firms when they announce their earnings and that the magnitude of surprise is also related to the family stake in the firm. These results show that the abnormal stock returns of family firms can be explained by investors' skepticism towards family firms and the fact that market participants are systematically positively surprised by firms where agency problems are potentially more severe

Author(s):

Dusan Isakov    
Université de Fribourg
Switzerland

Nicolas Eugster    
Université de Fribourg
Switzerland