After controlling for country, industry, and firm-specific characteristics, the author found that family firms overall did not have better results during the crisis than nonfamily firms. This result was tied to two metrics — accounting performance (as measured by return on operating assets) and stock market performance (following Tobin’s Q, a commonly used rating that calculates the market value of a company against the value of its assets).
Only the founder firms stood out, and only as measured by return on assets. The same advantage was not evident in the Tobin’s Q rating, the author found, which “implies that the financial crisis may have a disparate effect on corporate cash flow based performance and market value based performance.”
Put another way, the return on operating assets is a revenue-based measure of profitability driven by several factors — including business strategy, management skills, and operating efficiency — whereas Tobin’s Q is mainly driven by the price of stocks. The author ascribes the lack of a boost in founder firms’ stock value to investors’ irrational overreaction to bad market conditions and high volatility during recession times.
Delving deeper into why founder firms produced better returns during the crisis, the author found that their administrative costs were much lower, leading to the conclusion that in addition to being visionary or inspiring leaders, founders are also “good expense controllers.”
Further, founder firms invested much less during the crisis. But they also took on more short-term loans and higher levels of debt, to help them through rough patches. On average, founder firms during the crisis had US$431 million more in short-term debt than nonfamily firms, the author calculated, and their capital structures were more leveraged. Prior to the crisis, founder firms were less leveraged and invested more relative to nonfamily companies.
“Founder firms substantially change[d] their investment and financial strategy during the crisis,” the author concludes. “The fact that founder firms raise[d] their debt level during the crisis suggests that [they] have more financing resources than nonfamily firms in bad times, when financial institutions tighten credit.”
Although family firms overall did not outperform nonfamily companies during the global economic crisis, one type did: those benefiting from the active involvement of their founder. These firms controlled their expenses better and implemented a more conservative investment strategy once the crisis hit.