CONTROLLING-MINORITY STRUCTURE AND FRENCH
FAMILY PERFORMANCE
Hani Chaarani – Chargé d’enseignement à la FGM
ABSTRACT
This paper deals with the influence of family ownership structure and deviation from
control on financial performance. Using rich and accurate data from French Stock
Exchange firms during 2008-2009 and 2010, we have found that family ownership can’t
always be a guarantee to increase firm performance, specifically in the case of
controlling minority structure (CMS: below 50% of cash-flow rights). Our results indicate
that the affiliation to family pyramids associated with CMS structure leads to a more
entrenched situation. However, when the family becomes the ultimate majority owner
(with minimum 50% of cash-flow rights) the entrenchment and the expropriation
behavior decrease. Finally, we have not found any negative influence of separation
between voting and cash-flow rights when this separation is due to dual class voting
rights. In this paper, we reveal the dark side of CMS in family business and open new
areas for research.
KEYWORDS
Family Firms, Controlling Minority Structure, Performance, Pyramids, Dual class voting
rights.
1. INTRODUCTION
Family business is known to be the cornerstone of the French Economy. The names of
Peugeot, L’Oreal, GFI and many others are inseparable from the sagas of French
economical development of today’s industrial democracies. In fact, family-owned
1
businesses1 have significant contribution in both the French and international
economies. In France, 87% of the businesses are owned by the French and
international families. This percentage is verified by number of French and international
studies. For example, Allouch and Amann (1998) have found that family owned
business constitutes the most common type of French business. The importance and
the dominance of family business were verified in Europe by Faccio & Lang in 2002 and
by Claessens & Ali in 2000 (a and b).
In addition to being a significant influence on both French and international economies,
family firms appear to be distinct from non-family firms. The concentration of ownership
and the combination between the ownership and control provide the family firms with a
competitive advantage and superior performance. Jensen and Meckling (1976)
developed a theoretical framework to show that Concentrated Ownership Structure
(CO) is beneficial for corporate valuation. One channel can be through the reduction in
transaction costs through negotiating and enforcing corporate contracts with various
stakeholders, including managers, labor, material suppliers, customers, debt-holders,
and governments. In fact, in France, between the Dispersed Ownership Structure (DO)
and the Concentrated Ownership Structure (CO), there is a new type of control:
Controlling-Minority Structure (CMS), in which family cans control the firms by using a
low level of cash-flow rights.
In this study, we will investigate the relation between family CMS and firm performance
to explore if the families use this structure to expropriate the external non-family
shareholders. The main contributions of this research are theoretical and practical.
Firstly, this study leads us to test the convergence hypothesis between the ownership
structure and family firm performance. Secondly, our specification extends previous
work in this area and tries to capture the complex nonlinear relationship between
corporate value and family ownership, specifically when the family controls their firm by
1
In this study, we define family firm more narrowly to encompass only companies run by heirs of the people
previously in charge or by families that are clearly in the process of transferring control to heirs, (but the family
should have 10% as minimum ownership rights).
2
using the CMS structure. To attain our objectives, the paper will be divided into three
sections : section one is a literature review on the presence of the family controlling
shareholder, the discrepancy between ownership and control, the mechanisms used to
maintain control and the relations between CMS structure and corporate performance.
Section two discusses our data selection; as well as the construction and methodology
of the study. The last section includes the descriptive and multivariate results of the
study.
1-The family CMS Structure: Literature and Hypotheses
In this section, we provide an overview on existing studies done in the field of family
ownership to develop our testable hypotheses.
1-1-The family firms: from Concentrated Ownership Structure (CO) to ControllingMinority Structure (CMS)
To create any firm, first there should be an entrepreneur. However, with the passing of
time and the developing of concurrence, the entrepreneur can’t conserve their firms
without any assistance and any orientation to secure their growth. This leads to an urge
for help, in this phase the firm begins its first stage of family involvement. In this first
stage of family firm life, the ownership and the voting rights are concentrated with the
same family. After this first stage, the second stage of freezing out begins by the
opening of the family ownership to nonfamily members due to: the conflicts between
brothers and sisters; the conflicts between cousins; and (or) the financial decreases. In
this phase, the ownership structure begins the operations of transformation from
concentrated ownership to dispersed ownership and sometimes to non family
ownership. Holland and Boulton (1984) confirm that family firms start out as nonfamily
firms, later become family firms, and eventually end up as nonfamily firms again.
