Management succession and financial performance of family controlled firms

Abstract

This paper examines the immediate and long-term impacts on financial performance of 124 management successions within Canadian family controlled firms. When family successors are appointed, stock prices decline by 3.20% during the 3-day (−1 to +1) event window, whereas there is no significant decrease when either non-family insiders or outsiders are appointed. However, a cross-sectional analysis indicates that the negative stock market reaction to family successors is related to their relatively young age which may reflect a lack of management experience rather than their family connection per se. Investors are uncertain about the “management quality” of family successors who have less established reputations than more seasoned non-family insiders and outsiders. Non-family member appointments tend to follow periods of poor operating performance implying that there might be more scope for improvement when a non-family successor is appointed. Unlike the US sample in McConaughy et al. [McConaughy, D.L., Walker, M.C., Henderson, G.V., Mishra, C.S., 1998. Founding family controlled firms: efficiency and value, Review of Financial Economics 7, 1–19.], which indicates that the median percentage of votes held by controlling families is less than 15%, the Canadian sample indicates a more concentrated ownership with the median percentage of family controlled votes exceeding 51%. Of the firms in our sample, 62% use dual class capitalization to maintain control within the family.

Introduction

Despite the prevalence of family controlled firms in many countries, finance research has not extensively examined how corporate decision-making and financial performance is influenced by family control.¹ The special concern of firms controlled by families is that family interests may be furthered at the expense of outside shareholders. One corporate decision that may bring family and outside shareholder interests into conflict is the appointment of a family member to a senior management position.²

This study examines several fundamental questions related to the controlling family's decision as to whether to appoint as a successor, a family member, non-family insider or an outsider.³ What factors, including poor financial performance lead to succession by a family member, a non-family insider or an outsider? How do the three types of successors differ in terms of age and experience? What is the impact of an appointment of each of the three types of successors on shareholder wealth and post-succession corporate performance?

We analyze 124 management successions in Canadian family firms listed on the Toronto Stock Exchange (TSE) and draw the following conclusions. Those firms with multiple family members occupying senior management positions and without outside blockholders are more likely to appoint a family member as successor. There is some evidence that poor corporate performance leads to the appointment of a non-family insider or an outsider rather than a family member. Family successors tend to be younger than non-family insiders and are nearly always related by direct bloodline to the incumbent. The stock market reacts negatively to the appointment of family member successors but the effect is attributed to the fact they are younger and have less established reputations rather than their family connection per se. Furthermore, the operating performance of firms with non-family and outside successors is significantly below the industry median but improves after succession. The operating performance of firms with family successors is not significantly below the industry median before succession but worsens after succession.

Our results contrast with those of McConaughy et al. (1998) who find that US descendent controlled firms are more efficient than founder controlled firms. One aspect of our study focuses on the period immediately surrounding succession whereas McConaughy et al. (1998) do not. Thus, the difference in the findings may reflect the special challenges that family successors face in the transition period. In addition, the median ownership by families in our study exceeds 51% whereas that of McConaughy et al. (1998) is less than 15%. Thus, outside investors in family firms may have greater influence on appointment decisions in the US than in Canada.

The paper is organized as follows. Section 2of the paper reviews the literature on family succession and corporate performance. Section 3describes hypotheses, data and methodology. Research findings and conclusions are presented in 4 Empirical analysis, 5 Conclusions, respectively.