Frontiers of Entrepreneurship Research
1996 Edition

Back to Index96
Order hard copy editions of Frontiers of Entrepreneurship Research by mail


Robert Kleiman
Julian Lange
Benoit Leleux
William Petty
Joel Shulman
Oakland University/School of Business Administration
Rochester, MI 48309



Principal Topics

Much recent attention has been focused on the business activities of the Forbes 400, the wealthiest 400 individuals in the United States. Less well known but of potentially greater economic impact are the wealth creation activities of the larger sample of family-controlled businesses which play a key role in job creation and economic growth in the United States. Previous research suggests that these firms are responsible for about 50 % of gross domestic product and generate more than 2/3 of net new jobs in the United States. Other studies estimate that as many as 90% of businesses in the United States can be classified as family owned or controlled, and many industries(such as the media and real estate) are dominated by these firms.


While there are a number of well-known indices of the performance of publicly traded companies, at present there exists no such index for family-controlled publicly traded firms. In order to construct a sample of publicly traded family controlled firms, we proceeded as follows. We began with the sample of common stock issues covered by the Value Line Investment Survey Standard Edition. The Value Line Index is much more comprehensive than the S&P 500, the most widely used "market" proxy in the United States. Value Line includes nearly all the companies in the S&P 500 along with approximately 1200 other companies of interest. More than 80% of the stocks that are covered by this source are listed on the New York Stock Exchange.

Next, we selected those firms that met two additional criteria: (1) two or more officers and/or directors with the same last name identified from the corporation listings in the Million Dollar Directory and (2) 10% or more insider ownership identified from the Compact Disclosure Database. These criteria leave only those firms where the family has both a significant ownership interest and is active in developing and executing business and operating strategies. This selection process resulted in 215 publicly traded family controlled firms in the United States.

Despite the size of this market, relatively few substantive studies exist on the financial and operating characteristics of family businesses. Apriori, one would expect family business to exhibit certain fundamental characteristics that differentiate them from the larger universe of publicly owned entities. family businesses can invest in and run their business with a clear view to long-term value enhancement, even if this leads to suboptimal performance in the short-term. Another advantage of the family business results from a unified management -shareholder group since managers and shareholders are one in the same. As a result, there generally exists a continuity in management policies and operating focus. Some observers suggest that the family’s ownership stake induces executives to act more in the interests of the shareholders, thereby reducing agency costs.

On the other hand, because the business and the family interests are intertwined, decision making may not be rational in the market-driven sense, but rather influenced by the personal, estate planning, and tax considerations of the family. Also, some contend that the family has incentives to act in self-serving ways, maximizing their own welfare when there is a conflict of interest between the family and other shareholders. In addition, family businesses have to contend with such issues as generational disputes and sibling rivalries besides standard business concerns. In order to provide evidence on the operations of the family firms in comparison to the overall "market", we analyzed a number of common financial ratios for the sample of family controlled firms and the S&P 500 over the 1989-1994 time period.

Major Findings

Our results are consistent with the agency cost reduction hypothesis. Family controlled firms (FCFs) generate greater shareholder returns and have higher returns on assets than the overall universe of publicly traded firms. FCFs also differ from the overall sample of publicly traded firms in other respects. They tend to generate higher levels of cash flow and sales growth than other firms. In addition, family enterprises have lower debt to equity and dividend payout ratios. Finally, FCFs also have lower levels of capital expenditures in relation to sales and higher levels of liquidity as measured by the working capital to sales ratio.


The largest Internet provider of information for family-controlled firms(NetMarquee) has licensed the family controlled business index, and agreed to update it regularly on the Internet. Accordingly, there will be an intermediate outlet for the dissemination of the index to money managers as well as to owners and managers of family controlled businesses. The index is likely to be closely watched and utilized for performance assessments and ongoing longitudinal comparisons of the financial performance of family controlled firms and the general population of public companies.

Back to Index96