To stop this passing to dispersed ownership structure and the transformation to
nonfamily firms, the family members try to conserve their places by the entrenchment
and by using the principles of deviation from the one-share-one-vote to become the
ultimate controllers by having a small percentage of cash-flow claims (below then 50%
of cash-flow rights). This is the stage of CMS structure.
3
In France, 43% (19%+24%) of the family firms are controlled by a CMS structure by
having below than 50% of cash-flow rights. 24% may use the devices of deviation from
one-share-one-vote because they have below than 50% of cash-flow rights and above
than 50% of voting rights. 19% of French family firms have below 50% of cash-flow
rights and below 50% of voting rights; in this case the ownership structure of the family
firms should be largely dispersed to let the family control the firm with small part of
ownership. Our survey demonstrates this hypothesis because the average of the
second shareholders doesn’t have more than 5% of the voting rights in the family firms.
Figure 1: French family firms ownership during 2008-2009-2010.
The data set is comprised of 1345 family firms filtered from French listed companies in
the French Stock Market - 2008-2009-2010.
Voting
rights
100
100%
%
24%
CMS structure
Concentrated
56%
50
%
19%
10
%
50
%
100
cash-flow rights
%
1-2- the maintenance of the CMS by the deviation from one-share-one-vote
devices
The devices enabling a family to control a firm while retaining only a small fraction of the
cash flow rights, are chiefly stock pyramids, dual-class share structures and cross4
holdings. Bebchuk and al. (2000) demonstrate that for any desired ownership-vote
discrepancy level, however its extent, one of the above devices may allow a
shareholder to make a locus of control without owning more than a predefined fraction
of cash flow rights. This discrepancy level may be achieved also by combining two or
more mechanisms. Among these mechanisms, pyramiding is the most frequently used
device to maintain grip on control while owning only a tiny proportion of the equity
claims (La Porta and al. (1999)). Pyramiding allows the overarching family or the parent
company to control a range of affiliated firms via several layers of intermediary
companies and to interfere in their management. This hazy pattern shackles outside
monitoring and ensures to the ultimate owner the imperviousness of minority scrutiny so
as to enjoy and to warrant private benefits of control. The other mechanism is the crossholdings. Being horizontally interconnected, cross-holdings firms provide insulation and
entrenchment to controlling shareholders. The needed voting rights to maintain a lock
on control over an array of firms are, unlike pyramids, distributed among the whole array
instead of being the property of a single family or a parent company. In France, despite
the plenty of leeway that the law gives to use this kind of arrangement, cross-holdings
are seldom used (Faccio and al. (2002)).
The use of dual-class shares is generally subject to some restrictions. In many
countries, corporate law caps the proportion of low-vote shares and/or restricts the
voting ratio between high- and low-vote shares (Bebchuk and al. (2000)). French family
firms are allowed to grant a second vote to faithful shareholders when they hold a
registered stock for, at least, a two-year period. These high-voting shares, omitted in
previous studies, are not publicly traded on the French Stock Exchange, and are hence
closely held. French firms are accustomed to use voting pacts or in-concert actions with
preemption right clause to lock out other shareholders from control. Unlike pyramiding
and non-traded high voting shares, cross-holdings and non-voting shares are
uncommonly used in the French context as alternative devices to separate ownership
and control.
5
Table 1: the deviation from one-share-one-vote devices during 2008-2009-2010
The data set is comprised of 1345 family firms filtered from French listed in the French
Stock Market - 2008-2009-2010. In the table, Dual classes (Differential VOTING rights),
is the percentage of corporations with dual classes of shares. Pyramid (PYRAMIDS) is
the percentage of corporations with a one share-one vote structure, controlled through a
pyramidal scheme.
Percentage of the French family firms using the
deviation from one-share-one-vote devices
PYRAMIDS.
58,9754%
Differential VOTING rights
43,2950%
The statistics in table 1, confirm that the French family firms use the pyramids and
differential voting rights as the most commonly mechanism for concentration. 58% of
French families use the pyramids, and 43% use the differential voting rights. Our results
confirm the results of La porta and al. (1998).
1-3- Controlling-Minority Structure (CMS) and Corporate Performance
The research on the topic of ownership structures and corporate valuation goes back to
more than sixty years with Berle and Means (1932). They showed that diffuse
ownership yields significant power in the hands of managers whose interests do not
coincide with the interest of shareholders. As a result, corporate resources are not used
for the maximization of shareholders’ value with diffuse ownership. A more concentrated
ownership can consequently lead to better performance. Jensen and Meckling (1976)
developed a theoretical framework (Agency theory) to show that increasing
concentration in cash-flow rights is beneficial for corporate valuation. One channel can
be through the reduction in transaction costs by negotiating and enforcing corporate
contracts with various stakeholders, including managers, labors, material suppliers,
customers, debt-holders, and governments.
