Proceedings of 26th International Business Research Conference
7 - 8 April 2014, Imperial College, London, UK, ISBN: 978-1-922069-46-7
Family Business Agency Problems, Ownership
Concentration and Corporate Performance: Theory and
Evidence from Saudi Arabia
Mohammed Alghamdi* and Mark Rhodes
Agency costs, ownership concentration and firm performance are three constructs that
have been extensively examined in finance literature. The effect of agency costs and
ownership concentration on firm performance, however, remains contested despite the
formulation of theoretical propositions regarding the relationship between these
constructs. The Saudi Arabia; economy is characterized by large number of family
owned businesses, and the significant involvement of the Saudi government in the
private sector (non-family firms). However, few studies have investigated family firms in
the context of capital market research. Nevertheless, in a study of the top 300
manufacturing and 50 merchandising and other companies based on the 1965 Fortune
500 list, (Burch 1972) it was found that more than 47% of these publicly held firms were
family controlled.
This research attempts to fill a research gap on the relationship between separation of
ownership and control, as well as ownership concentration and firm performance in one
of the emerging markets, Saudi Arabia. Saudi firms are mainly family-owned or stateowned. The research addresses the questions: How can family firms be identified? How
does separation of ownership and control affect firm performance? Is there any
significant difference in agency costs between family firms and non-family firms? Do
family owned firms perform better? How does concentration of ownership affect firm
performance, comparing family firms to non-family ones? This study will be implemented
through a quantitative approach. Secondary data obtained from published annual
statistical data on the financial reports and DataStream database will be analysed to test
the impact of agency costs and ownership concentration on firm performance. The focus
of the investigation will be firms that are currently listed on the Saudi Stock Market
Exchange (SSM). The dataset is a panel of all firms in SSM from 2007-2011 excluding
financial firms. This study is very important because the problem of agency costs has not
previously been studied in the Saudi context, so this study will contribute to agency
theory in family business. It will have practical benefit to Saudi companies and the Saudi
government (as a major stakeholder in non family firms) by identifying agency problems.
Keywords: Agency Costs, ownership concentration, Family firms,
I. Introduction
Research importance and motivation the field of family business emerged as an
academic field of study about twenty years ago (Astrachan, 2003). The family
business was studied from another perspective in the era before the 1980s. These
researches were basically more focused on the family dynamics rather than the
business itself. However, with the recently increased attention towards this field,
now studies are focusing on defining the domain of the field. Previously, the inquiries
pertained to the definition of family businesses and towards pointing out the
differences between family firms and non-family firms.
___________________________________________________________________
*Mohammed Alghamdi - Phd Candidate Finance, Hull University Business School, Centre for
Empirical Finance and Banking, Email: M_algam929@hotmail.com,
Dr. Mark Rhodes,
Proceedings of 26th International Business Research Conference
7 - 8 April 2014, Imperial College, London, UK, ISBN: 978-1-922069-46-7
Therefore, a major gap has been created in understanding the family businesses.
The research criteria of the term, „family business‟ are now transformed from the
traditional practitioner oriented approach, that only focused on descriptive case
studies (Neubauer & Lank, 1998). There were only 45 articles on family businesses
available in major journals since 1958, as stated by Schulze et al, in 2001, which
makes an average of one article per year. According to Zahra and Sharma (2004),
there was only five sessions focused family business out of the 1,200 sessions at the
Academy of Management‟s 2004 annual conference. This shows the lack of interest
shown in this field.
However, the importance of this field is now being realized and this research will also
address this topic in an important developing country in the Middle East Saudi Arabia,
with its distinctive regulatory and cultural environment, which will be a particularly
interesting contribution to the literature. Also, people are beginning to realize the
importance of family businesses and the significance of agency theory in the
governance of family business.
