Ownership structure and rm performance in non-listed rms: Evidence from

Spain
Blanca Arosa *, Txomin Iturralde, Amaia Maseda
University of the Basque Country, UPV/EHU, Spain
1. Introduction
The inuence of ownership structures on rm performance has
been researched extensively in the theoretical and empirical
literature. The relevant literature suggests that ownership
structure is one of the main corporate governance mechanisms
inuencing the scope of a rms agency cost. Jensen and Meckling
(1976) suggested that ownership concentration has a positive
effect on performance because it alleviates the conict of interest
between owners and managers. The opposite view of the
ownership structure directs attention towards the effects of the
agency problem resulting from the combination of concentrated
ownership and owner control (Fama & Jensen, 1983). This
combination allows controlling shareholders to extract private
benets from the rm at the expense of minority shareholders
(Demsetz, 1983; Demsetz & Villalonga, 2001; La Porta, Lopez-de-
Silanes, Shleifer, & Vishny, 2000; Shleifer & Vishny, 1997;
Villalonga & Amit, 2006).
A growing body of research on ownership structure has focused
on the impact of ownership concentration on performance in
family rms (Ang, Cole, & Lin, 2000; Anderson, Mansi, & Reeb,
2003; Bennedsen, Nielson, Perez-Gonzalez, & Wolfenzon, 2007;
Chrisman, Chua, & Litz, 2003; Cronqvist & Nilsson, 2003;
Eddleston, Kellermanns, & Sarathy, 2008; Habbershon, Williams,
& MacMillan, 2003; Maury, 2006; Villalonga & Amit, 2006;
McConaughy, Walker, Henderson, & Mishra, 1998; Miller, Le
Breton-Miller, Lester, & Cannella, 2007). Nevertheless, the results
of the studies have not been conclusive, and existing studies on the
relationship between family ownership and rm performance
mainly use data collected from large rms. Although scholars have
reported that most family rms are small and medium-sized
enterprises (SMEs), empirical studies that explicitly examine how
family ownership inuences the performance of SMEs are still
necessary. This lack of studies is probably due to difculties in
collecting reliable and systematic data on SMEs. Given that SMEs
play a dominant role in the economic development of industrial-
ized regions and most family rms are SMEs (Poza, 2007), a study
that investigates the association between family and non-family
ownership and SME performance is of academic signicance (Chu,
2009). In this regard, analyzing whether ownership structure acts
as a control mechanism in non-listed SMEs is necessary to ll this
gap in the current literature.
Journal of Family Business Strategy 1 (2010) 8896
A R T I C L E I N F O
Article history:
Received 23 September 2009
Received in revised form 30 March 2010
Accepted 31 March 2010
Keywords:
Ownership
SMEs
Non-listed rms
Family rms
Performance
A B S T R A C T
This study provides new evidence regarding the way in which ownership concentration inuences non-
listed rm performance focusing on the conict between majority and minority shareholders, and
differentiating between the behavior of family and non-family rms, using data from 586 non-listed
Spanish rms. In rst-generation family rms our research shows that agency theory can be used to
explain the role of ownership concentration in balancing conicts between shareholder groups. Agreater
concentration of rm ownership in the rst generation may bring the monitoring and expropriation
hypotheses into play, whereas rms in which subsequent generations have joined may show a greater
spread of ownership. In rst generation family rms, the classic owner-manager conict is mitigated due
to the large shareholders greater incentives to monitor the manager. However, a second type of conict
appears. The large shareholder may use its controlling position in the rm to extract private benets at
the expense of the small shareholders.
The empirical evidence shows that for family rms, the relationship between ownership
concentration and rm performance differs depending on which generation of the family manages
the rms.
2010 Elsevier Ltd. All rights reserved.
* Corresponding author at: Departamento de Economa Financiera I, Avda.
Lehendakari Agirre, 83, Universidad del Pas Vasco, E48015 Bilbao, Spain.
Tel.: +34 94 6017058; fax: +34 94 6013879.