6
Agency theory is based on the idea that managers who are not owners will not watch
over the affairs of a firm as diligently as owner-managers. Ross (1973) formalized this
conflict of interest arising from the separation of ownership and management as a
principal-agent problem and Jensen and Meckling (1976) coined the phrase “agency
costs” to represent the costs of all activities and operating systems designed to align the
interests and/or actions of managers (agents) with the interests of owners (principals).
In the case of family firms, the researchers, like Sraer and Thesmar (2006) argue that
superiority of family firms is due to the high level of ownership concentration. Maury
(2006), suggest that family control lowers the agency problems between owners and
managers. Anderson and Reeb (2003) argue that the desire of family managers to
preserve their reputation gives them incentive to enhance the firm performance.
Anderson and Reeb reported a positive and significant difference for family firms. But,
the involvement of the controlling shareholder in the firm management, however, may
not necessarily be favorable. Given the dominance of concentrated control rights in
France, the first conflict agent for large family corporations is that of restricting
expropriation of external shareholders by the family shareholders, rather than that of
restricting empire building by unaccountable managers, specifically in descendant-CEO
firms (Villalonga and Amit, 2006). Claessens et al. (2002) find that private benefits of
control are a source of negative impact on family control in East Asia. Recently, Maury
(2006), shows that family control gives rise to conflicts between the family and minority
shareholders when shareholder protection is low and control is high. The scope for this
conflict, and the resulting expropriation, depends on the wedge between cash-flow and
control rights. Claessens et al. (2002) and Lins (2003) show that in East Asian
economies, the excess of large shareholders voting rights over cash flow rights reduces
the overall value of the firm, albeit not enough to offset the benefits of ownership
concentration. This separation of ownership from control rights is largely achieved in
France through the concurrent use of dual class voting shares and stock pyramids (see
section 1-2). Bebchuck, Kraakman and Triantis (2000) suggest that these ownership
structures involve larger agency costs than those imposed by dispersed ownership
7
structures and show how these structures can distort corporate decisions with respect
to investment projects’ choice, firm size and control transfer2.
Moreover, there are plausible reasons for thinking that governance problems in CMS
firms might be worse than in widely held firms. This is because widely held firms that
are too severely mismanaged suffer stock price declines. These, in turn, trigger
shareholder lawsuits, hostile takeovers, challenges by institutional investors at
shareholder meetings, and other pressures that often lead to management’s ouster and
to corporate policy more aligned with value maximization. Hostile takeovers are not
possible if the CMS is held together with control stakes greater than fifty percent, and
institutional investors can’t force their representatives onto boards in shareholder
meetings where more than fifty percent of the votes are controlled by the wealthy family.
Furthermore, pyramid member firms are vulnerable to a third agent problem that is not
generally thought of in countries of free-standing firms. This is the inter-corporate
transfer of wealth among pyramid firms to advantage the controlling shareholder, what
Johnson and al.(2000) call tunneling.
All of the above mentioned arguments lead to the following hypothesis:
H1: Family cash-flow rights3 are positively related to firm performance.
H2: The higher the firm’s ownership-control discrepancy through dual class voting
shares, the lower the family firm value.
2
Consistent with all the above points, Morck et al. (2000) find that Canadian heir controlled firms, many of which
belong to pyramids, underperform United States industry peer firms of comparable size and age, while widely held
Canadian firms do not. Claessens, Djankov, Fan, and Lang (2002) investigate the role of pyramids more directly,
and find that firm value falls when the control rights of the largest shareholder exceed its cash-flow ownership in a
study of Asian firms. Lins (2003) reproduces this finding in a study of control pyramids in emerging economies, and
also finds that the effect is weaker in countries with better legal protection for public shareholders and in pyramid
firms with large outside shareholders. Presumably, both the law and large independent shareholders prevent
tunneling and induce better governance. Bertrand, Mehta, and Mullainathan (2002) test for tunneling among Indian
pyramid group firms by looking for effects of shocks to one pyramid firm in the stock prices of others. They
conclude that tunneling is economically important in Indian control pyramids. Bae, Kang, and Kim (2002) report
concordant evidence for Korean family run control pyramids, or chaebol.