Contribution and Significance of this study focuses on the relationship between
agency costs, ownership concentration and company performance in family firms
and how that differs from non-family firms, as an important for listed and unlisted
businesses in today‟s world. This study aims to address and provides better
understanding of the contextual nature of family firms to improve their businesses,
also give advance knowledge to researcher in this area. This study is restricted to
Saudi listed companies and the design focuses on the use of quantitative data to
provide evidence.
Whilst issues of agency costs, ownership concentration and company performance
have been extensively studied in US and UK context, and also to some extent in
developing and Asian contexts, the Middle East region remains comparatively underresearch in this respect.
Non- listed companies, financial companies and insurance companies are excluded
from this research, due to the differences in their operating and applicable
regulations. The research covers the period 2006-2011 during which was the
beginning of corporate governance and reforms in Saudi Arabia.
II. Literature Review
A. Agency Theory
Agency costs are created as a result of separation of ownership and control.
According to many intellects, if ownership and management are combined, this will
tend to result in the elimination of the costs resulting from separation between the
management and ownership. The agency theory states that the thorough supervision
of company affairs requires the owners of the company to also be the managers.
Berle and Means were the first to create the phrase “the separation of ownership and
control”, which they did in 1932. This work was then further expanded, explained and
clarified by Jensen and Meckling in 1976. A vast body of work has since been
conducted into this area, with the agency theory facilitating the understanding of the
Proceedings of 26th International Business Research Conference
7 - 8 April 2014, Imperial College, London, UK, ISBN: 978-1-922069-46-7
relationship between n the owners of a business (principals) and its managers
(agents) from management, strategic, and financial perspectives.
B. Ownership Concentration:
Theoretically, there are reasons to expect that firms where ownership is
concentrated in the hands of some shareholders will be more efficient than other
firms. Concentrated ownership gives the owners a particular incentive to monitor the
managers, thus reducing agency costs connected to hired management (Schleifer
and Vishny, 1997).
According to Schleifer and Vishny (1997), if a firm is being owned and controlled by
a family, there is greater motivation for the owners to control the activity of the
management, which results in lower agency costs. Anderson et al. (2003) claim that
when a firm that is owned and controlled by the same people who started it, the risk
that is associated with every share purchase makes the life of shareholders easier.
This argue is supported by Jensen and Meckling (1976) who contend that it is logical
that families who have actually started the business would be more motivated to
ensure good performance as compared to other shareholders of the business. This
would mean that family owned businesses would also have to pay a lower interest
rate, as their business would be less risky than other publically owned businesses.
Moreover, the main emotions governing the relationships between owners are of
selflessness, dedication, commitment, and belief in the family members, potentially
explaining why such businesses would be more agile and responsive to changes in
the environment, resulting in better business performance (Pollack, 1985; Coleman,
1990).
C. Empirical Studies (Agency Costs and Ownership)
Shareholders can also actively participate in monitoring business operations,
although this capacity for involvement or supervision is directly proportional to share
in equity (Grossman and Hart, 1988); this means that a larger the share of equity
offers greater incentives and authority to supervise management, as well as
suggesting greater performance to ensure higher returns and the protection of
investments. In contrast, those with fewer shares have less incentive to monitor
business operations and play active role for investment management.
Research suggests that larger shareholders may reduce the agency problems linked
with managers, although they may also harm the organization by the creation of
conflicts between large and minority shareholders (Chrisostomos, Florackis and
Aydin Ozkan, 2004). This problem begins when large shareholders acquire power
and authority, leading them to manipulate procedures and profits at the cost of
minority shareholders (Shleifer and Vishny, 1997). Gomez (2000) argues that these
self interest incentives are stronger when shareholders face minimal control from
corporate governance, low regulatory control or having linnet legal system. The
existence of concentrated shareholdings leads to low diversification, stock ability to
grow and market liquidation, which results in majority shareholders being tempted to
seize company resources for their own self-interest (Beiner et al, 2003).
