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Technische Universität München Discussion of The Life Cycle of Family Ownership: A comparative study of France, Germany, Italy and the U.K. Julian Franks,

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Presentation on theme: "Technische Universität München Discussion of The Life Cycle of Family Ownership: A comparative study of France, Germany, Italy and the U.K. Julian Franks,"— Presentation transcript:

1 Technische Universität München Discussion of The Life Cycle of Family Ownership: A comparative study of France, Germany, Italy and the U.K. Julian Franks, Colin Mayer, Paolo Volpin, Hannes Wagner EFMA 2009 Symposium on Corporate Governance and Control Cambridge: April 10th, 2009 Markus Ampenberger Technische Universität München Center for Entrepreneurial and Financial Studies

2 Klicken Sie, um das Titelformat zu bearbeiten Markus Ampenberger, EFMA 2009 Symposium on Corporate Governance and Control Summary of the paper (1/2) 2 Main Question: How does family ownership evolve within different financial systems? (against the background of U.K. (outsider system) and Italy, France and Germany (insider system) Empirical study is divided in two parts: Part A: Analysis of the 1,000 largest firms in the four most important Western European countries (U.K., France, Italy and Germany), snapshot for 1996 and 2006 (major source: Bureau van Dijk Database) Part B: Analysis of the Faccio and Lang (2002, JFE) listed family firms because of stronger transparency requirements (more detailed information about board characteristics, family generations, etc.)

3 Klicken Sie, um das Titelformat zu bearbeiten Markus Ampenberger, EFMA 2009 Symposium on Corporate Governance and Control Summary of the paper (2/2) 3 Main Findings: U.K. family firms have a lower chance of survival as family-controlled firms than their counterparts from Italy, France and Germany The importance of listed firms is different across the countries (with 43% listed firms in U.K., 11% in Italy, 17% in Germany and 19% in France); representation of family firms is considerably lower among listed companies than in private companies; While family shareholders are predominant in the continental European countries (family ownership in Continental European countries is at the high end on an International scale), widely- held firms are dominant in U.K. (family ownership in the U.K. is at the low end on an International scale). Foreign blockholders are much more common in the U.K. than in Continental European countries. A life cycle view of ownership suggests two mechanisms that may lead to a dilution of family ownership: (i) the need to raise external capital to finance growth (ii) the activity of the market for corporate control In contrast to the U.K., family firms in Continental Europe are also present in industries with high capital requirements; (along their life cycle family firms in the U.K. need to go public in order to raise new external capital while family firms in Continental Europe can use other institutions, such as relationship lending or pyramidal business groups) There are no differences in terms of profitability between family and non-family firms in the U.K. while there is a difference in Continental European countries (the market for corporate control is vital in the U.K. and eliminates differences in profitability)

4 Klicken Sie, um das Titelformat zu bearbeiten Markus Ampenberger, EFMA 2009 Symposium on Corporate Governance and Control Contribution to the literature 4 Main Contribution to the literature: Analysis of private and listed firms The research question is interesting: There is little knowledge about the life cycle of family ownership. The research design is interesting: It takes different institutional settings into account. (i) Thereby, it considers the relative importance of stock markets (equity) and banks (debt) for the financial systems. (ii) It allows an international comparison to earlier studies (LaPorta et al. (1999, JF) Claessens et al. (2000, JFE) Faccio and Lang (2002, JFE) Villalonga and Amit (2006, JFE)) Measurement of previous papers is improved: In contrast to Faccio and Lang (2002) the ultimate ownership of private firms is tracked back to the “real owners” instead of considering them as family-owned per se. I like the paper because…. It is well-written, technically well-done and covers an interesting topic that is still a puzzle in corporate finance research, the evolution of ownership structures over time It uses a unique, hand-collected dataset and it improves in terms of methodology in comparison to Faccio and Lang (2002, JFE)

5 Klicken Sie, um das Titelformat zu bearbeiten Markus Ampenberger, EFMA 2009 Symposium on Corporate Governance and Control Part A (the 1,000 largest firms): Comments and questions (1/2) 5 Some ideas for improving the paper (part A on the largest 1,000 firms in each country): Development of hypotheses: Hypotheses 1 and 2 are better described in the introduction than in the section about hypotheses  From my point of view there seems to be a “jump” from the institutional environment to the testable hypotheses while the development of hypotheses 1 and is less clear Descriptive statistics: There is no table with descriptive statistics other than firm size in the paper (table 4). It would be interesting to know more descriptive statistics about other firm characteristics (such as leverage, operating profits, total assets, employees, labor costs, firm age, etc.). Representativeness? Size Bias? Table 4 concludes that for the three Continental European countries the size of the family and non-family firms is remarkably similar and only in the U.K. are family firms much smaller than non-family firms. Those results (as other results for the first part of the paper) might be biased towards larger firms (for example there are only 124 listed firms covered in Germany among the 1,000 largest firms, while there are about 417 industrial firms in the Faccio and Lang (2002, JFE) sample based on 1996 ownership data, cf. p. 25 of this paper). While the paper certainly improves in terms of representativeness in comparison to studies focusing on only listed firms, it might be biased towards larger firms. Hence, true family influence and differences in firm characteristics (such as sales) might be underestimated Dependence on External Financing Needs (table 8): Why do the probit regressions only contain the interaction term (U.K.) x (External dependence)? To show that the Continent differs from the U.K., do we not need to see the coefficient on (External dependence) in general in the same regression model?