E-mail address: blanca.arosa@ehu.es (B. Arosa).
Contents lists available at ScienceDirect
Journal of Family Business Strategy
j our nal homepage: www. el sevi er . com/ l ocat e/ j f bs
1877-8585/$ see front matter 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jfbs.2010.03.001
The aim of this paper is to analyze the usefulness of ownership
concentration as an internal control mechanism that prevent or
reduce the potential conict of interest that arise between
different agents involved in non-listed SMEs and, in the case of
family rms, also consider the generational effect. To test our
hypothesis that ownership concentration moderates conicts
between opposing groups in the rm, we examined the relation
between rm performance and ownership concentration in family
and non-family rms.
Our results indicate that there is no relationship between
ownership concentration and performance regardless of whether
rms are family or non-family owned. This paper has not been able
to conrm the relationship between the ownership concentration
and rm protability in non-listed rms. These results are in line
with previous studies of non-listed rms (Castillo & Wakeeld,
2006; Westhead & Howorth, 2006). However, for family rms, our
results suggest that the relationship between ownership concen-
tration and rm performance differs depending on which
generation of the family manages the rms. In rst-generation
family rms the results show a positive relationship between
ownership concentration and corporate performance at low level
of control rights as a result of the monitoring hypothesis and a
negative relationship of high level of ownership concentration as a
consequence of the expropriation hypothesis. Both the monitoring
and the expropriation effects are conrmed.
Our study contributes to the existing literature in several
different ways. First, we analyze the relationship between
ownership structure using the ownership concentration as an
independent variable and rm performance in non-listed rms.
Second, our ndings provide a new perspective on the role that
ownership concentration plays in corporate governance as an
internal control mechanismin family rms. We consider the role of
this internal control mechanism in mitigating moral hazard
conicts between shareholder groups with diverging interests in
family rms. Third, in rst-generation family rms our research
shows that agency theory can be used to explain the role of
ownership concentration in balancing conicts between share-
holder groups.
The remainder of the article is organized as follows. Section 2
contains a review of the literature regarding the ownership
structure as a control mechanism and presents the hypothesis.
Section 3 presents the data and the analysis procedure used to
conduct the empirical study. Section 4 presents the main results
and the discussion of the investigation. Section 5 introduces the
principal conclusions, and the paper ends with a list of
bibliographical references.
2. Theoretical background
2.1. Literature review
According to Jensen (2000), rms are affected by different
mechanisms of corporate control, one of them being ownership
structure. This internal control mechanism is signicant in
determining rms objectives, shareholder wealth and the level
of discipline of managers.
The literature on ownership structure has focused on three
dimensions: the ownership concentration (Castillo & Wakeeld,
2006; Demsetz & Lehn, 1985; Leech & Leahy, 1991; Martnez,
Sto hr, & Quiroga, 2007; McConnell & Servaes, 1990; Morck,
Stangeland, & Yeung, 2000; Sciascia & Mazzola, 2009; Shleifer &
Vishny, 1986; Sraer &Thesmar, 2007; Westhead &Howorth, 2006),
insider ownership (Faccio & Lasfer, 1999; McConnell & Servaes,
1990; Morck, Shleifer, & Vishny, 1988; Stulz, 1988), and owner
identity (Galve & Salas, 1992; Pedersen & Thomsen, 1997). The
ownership concentration may result in a reduction in problems
arising from the divergence of interests between different agents,
including an analysis of the prevailing hypothesis of monitoring
compared to that of expropriation.