Proceedings of 26th International Business Research Conference
7 - 8 April 2014, Imperial College, London, UK, ISBN: 978-1-922069-46-7
III. Ownership Pattern in KSA
In a study conducted by La Porta et al. in (1999) they attempted to find out if there
was any kind of relationship present between the ownership concentration and legal
protection available. Their results showed that nations not offering strong protection
for investors tended to show an ownership pattern where firms were controlled by
either the State or families. It should come as no surprise to find out that in Saudi
Arabia company ownership lies mostly in the hands of the government or families.
Table 3.2 shows the details of the equity shares percentages that are held by foreign,
joint stock, government and Family firms.
Table (1): Details of the equity shares percentages in the KSA
Sector
Gov.
Joint Stock
Foreign
Banking
Manufactur
ing
Telecom
23%
2%
15%
Others
(Family)
60%
49%
4%
1%
46%
70%
0%
0%
30%
Electrical
76%
7%
0%
17%
Cement
19%
2%
2%
77%
Services
Agricultura
l
Total
19%
1%
0%
80%
10%
0%
0%
90%
38%
2%
3%
57%
Source: Bakheet Financial Advisors (www.bakheetgroup.com)
A. Family Owned Businesses in Saudi Arabia
According to Raven and Welsh (2006), the family companies represent almost 95%
of the registered businesses in Saudi Arabia (listed and unlisted) which are
administered by the founder of first generation; they are similar to the businesses
operating in other countries.
Proceedings of 26th International Business Research Conference
7 - 8 April 2014, Imperial College, London, UK, ISBN: 978-1-922069-46-7
Chart (1) the percentage of family business in KSA compared to some other countries
100%
90%
80%
30%
20%
10%
25%
15%
5%
5%
24%
70%
60%
50%
40%
30%
70%
80%
90%
75%
85%
95%
95%
Others
76%
Family
20%
10%
0%
Source: Council of Saudi Chambers (2010)
Algalayani (2010) stated that 70% of the companies are managed by the founders,
20% by the second generation and only 10% by the third generation, however such
businesses are symbolized by their administrative steadiness and prosperity. The
regulations in Saudi Arabia mandate the disclosure of ownership that is more than 5%
in a company as well as board ownership
IV. Research Methodology
Data were collected mainly from secondary sources, specifically the Datastream
database and Thomson one Banker database, consisting of published accounts data.
Providing value accounting data on the organizations and the market value equally,
the Datastream system is very useful for investigating balance sheets, profits and
losses and cash flow patterns for companies in different countries. Datastream,
provides data for firms registered in the Saudi Stock Exchange (SSE) Market.
The research covers the period 2006 to 2011, a total of 6 consecutive years. Data for
an extended period is considered necessary to draw clear statistical estimations of
the relationships between variables. The Saudi Stock Market, being one of the
largest markets in the Gulf Cooperation Council (GCC) which comprises seven
countries and, also in the Arab world, in today‟s world over powers most of its rivals.
Ranked by market capitalization, it has the highest name in the list with a staggering
319 billion US dollars, which is compared to a mere 65 billion dollars on average for
the other Arab countries participating in the Arab Monetary Fund index. Based on
Proceedings of 26th International Business Research Conference
7 - 8 April 2014, Imperial College, London, UK, ISBN: 978-1-922069-46-7
this comparison, the Saudi Arabian stock market is by far the biggest market, and
holds shares worth approximately three hundred and thirty-seven billion US dollars,
according to the 2009 quarterly bulletin of the Arab Monetary Fund.
Chart 2: Industry Classification
Industry classification
25
21.29
20
15
10
5
7.09
9.03
7.09
9.67
9.03
6.45
1.29
3.22
4.51
9.67
5.16
2.58
1.93
1.93
0
Sectors
Banks and finance companies and insurance companies are excluded from our list
because they have different financial reports as their balance sheets have a
significantly different structure from those of non-financial companies Peasnell et al.,
2000b; Chtourou et al., 2008.