6 Klicken Sie, um das Titelformat zu bearbeiten Markus Ampenberger, EFMA 2009 Symposium on Corporate Governance and Control Part A (the 1,000 largest firms): Comments and questions (2/2) 6 Some ideas for improving the paper (part A on the largest 1,000 firms in each country): Comparison of Performance (table 9): (i) Leverage and labor costs are not commonly applied measures of firm performance, rather they describe examples for firm policies (however, they are labeled as performance measures in this paper) (ii) Do the regressions contain all relevant explaining factors or is there omitted variable bias? For example, Anderson and Reeb (2003, JF) or Villalonga and Amit (2006, JFE) control among other factors for outside block ownership (monitoring as an alternative corporate governance device), R&D/total assets, capex/total assets, leverage, sales growth, firm age, market risk and achieve higher adjusted R 2 (iii) What about endogeneity issues (see Himmelberg et al. (1999, JFE) for a discussion in the context of insider ownership)? At least some discussion of endogeneity/causality issues would be appropriate from my point of view. Does not the change in ownership structure offer a better possibility to test for performance differences without endogeneity problems? (see for example Fahlenbrach and Stulz 2008, forthcoming JF in the context of managerial ownership) What is the role of the market for corporate control? There are no differences between family and non-family firms in terms of operating performance in the U.K.  the authors argues that the “market for corporate control” arbitrages away performance differences in the U.K. (p. 3), but: Is the market for corporate control not a mechanism device to replace “bad corporate governance”? If family firms perform better than non-family firms (and this is a sign of better corporate governance or lower agency costs) why should the market for corporate control arbitrage away those performance differences?

7 Klicken Sie, um das Titelformat zu bearbeiten Markus Ampenberger, EFMA 2009 Symposium on Corporate Governance and Control Part B (Listed family firms): Comments and questions (1/2) 7 Some ideas for improving the paper (part B on the development of listed family firms in each country): Part B uses the listed family controlled firms in Faccio and Lang (1996) as a starting point for the analysis Whether the “founding family” is invested in the firm seems to be by far the strongest determinant for the question whether a family business remains a family businesses (both from its economic and statistical significance, cf. table 11); In the literature there are two accepted definitions of a family business (i) one is related to the identity of the ultimate controlling shareholder (LaPorta et al. (1999, JF), Faccio and Lang 2002, JFE), this paper, etc.) (ii) one is related to founding family ownership/management (Anderson and Reeb (2003, JF), Villalonga and Amit (2006, JFE), Sraer and Thesmar (2006, JEEA) etc.). Does that result tell us that the founder family aspect is important for empirical studies on family firms? Do some characteristics commonly associated with family firms (such as long-term orientation, undiversified owners, family culture etc. see Betrandt and Schoar (2006, JEP) better apply to founders and their descendents than to other non-founding family blockholders (such as for example the Quandt Family in Germany)? Shouldn’t thus the paper at least include a discussion of the two different concepts (since it is citing papers from both strands of literature) in the literature review section? Isn’t it an interesting question for further research how the two concepts are related to each other? (maybe an idea for further research with this dataset)

8 Klicken Sie, um das Titelformat zu bearbeiten Markus Ampenberger, EFMA 2009 Symposium on Corporate Governance and Control Part B (Listed family firms): Comments and questions (2/2) 8 Some ideas for improving the paper (part B on the development of listed family firms in each country): Part B uses the listed family controlled firms in Faccio and Lang (1996, JFE) as a starting point for the analysis. Are there differences in inheritage taxes between the three countries? In particular between U.K. and the Continental European countires? How does that affect the results? (see Ellul, Pagano and Panuzzi (2008, WP) for a discussion of this aspect). In Europe stock markets have experienced an unusual wave of IPOs during the period of analysis? How did that development affect the results from 1996 to 2006? There is one related paper to this empirical study which is not cited: S.Klasa (2007, JFQA) that analysis the question “what makes family owners sell their stake?” for a sample of U.S. industrial firms

9 Klicken Sie, um das Titelformat zu bearbeiten Markus Ampenberger, EFMA 2009 Symposium on Corporate Governance and Control Contact Details Markus Ampenberger Technische Universität München Center for Entrepreneurial and Financial Studies (CEFS) Arcisstr München Website: Thank you for your attention! 9


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