3
Voting rights was excluded from this hypothese, because the family firms may have a big risk of tunneling when
the voting rights exceed the cash-flow rights. So the cash-flow rights represent the valid family interests in the firm.
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H3: The higher the firm’s ownership-control discrepancy, through pyramids, the lower
the family firm value.
2. DATA CONSTRUCTION, VARIABLES AND METHODOLOGY
In this section, we define our sample, our variables and our methodology of thinking.
2-1- The sample
The analysis is based on newly-assembled data for one thousand, three hundred and
forty five (1345) family publicly-traded corporations in France. As a starting point for the
data collection, we have used the World scope database which generally provides the
names and holdings of large owners. We supplemented the data with information from
the annual reports. We excluded financial firms and companies which have proxy
ownership that cannot be traced to a specific owner. In all cases, we collected the
ownership structure as of December 2008-2009-2010 or the end of the 2008-2009-2010
accounting year. We ended up with 1345 family companies (represented in table 2) for
which we can trace the ultimate owners, and where stock market data are available.
Table 2: Number and percent of family firms by two digit SIC code (n=1345 family
firms) during 2008-2009-2010
SIC Code
1,2,9,20,21,54
15,16,17,32,52
10,12,14,24,26,28,33
25,30,36,37,50,55,57
34,35,38
27,58,70,78,79
Number of
Percentage(%) of family
family firms
firms in the industry
87
6.46840149
contracting
105
7.80669145
Basic industries
183
13.605948
255
18.9591078
132
9.81412639
99
7.3605948
Industry Description
IAA and tobacco
Products
Constructions and public
Consumables and
durables goods
Metals, machinery and
instruments
Hotels, eating and
amusement services
9
72,73,75,76,80,82,87,89
Services
354
26.3197026
22,23,31,51,53,56,59
Textile and commerce
130
9.66542751
1345
100
Total
The database shows consolidated company account data when it is disclosed.
Information on whether the accounts are consolidated is given by World scope in a field,
which contains standardized text such as “All subsidiaries are consolidated,”
“Consolidation for significant subsidiaries, others are on equity basis,” and “No
consolidation, cost basis.” If a company changes its consolidation practice, this change
is recorded in the data.
To test the robustness of our main results, we rerun all regressions while excluding
firms with unconsolidated statements.
2-2-The variables
Following on La Porta, Lopez-de-Silanes, and Shleifer (1999), we analyzed the control
pattern of companies by studying ultimate shareholdings. We identified their owners, the
owners of their owners, etc. We divided our sample into family and non family
corporations. Our study relies on two main variables: ultimate cash-flow rights (VFR)
and ultimate voting rights (VCR). Suppose that a family owns 11% of the stock of
publicly-traded Firm A, which in turn has 21% of the stock of Firm B. We would say that
contrast, we would say that the family owns about 2% of the cash flow rights of Firm B,
the product of the two ownership stakes along the chain. To make the distinction
between cash-flow and control rights, we document pyramiding structures for each firm,
cross-holdings among firms, and deviations from one-share-one-vote rules. In this
paper, we will interpret the cumulative concentration of cash-flow by using the square
and the cube of cash-flow variables. The differences in the ratio of cash-flow to control
rights become easier to explain if we consider the channels through which such
deviations are made possible. In our study, Ownership-control discrepancy OD is
measured by control minus ownership over control (VFR-VCR/VFR). To detect the
10
impact of dual class voting rights and pyramid structure, we will use respectively ODv
and ODp. ODv is measured by control (due to dual class voting rights) minus ownership
over control; While ODp is measured by control (due to pyramid structure) minus
ownership over control.
Although the performance is a fundamental element of the financial literature, its
measure is more problematic. To explain the performance of family firms, we will apply
Tobin's Q ratio, by using the formula below4:
Q = (MV EQ + PREF + DEBT)/ BV ASSETS
Where;
MV EQ = the year-end market value of the firm's common stock;
PREF = the year-end book value of the firm's preference shares (preferred stock);
DEBT = the year-end book value of the firm's total debt; and
BV ASSETS = the total assets employed by the firm, which is measured as total assets
minus current liabilities.
Several control variables were introduced into our analysis to control firm
characteristics. Firm size is the natural log of the book value of total assets. Debt is
controlled in the capital structure by dividing long-term debt by total assets. Firm age is
measured as the natural log of the number of years since the firm's inception. Some
other variables were excluded due to lack of information.