Proceedings of 26th International Business Research Conference
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A. Conceptual Framework:
AGENCY COSTS
FIRM PERFORMANCE
-
Agency Costs in family Firms (H1)
Agency Costs in Non-Family Firms
(H2)
OWNERSHIP CONCENTRATION:
-
Family Ownership (H3)
Managerial Ownership (H4)
CAPITAL STRUCTURE:
-
Leverage (H5)
BOARD OF DIRECTOR CHARACTERISTICS
-
Board Size Family and Non-Family
Firms(H6)
CEO duality Family and Non-Family
Firms( (H7)
Figure 3: Conceptual Model Underpinning this thesis
Proceedings of 26th International Business Research Conference
7 - 8 April 2014, Imperial College, London, UK, ISBN: 978-1-922069-46-7
Testing for Multicollinearity (VIF):
Table 3: VIF Test Results
Equation
⁄
⁄
A.
IV
Tolerance
VIF
ATRN
.632
1.582
EXPRAT
.771
1.296
F-Owner
.869
1.150
M-Owner
.825
1.212
BRDSIZE
.893
1.120
LEV
.953
1.049
CEO/Chair
.944
1.059
F SIZE
.945
1.058
M/B
.776
1.289
ATRN
.800
1.250
EXPRAT
.890
1.124
M-OWNER
.915
1.093
BRDSIZE
.819
1.221
LEV
.886
1.129
CEO/Chair
.852
1.173
F SIZE
.852
1.174
M/B
.924
1.082
Preliminary analysis of behaviour:
In this section we did preliminary analysis for the Data were collected mainly from
secondary sources, specifically the Datastream database and Thomson one Banker
database, consisting of published accounts data. The research covers the period
2006 to 2011, a total of 6 consecutive years for listed companies which are classified
into fifteen sectors according to the Saudi Stock Market industry classification codes
in TADAWUL.
First, family shareholding firms based on the Saudi listed firms data, we can see all
families shareholding more than 10% except four companies who the family
shareholding are between 7 % to 9 % (see chart 4) it is reflect the ownership
distribution, and we can see clearly how the ownership percentage in high level from
10 % and above.
Proceedings of 26th International Business Research Conference
7 - 8 April 2014, Imperial College, London, UK, ISBN: 978-1-922069-46-7
Chart 4: shareholding distribution
Family shareholding %
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
Chi-Squared result values:
All Chi-Squared values appear in the following table:
Table (5): The statistical results of
F - shareholding
χ2
P-Value
ROA
17.72
Tobin’s Q
test of the variables
ROA
Tobin’s Q
χ2
P-Value
0.038*
13.92
0.030*
16.13
0.013*
13.33
0.038*
CEO family
15.52
0.001*
19.45
0.0000*
7.90
0.019*
CEO/Chair
11.01
0.011*
6.90
0.031*
1.30
0.522
LEV
43.42
0.000*
26.66
0.001*
28.73
0.0006*
13.92
0.030*
13.33
0.038*
BSIZE
χ2
P-Value
χ2
Board Size
P-Value
ARTN
20.96
0.001*
32.64
0.0000*
18.22
0.001*
22.43
0.0001*
EXPRAT
22.65
0.0009*
54.38
0.0000*
22.84
0.0001*
15.27
0.004*
* Significant……at the 0.05 level * Number of observations 80 firms
Proceedings of 26th International Business Research Conference
7 - 8 April 2014, Imperial College, London, UK, ISBN: 978-1-922069-46-7
F - shareholding
10% above +
Board
χ2
P-Value
F - shareholding
20% above +
Board
χ2
P-Value
ROA
21.30
0.011*
21.49
0.010*
Tobin’s Q
13.4
0.037*
16.84
0.009*
* Significant……at the 0.05 level
The results in table (4-3) show that for all of the Chi squared tests the null hypothesis
of random distribution is rejected, except for one result Tobin‟s Q with CEO/Chair fail
to reject
In our study, a Chi-Square test indicates that there is an association between family
shareholding and performance (ROA) because the calculated Chi-Square value is
17.72 with the degree of freedom of 9. The critical value with the 0.05 confidence
level is 16.91. Considering that the Chi-Square value is higher than the table value,
the null hypothesis is rejected. In addition, the Chi-Square test indicates that there is
an association between family shareholding and performance (Tobin‟s Q) because
the Chi-Square value is 16.13 with the degree of freedom of 6. The critical value with
the 0.05 confidence level is 12.59. As the Chi-Square value is less than the table
value, the null hypothesis is likewise rejected.
