The Impact of Family Ownership on Firm Performance: An Empirical Study based on Indian Publicly Listed Firms

Abstract: There have been several studies in developed markets which state that the long-term stock performance of family owned firms is far superior to that of non-family owned firms. The reasons often cited for this phenomenon are that family owners have a long-term horizon, a goal of building a legacy company and prudent investments in projects which are not biased by short term incentives. However, India is a very unique market. Family businesses in India are often perceived to have weak corporate governance, lack of competency and a history of corruption. These characteristics and the fact that India is becoming an increasingly important destination for equity investments make it particularly interesting to study how such publicly listed family businesses perform vis-à-vis non-family owned businesses. Moreover, we deepened this study by investigating how family firms with a family member as the CEO performed vis-à-vis family owned firms with externally recruited CEO's. For our study, we have measured firm performance based on stock price performance between 2006-2016 as well as return ratios such as ROE, ROA and ROIC. We used a sample of the 350 largest listed firms on Indian Stock Exchanges (NSE or BSE) and our results indicate that stock returns of family owned firms outperform non-family firms. However, we did not obtain statistically significant results when evaluating the impact of family ownership on the return ratios. For the impact of family members being CEO's, our results indicate that firms with family-member CEO's outperform firms with externally recruited CEO's. In terms of return ratios, the ROA, ROIC and ROE are superior for family-member CEO firms however the ROE relationship is statistically insignificant. Contrary to popular opinion that family businesses in India are inferior to professionally managed firms, the empirical evidence in this thesis shows that owning a portfolio of stocks of family owned businesses can in-fact result in superior performance as compared to a portfolio of stocks in non-family owned businesses.