In the context of companies with high ownership concentra-
tion, agency theory suggests that controlling shareholders often
use their power to undertake activities intended to obtain private
prot to the detriment of minority shareholders wealth (Francis,
Schipper, & Vincent, 2005; Miller et al., 2007; La Porta, Lopez-de-
Silanes, & Shleifer, 1999; La Porta et al., 2000; Shleifer & Vishny,
1997). A greater concentration of voting rights can therefore lead
to greater incentives for controlling shareholders to obtain private
benets. This trend may be exacerbated in the case of family rms
because those benets remain in the controlling family, whereas in
non-family rms, they are distributed among a large number of
shareholders (Villalonga & Amit, 2006). In this regard, some
scholars have argued that controlling family shareholders can
easily advocate for their own interests at the expense of those
interests of minority shareholders by treating the company as a
family employment service or a private bank, by limiting top
management positions to family members or by making extraor-
dinary dividend payouts (Demsetz, 1983; Fama & Jensen, 1983;
Shleifer & Vishny, 1997). In these situations, agency costs take the
form of dividends and extraordinary remunerations or of the
entrenchment of the family management team. This entrenchment
results in certain expropriatory practices of the controlling family
shareholders wielding power over minority shareholders and
ultimately reducing rm protability (DeAngelo & DeAngelo,
2000; Fan & Wong, 2002; Francis et al., 2005; Gomez-Mejia,
Nunez-Nickel, &Gutierrez, 2001; Morck et al., 2000; Santana, Bona,
& Pe rez, 2007).
However, another group of authors suggested that the
distinctive features of family rms have a positive effect on their
corporate behavior. The familys interest in the long-term survival
of the business as well as its concern for maintaining the
reputation of the rm and the family, lead the family to avoid
acting opportunistically with regard to the earnings obtained
(Anderson & Reeb, 2003; Burkart, Panunzi, & Shleifer, 2003; Wang,
2006). Families have concerns and interests of their own, such as
stability and capital preservation, which may not align with the
interests of other rm investors.
In general, the empirical evidence is not conclusive. Some
empirical ndings indicate that rms with concentrated owner-
ship structure, such as founding families, showlower protability
than those rms with a dispersed ownership structure (DeAngelo
& DeAngelo, 2000; Fama & Jensen, 1983; Gomez-Mejia et al.,
2001). In contrast, empirical studies by Anderson and
Reeb (2003), Burkart et al. (2003), and Wang (2006) report
that controlled family ownership positively inuences rm
performance.
2.2. Hypothesis development
Empirical studies that are specically focused on examining the
relationship between ownership-concentrated non-listed rms
and performance are scarce. This scarcity is probably due to
difculty collecting data on SMEs and because there is no ofcial
database of family rms.
In rms with high ownership concentration some studies
focused on the conict between large and small shareholders or
controlling andminority shareholders (Francis et al., 2005; La Porta
et al., 1999, 2000; Miller et al., 2007; Shleifer & Vishny, 1997).
When large shareholders effectively control rms, their policies
may result in the expropriation of minority shareholders. The
conicts of interest between large and small shareholders can be
numerous, including controlling shareholders enriching them-
selves by not paying out dividends or other expropiatory practices.
B. Arosa et al. / Journal of Family Business Strategy 1 (2010) 8896 89
Fan et al. (1999) show that the concentration of control is
negatively associated with market valuation.
In this context, the rst hypothesis proposes that an ownership
concentration will be associated with a negative impact on
performance. Accordingly, the following hypothesis is presented:
H1. There is a negative relationship between ownership concen-
tration and non-listed rm protability.
Among non-listed rms, founding families represent a special
type of shareholders. Family owners differ fromother shareholders
in two main aspects: the interest of the family in the long-term
survival of the rmand the concern of the family for the reputation
of the rm and the family itself.
Anderson and Reeb (2003), Villalonga and Amit (2006), Maury
(2006), Barontini and Caprio (2006) and Pindado, Requejo, & de la
Torre (2008) nd a positive relationship between corporate
performance and ownership concentration. The long-term goal
of family rms suggests that these family rms desire longer term
investment projects than other shareholders.
The wealth of the family is closely related to the value of the
company, so families have strong incentives to monitor agents
(Anderson & Reeb, 2003) and create long-term loyalty in them
(Weber, Lavelle, Lowry, Zellner, & Barrett, 2003).
Moreover, due to the substantial and long-term presence of
families in rms and their intention to preserve the family name,
families have a greater interest in the company than others do.