In our sample we see that clearly the ROA percentage was very low when family
shareholding between 0 - 0.05 percent and that percentage an increase with
increase in family shareholding especially when the percentage was between 0.06 –
0.20, and this is a normal because most of family firms in our sample concentrated
ownership in this range.
Given this result, we explore the relation between family shareholding and firm
performance in Saudi Stock Market (SSM) firms, using return on asset (ROA) and
market value of the firm to the total assets (Tobin‟s Q) to measure firm performance;
we conduct a time-series cross-sectional comparison of family and nonfamily firms
(2006-2011). It is evident in the table (4-1) that the performance of ROA is at its
highest rate when the family shareholding is between 6-20% and that this rate
decreases with an increase in the family shareholding. This means that non-family
firms will perform better than family firms because in these firms there will be no
concentration of ownership.
Existing literature supports the result that family owned business can be less
productive than their publically held counterparts. Family owned businesses would
have a high interest rate because their risk rate would be higher due to the
concentration of resources of such a business within the firm (Demsetz and Lehn,
1985). If the family members have all their assets in their own firm, the stake would
often be very high for them in the event of needing to take bold steps for the
prosperity of the business (Agrawal and Nagarjan, 1990; Gallo and Vilaseca, 1996).
Proceedings of 26th International Business Research Conference
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Table (6): CEOs in shareholding firms
Family Firms
CEOs family
CEOs hired
Total
47
16
31
Percent
100%
34.04%
65.95%
In our results, most of the concentration of ownership in family firms was between 620%. We can also clearly determine the number of CEO-family observations
increases with an increase in family ownership; the CEO-family was 28 observations
when family ownership was between 6-20% and those observations increase to 36
observations with an increase of family ownership (see appendix). That means that
some of the family firms in the sample have a CEO from the family who is also an
owner, and this may be one of the reasons why non-family firms perform better than
family firms. This is due to the fact that family-managed firms may have a lack of
professional management and as a result, it will be difficult for them to become
successful (Dyer, 1989). On the other hand, CEOs-family prefers to avoid risk
because they are owners with “most of their eggs in one basket.”
Regarding CEO/Chair, and based to the Saudi Corporate Governance (SCG)
regulation, it is not allowed for the Chairman of the board of directors to
simultaneously hold any executive position such as Chief Executive Officer (CEO).
The SCG was established in 2006 and most of the code did not become mandatory
until 2010. The separation between CEO and Chairman One of these codes. In our
results, most of the firms (family or non-family) have different people in each position.
A common trend within family firms is that the members of the family often act as the
firm‟s CEO or fill other positions in upper management.
B.
Defining Family owned firms:
We will adopt the definition of family firms based on our statistical results of
test of
the variables; and how does the behaviour and performance of firms differ as family
shareholding changes. We can see clearly a Chi-Square result indicates that in table
(4-3) a significant association between family shareholdings in the level of (10%
above + one of family in the board of directors and 20% above + one of family in the
board of directors) and other performance variables which confirm that there are no
difference in performance when we cut family shareholdings percentage whether we
chose 10% or 20% above include one of family in the board of directors, also, major
shareholders in Saudi listed family firms, who‟s have a minimum of 10% of the right
in the company.