2-3-Methodolgy
In this paper, we are analyzing the relationship between control and performance. We
will begin our analysis by using OLS to explain variations in Tobin's Q as a function of
ownership types. We will study the effects of deviation from one share-one vote in
separate regression equations because deviation and ownership are highly correlated
and result in severe multi-co linearity if both are included in one regression equation
(Figure 2).
4
Our measure is consistent with the modified version of the formula as used by Chung and Pruitt (1994).
11
Figure 2: the correlation between concentration of voting rights and Separation
between ownership and voting rights, (view by LLR Smoother).
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Ownership
We will also study the combined effect of deviation and ownership concentration on firm
value by dividing our sample into two small samples. The first one is including the family
firms with highly ownership concentration (above then 50% of cash-flow rights) while the
second one including the family firms with small level of concentration (below then 50%
of cash-flow rights). However, it is of interest to see what their combined effect is on firm
value.
To test the possible existence of these two effects (family ownership and the separation
between the ownership and control), we regress Tobin’s Q on the cash-flow rights and
on separation in the presence of the control variables within a multiple regression
models (see table 6, 7, 8 and 9 for more details):
Tobin’s Q = β0 + β1 (ownership variables)it + βn (n control variables)it + εit
Tobin’s Q = β0 + β1 (separation variables)it + βn (n control variables)it + εit
3. CMS STRUCTURE AND FAMILY FIRM’S PERFORMANCE:
EMPIRICAL EVIDENCE
12
In this section, we will describe our sample and our results using OLS regressions.
3-1-Descriptive statistics
Our sample consists of all the family firms listed on the French Stock Exchange in 20082009-2010. Tables 3 and 4 present descriptive statistics for governance mechanisms,
controls, and performance measures.
Table 3: Descriptive statistics for variables (n=1345)
In the following table, we present the average and standard deviation values of some
variables of main interest in 2008-2009-2010. Ultimate voting rights (VCR) is the
amount of ultimate voting rights held by the family (in term of direct voting rights)
shareholder. Ultimate cash-flow rights (VFR) are the amount of ultimate cash-flow rights
held by the family shareholder. Separation (OD) is the wedge between the cash-flow
and the voting rights held by the largest shareholder.
Variables
Mean
Standard deviation
Tobin’s Q
1.7550
0.4302
VFR
44.0804
21.0026
VCR
59.1012
19.5942
OD
20.2321
18.0011
In table 3, Tobin’s Q has a mean value of 1.7550 and a standard deviation of 0.4302,
which is higher than the value reported in CHAARANI. (2009) using all French firms
listed in the French Stock Market. Family cash-flow rights (VFR) have a mean value of
only 44.0804%, which is much smaller than Family voting rights (VCR) with 59.1012%.
The high level of wedge between cash-flow and voting rights (OD) in French family firms
can demonstrate this superiority of voting rights.
Table 4: Descriptive statistics for the separation between cash-flow and voting
rights (n=1345)
Each row presents descriptive statistics for a class of wedge between the cash-flow and
the voting rights held by the largest shareholder. In the first group Dual shares (ODv)
13
only family firms non controlled through a pyramid, but that have dual classes of shares
with different voting rights. In the second group Pyramidal control (ODp) only we include
family firms with a one share-one vote structure, controlled through a pyramidal
scheme. In the third group both devices we include family firms that have a dual class
structure and are controlled through a pyramid.
Separation between
Source of separation : ODv
Source of
cash-flow and voting
(due to dual class and
separation : ODp
rights (OD)
differential voting rights)
(due to pyramids)
0-9.99%
65.50%
17.50%
17.00%
100.%
10-19.99%
60.90%
20.80%
18.30%
100.%
20-29.99%
37.50%
37.30%
25.20%
100.%
30-39.99%
18.80%
33.00%
48.20%
100.%
Above then 40%
16.20%
13.50%
50.30%
100.%
Average
41.78%
28.42%
29.80%
100.%
Source of separation
: both = ODv + ODp
Total
In Table 4 we present more analysis about the empirical distribution of cash-flow and
voting rights across the family firms in the sample. The separation, that we already
noted to be present in table 3, is due in 65.50% of the 1345 family firms to double voting
shares, in 17.50% to pyramidal control, and in 17.00% to the presence of both dual
classes and pyramidal control when the wedge is between 0% and 9.99%. When the
wedges become above then 40%, we can observe that French family uses excessively
the two devices of separation (50.30%) then just the pyramids structures (13.50%) or
the dual class voting rights (16.20%).
