Are Family Firms Financially Healthier Than Non-Family Firm?

Abstract

This study examines the whether or not family firms are financially healthier than non-family in terms of capital structure and leverage. It therefore takes into consideration the existence of any significant differences between the leverage and risk choices of family and non-family firms. Using a panel data set of 888 firms and 7104 firm-year observations of unlisted small and medium size firms over the period 2007-2014, we present that family owned businesses have lower financial structure than those of non-family owned businesses. This indicates that most family firms use less debt financing than non-family firms, and as such maintain a lower level of debt. Secondly, family firms demonstrate lower risk as illustrated by the Altman Z-score. The Altman Z-score scale illustrates a contrary relationship of significance with respect to family firms and their counterparts in terms of the operation aspect of the business's risk factors. Family firms managed their business operations with lower risk and are generally healthier financially than their counterpart firms. Lastly, findings from the robust tests for the hypotheses using a sample of bankrupt firms in Iberian Balance sheet Analysis System (SABI) reveal that the proportion of failure of family firms as opposed to their counterpart firms is relatively low. Analyzing the bankruptcy files of firms from 2002 to 2014 shows a considerably low ratio of family firms at the 5% significant level. This affirms that the low risk illustrated in the Altman Z-score regression is consistent to the lower ratio of family firms that were declared bankrupted over the study period, which makes Spain an important case in this study.

KNOWCON 2021. Knowledge on Economics and Management: Conference Proceedings

“…As a matter of fact, families are "risk willing", in terms of performance hazard, to maintain a firm's control and preserve the nonfinancial returns they derive from the business, but, at the same time, they are averse to entrepreneurial risk (Gómez-Mejía et al, 2007;Gottardo & Moisello, 2017). As regards capital structure, numerous studies indicate that family businesses adopt highly conservative strategies, characterized by a stronger preference for using internal resources for financing, less investment in intangible assets, a lower level of debt, a high concentration of capital in the hands of one sole family, and a static ownership structure that leads them to reject the possibility of sharing control of the business with external partners (Gallo & Vilaseca, 1996;Ntoung et al, 2020). As financial resources are fundamental to firms' activity, age and size may be one of the most crucial factors (Serrasqueiro et al, 2016) in explaining firms' financing decisions; we can expect the financing decisions of young, small firms to be quite different from those of older, larger ones.…”

Does the implementation of IFRS improve transparency regarding the company's financial conditions?: evidence from an emerging market

“…In fact, this model has been proven to perform well across different country settings (Altman et al, 2017) and is widely used by practitioners and academics (e.g. Kainth and Wahlstrøm, 2021;Ntoung et al, 2020;Vo et al, 2019;Tian and Yu, 2017;Bodle et al, 2016;Appiah et al, 2015;Tian et al, 2015;Mansi et al, 2012). This study compares two predictions of company's financial conditions based on the Z-Score model, one using the financial statements prepared in accordance with the IFRS (2017-2019) and the other using the financial statements prepared in accordance with the Saudi accounting standards (2014-2016).…”

Assessment of financial health of Slovak family businesses using models predicting financial distress

“…As a matter of fact, families are "risk willing", in terms of performance hazard, in order to maintain a firm's control and preserve the nonfinancial returns they derive from the business, but, at the same time, they are averse to entrepreneurial risk [21,22]. Characteristics of family owned companies could be a possible reason for family business risk aversion and the choice of capital structure [23].…”