Chi-Square test in table (4-5) indicates that there is an association between the
family shareholding 10% above plus one of family in the board and performance
(ROA) because the calculated Chi-Square value is 21.30, with the degree of freedom
of 9. The critical value with the 0.05 confidence level is 16.92 and the p-value is
Proceedings of 26th International Business Research Conference
7 - 8 April 2014, Imperial College, London, UK, ISBN: 978-1-922069-46-7
0.011 < 0.05. As the Chi-Square value is higher than the critical value, and the pvalue is less than the confidence level 0.05, the null hypothesis is rejected. It is
clearly that the performance is at its highest rate when the family shareholding is
between 10-20 percent and this rate decreases with increase in the family
shareholding.
C. Descriptive analysis Comparison of family and non family owned firms:
This section will discuss the results obtained from the study conducted within 80
firms in the Saudi Stock Market (SSM), divided into two categories, 43 firms
representing family businesses and 37 firms representing non-family firms. Also, this
section will use the sample set to further show and discuss some descriptive
statistics analyses for these variables.
Table (9) Descriptive Statistics for Family firms (2006-2011).
Variables
Mean
Max
Min
S Deviation
Price
35.32
127.83
16.42
20.57
R-Index
37.31
127.83
17.4
19.85
ROA
0.084
0.29
-0.3
0.084
Tobin’s Q
1.64
9.67
0.34
1.242
ATRN
0.67
3.05
0
0.563
EXPRAT
0.81
1.44
0.57
0.2
F SIZE
8.51
10.16
5.92
1.024
BSIZE
8.2
13
4
1.892
LEV
0.06
0.35
0
0.081
CV
0.582
0.532
1
0.751
0.835
0.246
0.119
0.23
1.333
Table (10) Descriptive Statistics for Non-Family firms (2006-2011).
Variables
Mean
Max
Min
S Deviation
CV
Price
41.48
117.17
13.62
18.85
0.454
R-Index
43.91
116.84
14.22
18.77
0.427
ROA
0.047
0.3
-0.68
0.1
2
Tobin’s Q
1.83
7.37
0.26
1.448
0.792
ATRN
0.46
4.81
0
0.482
1.021
EXPRAT
0.86
4.83
0.14
0.383
0.441
F SIZE
8.19
10.63
5.86
1.108
0.135
BSIZE
7.8
12
4
1.748
0.187
LEV
0.12
0.66
0
0.181
1.384
This table contains descriptive statistics for variables used in the analysis of the
sample 43 family and 37 non-family Saudi listed firms for the years 2006 & 2011.
There are differences in the mean price between family and non-family firms. And as
mentioned in the previous chapter all the prices index rebased to 100 in 2006 then
express all other points as a number relative to 100, in the table (4-6) for family firms
(2006-2011) ranges from a minimum of 16.42 to a maximum of 127.83 with an
average of 35.32, whereas the price index in the table (4-7) for non-family firms
(2006-2011) ranges from a minimum of 13.62 to a maximum of 117.17, with an
average of 52.63. Further, it is found that family listed firms exhibit a lower average.
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There are differences between family and non-family firms in the mean and for return
index, which suggests significant skewness in the distribution of the size of the firms
included in the sample.