Table 5: correlation between Tobin’s Q and Separation between cash-flow and
voting-rights
In this table, each row presents descriptive statistics for a class of wedge between the
cash-flow and the voting rights held by the largest shareholder. In the next column
under the header Tobin’s Q are presented, for each wedge class, the average of
performance. OD is measured by control minus ownership over control (VFRVCR/VFR). Tobin’s Q is measured by (MV EQ + PREF + DEBT)/ BV ASSETS
Separation between cash-
Tobin’s Q
Size
14
flow and voting rights (OD)
0-9.99%
1.62
4.55
10-19.99%
1.78
5.32
20-29.99%
1.83
4.76
30-39.99%
1.60
3.89
Above then 40%
1.45
3.96
Total/Average
1.656
4.496
Finally, in table 5 we document the average of Tobin’s Q for every level of wedge
between the cash-flow and voting rights. No clear pattern emerges from their
observation, and we cannot anticipate that some inferences could be suggested by this
first evidence. We will try to verify our results by the regressions presented in the next
section.
3-2-CMS structure and family firm performance
In view of the evidence presented above suggests that the risk of appropriation within
firms affiliated to CMS structure, we investigate the relationship between firm
performance and ownership. Table 6 presents multivariate analysis results of the
relationship between the ownership and control of the largest controlling family
shareholder and firm value with continuous variables proxying for the ownership-cashflow rights. Before running any regression, the absence of multicollinearity is checked
using variance inflation factors. Besides, we used the White (1980) formulation of a
heteroskedasticity consistent covariance matrix estimator that provides correct
estimates in the presence of heteroskedasticity of an unknown form.
We estimated the regression model using a hierarchical procedure to identify the
influence of family ownership concentration on corporate value. In the first stage of
estimation (Model 1), family ownership was regressed against Tobin’s Q. In the two last
stages (Model 2 and 3), family ownership squared and cubic was added to test the
linearity between family ownership and firms performance.
In the first regression, we didn’t find any significant influence of the family cash-flow
rights on firm performance. In this first model the regression was positive and non
significant. But, in the second and the third regression we detected a positive and
15
significant influence of ultimate family cash-flow concentration on firm performance.
Therefore, our findings seem to confirm the predictions of agency’s theories at a high
level of family cash-flow concentration.
Table 6: Correlation between ultimate cash-flow rights and family firm
Performance
The dependent variable is Tobin’s q. The independent variables are: VFR is % of the
ultimate cash-flow rights; several control variables were introduced into our analysis to
control for firm characteristics. Firm size is the natural log of the book value of total
assets. Debt is controlled for in the capital structure by dividing long-term debt by total
assets. Firm age is measured as the natural log of the number of years since the firm's
inception.
Tobin’s Q : dependent variable
Independent variables
Regression 1
VFR
0.0232
Regression 2
(0.2663)
VFR2
Regression 3
0.0241
(0.2412)
0.0229
(0.3062)
0.0248
(0.0028 a)
0.0246
(0.0016)a
0.0229
(0.0036)a
3
VFR
Firm size
-0.1326
(0.0275)b
-0.1334
(0.0069)a
-0.1347
(0.0258)b
Age
-0.0056
(0.0044)a
-0.0052
(0.0083)a
-0.0054
(0.0045)a
Debt
-1.5016
(0.0024)a
-1.5217
(0.0494)b
-1.4854
(0.0375)b
Sector
Yes
Observations number
1345
Constant
3.4481
R2 adjusted
0.2501
0.2481
0.3023
Stat F
5.1836a
4.4576a
5.0908a
Yes
Yes
1345
(0.0000)a
3.3923
1345
(0.0000)a
3.4152
(0.0000)a
To detect the validity of these results, we used the MSV5 model to identify the influence
of family ownership on the corporate value through a piecewise linear function with
prespecified steps which maximize the R2.
Table 7 investigates the impact of nonlinearities in the effects of family control on firm
performance. Again, an interesting difference between valuations profits rates arises:
family control is associated with increased valuation at both higher and lower control
5
Morck, Shleifer and Vishny (1988) (MSV) analyze the relationship between Q and insider holdings, capturing nonmonotonicity through a piecewise linear function with prespecified steps which maximize the R2. They find that performance
increases with insider holdings up to 5%, decreases as the stake grows further to 25%, and increases again thereafter.
16
levels (above 50% and below 30% of cash-flow rights), whereas family control starts to
increase its profit rates and its entrenchment at moderate control levels (30–40% and
40–50% of cash-flow rights).
