How Do Banks and Investment Funds Affect Family Risk-Taking? Evidence from the Financial Crisis

Abstract

We study the risk-return relationship for an international sample of family and non-family firms in the period 2007–2014. According to prior studies and following the prospect theory, we obtain a nonlinear risk-return relationship and a target level of profitability for family firms in order not to assume an excessive level of corporate risk-taking. This relationship is more prominent in companies from countries with lower protection of creditors and less aversion to uncertainty. We also find evidence that institutional investors exert pressure on family firms to increase corporate risk-taking, even when the return is lower than the target, with the negative consequence of reducing profitability and going to bankruptcy, as occurred during the years of financial crisis. Furthermore, as major shareholders, banks reduce risk as a result of trying to maintain their financial relationship with family firms. This conservative role has a positive influence on the profitability of the firm for values lower than the return target.