Comparing Chi-Squared testing Family and non-Family Firms:
Table (15): The statistical results of χ2 test of the Family firms
Family shareholding
χ2
P-Value
ROA
13.74
Tobin’s Q
ROA
Tobin’s Q
P-Value
χ2
P-Value
BSIZE
χ2
P-Value
0.032*
10.87
0.092
9.16
0.057
11.08
0.085
CEO family
11.41
0.003*
7.75
0.020*
15.93
0.0003*
CEO/Chair
8.01
0.018*
4.75
0.093
1.30
0.522
LEV
19.14
0.003*
12.15
0.016*
18.58
0.0004*
10.87
0.092
11.08
0.085
BSIZE
χ2
ARTN
27.89
0.0001*
25.79
0.0000*
17.18
0.0017*
11.71
0.019*
EXPRAT
31.84
0.000*
17.71
0.0005*
6.92
0.14
28.14
0.000*
* Significant……at the 0.05 level
Table (16): The statistical results of x 2 test of the Non- Family firms:
ROA
Tobin’s Q
BSIZE
χ2
P-Value
χ2
P-Value
LEV
6.15
0.188
10.62
0.031*
χ2
P-Value
BSIZE
6.59
0.36
6.79
0.35
ARTN
10.6
0.031*
6.96
0.138
21
0.0003*
EXPRAT
38.94
0.0000*
17.35
0.001*
10.79
0.029*
* Significant……at the 0.05 level
In this section we have a result of Chi-Square test after we identified the family firms
so, separate the firms to two groups family and nonfamily firms to comparing ChiSquare result. The table (15) represent the Chi-Square result for family firms and (16)
represent the Chi-Square result for non-family firms, we can see that in family firms
there are an association between family ownership and performance (ROA) because
the calculated Chi-Square value is 13.74 with the degree of freedom of 6. The critical
value with the 0.05 confidence level is 12.59. Considering that the Chi-Square value
is higher than the table value, the null hypothesis is rejected. In addition, the ChiSquare test indicates that there is no association between family ownership and
performance (Tobin‟s Q) because the Chi-Square value is 9.16 with the degree of
Proceedings of 26th International Business Research Conference
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freedom of 4. The critical value with the 0.05 confidence level is 9.48. As the ChiSquare value is less than the table value, the null hypothesis is accepted.
D.
Chart analysis for family and non-family firms:
To compare RI and P between family and non-family firms, 2007 is designated as
the base year and the price index called 40, which is a good way to show a relative
movement.
RI = ∑
=
P=∑
=
Where:
RI, is the daily return index.
P, is the daily share price.
Is the daily market value
, is the total of market value for all firms in each day.
Chart 5: Return Index
RI
100
90
80
70
60
50
Non-Family
40
Family
30
20
10
2011
2010
2009
2008
2007
0
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Chart 6: Share Price
Price
100
80
60
Non-Family
40
Family
20
2011
2010
2009
2008
2007
0
We can see clearly in the (chart 6) of share price the non-family firms in most of
years higher than share price in family firms, one of the reason is the dividends,
Woolridge (1982) “defined dividend as payments made by businesses to their
shareholders. It is the distribution of the business recent profit to its owners and also
a reward for investing in a business”. In family firms most of shares hold by family
members and they prefer to reinvest their profit rather than take it as dividends to
increase the family wealth. In non-family firms one of the goals are to maximize
shareholder wealth and paying dividends to shareholders‟ is a kind of that (Arnold,
2008). In our sample case produce a new chart that looks at returns index (RI) to
make a comparison between family and non-family firms, so we see the relative
change in the monthly (RI), each series was logged and then the difference taken to
give the monthly returns.
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Chart 7: Monthly percentage change in RI
Monthly % Change RI
0.4
0.3
Monthly % Change
0.2
0.1
0
-0.1
-0.2
Non-Family
Family
-0.3
-0.4
-0.5
-0.6
As can see in the chart (7) the monthly change in the RI and it is interesting because,
Pattern of the index in the charts (5) and (6) show that the difference between return
index and price, in Non-family firms have a much more volatile pattern. A difference
between Family and non-family firms in each chart means that the firms have a
different dividend policy. However, also do not think that it is very easy to look at the
level of prices or RI because the starting point matters too much.
For that the chart (7) reflect the monthly change in return index to see how the
difference between family and non-family during the period. During 2007 there is not
much change in the patterns between the family and non-family. But in 2008 there is
change in the patterns between them because of financial crises, during this year the
non-family firms faced sharp drop which is not happened in family firms and for that
we see the difference between them. In the period 2009-2011 the monthly
percentage change in return index show not much change in the patterns between
the family and non-family.