Table 7: Nonlinearities regression between firm performance and family control
The dependent variable is Tobin’s q in. The independent variables are: VFR [10,20]
equals one if the controlling shareholder is a family or unlisted firm with cash-flow >10%
but < 20%, and zero otherwise (and correspondingly dummies for other control levels up
to 50%); several control variables were introduced into our analysis to control for firm
characteristics. Firm size is the natural log of the book value of total assets. Debt is
controlled for in the capital structure by dividing long-term debt by total assets. Firm age
is measured as the natural log of the number of years since the firm's inception.
Panel A
Tobin’s Q : dependent variable
Independent variables
Model 1
VFR 10-20
0.191
(0.0345)b
VFR 20-30
0.025
(0.0664)c
VFR 30-40
-0.142
(0.0246)b
VFR 40-50
-0.002
(0.0044)b
VFR > 50
0.156
(0.0031)a
Firm size
-0.1326
(0.0241)b
Age
-0.0056
(0.0031)a
Debt
-1.5016
(0.0022)a
Sector
Yes
Observations number
1345
Constant
1.397
R2 adjusted
0.301
Stat F
5.2342a
(2.01)b
`
The results support a nonmonotonic relationship between family control and firm
performance. Thus, it would be incorrect to argue that French family-control always
increases firm performance, and specifically in the case of CMS structure (below then
50% of cash-flow rights). At low level of family ownership concentration, our results do
not support the agency theory and the absolute performance of family firms, but at the
same time the empirical results confirm the predictions of theoretical studies that
17
investigate the negative effects of ownership concentration on firm value (Morck. and al.
(1998)).
3-3- CMS Devices and family firm performance
Up to now the findings do not provide any enlightenment concerning the devices that
bring about value discounts in family firms. The regressions in Table 8 are aimed to
investigate the effect of control mechanisms on the firm value. For this reason, three
variables were added (OD, ODv and OVp) to detect the influence of using pyramids and
dual voting rights on family firm’s performance.
Table 8: The dependent variable is Tobin’s q in. The independent variables are: OD is
measured by control minus ownership over control (VFR-VCR/VFR). ODv is measured
by control (due to dual class voting rights) minus ownership over control; ODp is
measured by control (due to pyramid structure) minus ownership over control. Several
control variables were introduced into our analysis to control for firm characterist
ics. Debt is controlled for in the capital structure by dividing long-term debt by total
assets. Firm size is the natural log of the book value of total assets. Firm age is
measured as the natural log of the number of years since the firm's inception.
Tobin’s Q : dependent variable
Independent variables
Regression 1
OD
0.2451
Regression 2
(0.3521)
ODv
-0.3191
(0.0373)b
ODp
-0.1321
(0.1373)
-0.0823
(0.0212)b
-0.0611
(0.0231)b
Age
-0.0058
(0.0852)
c
-0.0042
(0.0742)c
Debt
-1.0342
(0.0998)c
-1.0147
(0.0421)b
Sector
Yes
Firm Size
Number of
observations
Yes
1345
1345
(0.0000)
a
Constant
2.9532
R2 adjusted
0.2114
3.0125
0.3112
Stat F
6.272 a
6.102 a
(0.0001)a
Our results in table 8 indicate that the coefficients of the separation between cash-flow
and voting rights (OD and ODv) are negative but insignificant, and the separations used
by pyramids (ODp) have a negative and significant influence (this result is based on
18
1345 observations of French family firms). The evidence suggests that the affiliation to
pyramids leads to a more entrenched situation associated with value discounts.
We deepen the analysis by dividing our main sample to two samples CO and CMS
structures (with a family firms that having respectively above and below then 50% of
cash-flow rights), then we perform a multiple regression analysis to test if CMS devices
bear negatively on family corporate value.
Table 9: The dependent variable is Tobin’s q in. The independent variables are: OD is
measured by control minus ownership over control (VFR-VCR/VFR). ODv is measured
by control (due to dual class voting rights) minus ownership over control; ODp is
measured by control (due to pyramid structure) minus ownership over control. Several
control variables were introduced into our analysis to control firm characteristics. Firm
size is the natural log of the book value of total assets. Debt is controlled for in the
capital structure by dividing long-term debt by total assets. Firm age is measured as the
natural log of the number of years since the firm's inception.
