Performance and Behavior of Family Firms: Evidence from the French Stock Market

Abstract

This paper empirically documents the performance and behavior of family firms listed on the French stock exchange between 1994 and 2000. On the French stock market, approximately one third of the firms are widely held, another third are founder-controlled and the remaining third are heir-controlled family firms. We find that, in the cross section, family firms largely outperform widely held corporations. This result holds for founder controlled firms, professionally managed family firms, but more surprisingly also for firms run by descendants of the founder. We then propose explanations that differ according to the identity of the management in the family firm. First, we offer evidence of a more efficient use of labor in heir-managed firms. These firms pay lower wages, even allowing for skill and age structure within the firm. We also find that descendants smooth out industry shocks and manage to honor implicit labor contracts. Secondly, we present evidence consistent with outside CEOs in family firms making a more parsimonious use of capital. They employ more unskilled, cheap labor, use less capital, pay lower interest rates on debt and initiate more profitable acquisitions.