Overall there is a difference in the pattern of returns, based on the sample of family
and non-family firms. Relative performance appears to differ depending on the (sub)
period and specific events. It appears that family firms show a less volatile pattern of
returns. However further exploration may serve to better explain why this is the case.
A preceding analysis in table (4-9) suggested that leverage is different between
these classifications for example as also is the asset to turnover ratio.
Regarding the return index in (chart 2), we can see that the family firms perform
better in 2006 and 2008 than non-family firms. In 2008 The impact of the Global
Financial Crisis saw the market capitalization slide to SAR 924.5 billion before rising
to SAR 1.2 trillion in 2009 (Oxford Business Group, 2010). Family company is a
company where the founding family is the major shareholder; however the director is
not a family member. In this type of company, the founding family has influence and
power only through ownership. Thus, the founding family as a large shareholder is
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able to discipline and monitor the manager, and contribute to the company
performance (Shleifer and Vishny, 1986).
For that we can say, return of family firms during long term seem to be stable than
non-family firms over 2006-2011,while when we look at the individual indices
difference between family and non-family firms we saw that during the short term
non-family firms give back return higher than family firms.
In addition, we can see the stock price and return index in Saudi stock Market for
family firms during the period of crisis better than non-family firms and that because
the ownership concentration and controlling the management in this firms. Mitton
(2002) find that firms with higher ownership concentration have higher stock price for
the period of the crisis. Also, Lemmon and Lins (2001) show that during the crisis
period, firms which controlling owner-managers suffered more loss of share values.
In our result we can see that clearly, those family firms are more stable than nonfamily firms in the long term, whether it is before or after the financial crisis. In 2008,
all firms dropped in the Saudi Stock Market, but the non-family firms dropped sharply,
which did not happened with family firms. Family managers‟ aim at long-term value
maximization, but managers of non-family firms aim for short-term period to satisfy
their own personal gains and shareholders (Daily and Dollinger 1992).
Of course, most of the world‟s elderly companies are in very old-economy industries,
for example building, agriculture and hospitality (Economist, 2004). These industries
want long- term investment and that corresponds to the independence and objective
of family firms. In our results this may be one of the reasons; why we see family firms
more stable and performing better in long-term investment.
In our result, that could be one of the reasons to see the return index in family firms
less perform less well than non-family firms in the Saudi Stock Market. There is a
positive relationship between return and risk (high risk, high return; low risk, low
return). Agency costs in family firms might be lower if members of the founding
family are involved in the management of the family firm. Based on this argument of
lower agency costs in family firms we would expect them to use less income
smoothing than non-family firms. Hence, we expect that family management leads to
lower levels of diversification.
VI. Overall Summary
The results of empirical findings on the association between four important sets of
variables, namely, Agency costs, ownership structures, board characteristics, and
the performance in the Listed Saudi Stuck Market (SSM) firms over the period of six
years from 2006 to 2011. The objective of this chapter has been to examine
statistically the association between variables, mainly Agency costs, boards of
directors, ownership structure and performance, analysed with the Chi-Square test.
And based on that we defined the family firms where the family owns at least 10 %
or above of the firm‟s equity with at least one family member on the board, and we
make a comparison between this results to see how family firms different from nonfamily firms. And then we discussed descriptive statistics analyses for these
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variables. The descriptive statistics include mean, standard deviation, minimum,
maximum and Coefficient of variation (CV). Then we using the Pearson and
Spearman tests to see the correlation between variables of Agency costs, ownership,
performance and control variables, finally we make analysis to discover if there is
any difference in return index and share price between family firms and non-family
firms to have an idea about the performance. Also did tests of multicollinearity for the
study variables for different relationships depending on the correlation matrix
between the study's variables.
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