Panel A - CMS structure
Tobin’s Q : dependent variable
Independent variables
Regression 1
OD
-0.4002
Regression 2
(0.0521)c
ODv
-0.2113
(0.3421)
ODp
-0.4291
(0.0373)b
Firm Size
-0.1021
(0.2102)b
-0.1251
(0.0202)b
Age
-0.0048
(0.0641)c
-0.0032
(0.0566)c
Debt
-1.221
(0.0788)c
-1.322
(0.0221)b
Sector
Yes
Number of
observations
Yes
1345
1345
(0.0000)
a
Constant
3.6422
R2 adjusted
0.3411
3.2515
0.3462
Stat F
5.251 a
6.266 a
(0.0000)a
Panel B - CO structure
Tobin’s Q : dependent variable
Independent variables
Regression 1
OD
-0.1251
Regression 2
(0.1314)
ODv
-0.1532
(0.3461)
ODp
-0.2134
(0.1541)
-0.1211
(0.0404)b
-0.0981
(0.0332)b
Age
-0.0042
(0.0322)
c
-0.0055
(0.0446)c
Debt
-0.9621
(0.3217)
-1.061
(0.2622)
Sector
Yes
Firm Size
Number of
observations
Constant
Yes
1345
2.8482
1345
(0.0000)a
2.9535
(0.0000)a
19
R2 adjusted
0.3411
0.3462
Stat F
6.441 a
5.176 a
The results of these regressions (regression 2, panel A, Table 9) are consistent with the
existing findings, specifically in the case of CMS structure. We find a negative and
significant influence of the pyramids when the family firm is controlled with a small part
of cash-flow rights (below then 50% of cash-flow). However, the negative influences
become insignificant when the families have more then 50% of cash-flow rights
(regression 2, Panel B, Table 9).
We find in the same time that the separation between cash-flow and voting rights due to
dual voting rights (Ov) have a negative and insignificant influence on both situations:
when the family firm is controlling by CMS structures (below 50% of cash-flow rights)
and by concentrated structures (above 50% of cash-flow rights). In sum, pyramiding
seems to be the most detrimental controlling device to minority shareholders in CMS
structure. Such a device is propitious to tunneling activity in that it eases channeling
resources to firms located at the very top of the pyramid. These more tightly-owned
firms may benefit from favorable loan terms when dealing with lower tier firms within the
pyramid internal capital market. These results are in accordance with those of
Claessens and al. (2002) who found that the value discount is driven by the ownershipcontrol discrepancy, and specifically trough pyramids.
4. CONCLUSION
In France, most large firms are parts of family business groups. We have argued above
that CMS structure could conceivably give rise to agency problems in family firms at
least as serious as those known to afflict widely held firms.
We find that higher cash-flow rights are associated with higher market valuation when
the family have above then 50% of cash-flow rights, but higher cash-flow rights are not
always associated with higher market valuation in the cases of CMS structure,
especially when cash-flow rights are low and control rights are high. Our results do not
support the agency theory and the absolute performance of French firms, specifically,
20
when the families control their firms with CMS structure. The empirical results show that
at a low level of controlling families’ cash flow rights, the threat to lose control at any
time motivates the increasing of firm performance. Meanwhile, at a moderate level of
controlling families’ cash flow rights, the entrenchment and the expropriation effects
create a negative relationship with firm performance. Finally, at the very highest level of
controlling families’ cash flow rights, the convergence of interests between the family
and the firm helps to create a high level of firm performance.
Family ownership is not without limitation. In CMS structure, the family may uses the
pyramids to increase its entrenchment and expropriation of minorities. Using
regressions we conclude that family pyramids is an important factor behind the negative
influence on corporate performance.
Finally, all these above arguments lead to refute the first H1 (Family cash-flow rights are
positively related to firm performance), and the second hypothesis H2 (The higher the
firm’s ownership-control discrepancy through dual class voting shares, the lower the
family firm value). Only the third hypothesis H3 (The higher the firm’s ownership-control
discrepancy, through pyramids, the lower the family firm value) was confirmed and
suggests expropriation of minority shareholders by family shareholders, specifically in
the cases of CMS structure.
The results are considered exploratory due to several limitations. The limitations of this
study were related to performance variables, and to controlling ownership definitions.
For some authors the Tobin’s Q cannot detect the firm performance, and some others
consider this variable as dependent variable and non as independent variable.
The controlling ownership definition used in our study may don’t detect the direct and
indirect part of family ownership in the firm. Family shareholders, who are also members
of the board but use a different family name to other managerial-family members,
however, were not included as managerial-family shareholders.
21
We should note that the current research might be extended in various directions. The
composition of the board of directors and the interlocking directorate within pyramids
are worth studying to ferret out the extent of power vested in the family shareholder.
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