Furthermore, families are more likely to give up short-term
benets due to incentives to pass the business to future
generations and protect the familys reputation (Wang, 2006).
Also, this perspective generates a reputation for the family that
involves creating long-term economic consequences for the
company compared to non-family rms (Anderson et al., 2003).
Strong control mechanisms can motivate family members to
communicate more effectively with other shareholders and
creditors, using higher quality nancial reporting and, conse-
quently, reducing the cost of debt (Anderson et al., 2003).
These arguments suggest that the sustained presence of family
owners in the rm may have positive economic consequences
(Anderson et al., 2003; Wang, 2006). Thus, we expect family rms
to be more protable than non-family ones.
H2. There is a larger positive relationship between family owner-
ship concentration and rm protability in non-listed family rms
than in non-family ones.
Nevertheless, high ownership concentration can trigger other
problems with corporate governance and other types of cost. If
there are controlling shareholders, they are more likely to be able
to use their power to undertake activities intended to obtain
private prot to the detriment of minority shareholders wealth (La
Porta et al., 1999; Villalonga &Amit, 2006). Furthermore, this trend
can be exacerbated in the case of family-controlled rms, where
the agency costs may take the formof dividends and extraordinary
remunerations or the entrenchment of the family management
team, showing certain expropriatory practices that ultimate
reduce protability (DeAngelo & DeAngelo, 2000; Fan & Wong,
2002; Francis et al., 2005; Gomez-Mejia et al., 2001; Santana et al.,
2007).
There are two potential costs that can generate a negative effect
on certain levels of ownership concentration (Pindado et al., 2008).
On the one hand, there is the incentive of the owning family to
carry out actions that increase its personal utility, resulting in poor
rm performance (Anderson & Reeb, 2003). Derived from this fact,
one can assume that high levels of ownership concentration may
be related to less efcient investment decisions, which can lead to
a reduction in rm performance (Cronqvist & Nilsson, 2003). On
the other hand, there are authors who suggest that a high family
ownership concentration is related to the inuence of the
controlling family on its managers, which may, in turn, be related
to a higher level of entrenchment of managers (Gomez-Mejia,
Larraza-Kintana, & Makri, 2003).
In summary, family ownership may have both positive and
negative effects on the functioning of the rm. Numerous empirical
studies have found a nonlinear relationship between ownership
concentration and rm performance in listed family rms
(Anderson & Reeb, 2003; Maury, 2006; Pindado et al., 2008;
Thomsen & Pedersen, 2000). This relationship implies that when
ownership is less concentrated, there is a positive effect on
performance, as a result of the monitoring hypothesis. That is, all
shareholders devote their efforts to monitoring managers to
maximize the value of the rm. However, as ownership becomes
more concentrated, the relationship between the two variables
becomes negative as a result of the expropriation hypothesis.
When shareholder ownership is high enough, shareholders tend to
expropriate wealth from minority shareholders and look for their
own wealth.
This observation led us to hypothesize that the relationship
between family ownership and protability is nonlinear in non-
listed family SMEs. More specically, we propose that the
relationship is inverted U-shaped. First, we propose a positive
relationship between ownership concentration and rm perfor-
mance at low levels of the former as a result of the monitoring
hypothesis and a negative relationship afterwards as a conse-
quence of the expropriation hypothesis.
H
3
. There will be an inverted-U-shaped relationship between
family ownership concentration and rm protability
According to Schulze, Lubatkin, Dino, & Buchholtz (2001),
whereas the main source of agency problems is the separation
between ownership and monitoring, such problems do not exist in
rst-generation family rms because the same person is responsi-
ble for making management and supervision decisions. Reductions
in agency costs may be achieved by entirely eliminating the
separation between owners and management. In such cases, the
interests of principal and agent are aligned, and it is assured that
the management will not expropriate the shareholders wealth
(Miller & Le-Breton-Miller, 2006).
Because the family property is shared by an increasingly large
number of family members, conicts may start to arise when the
interests of the family members are not aligned, and the agency
relations between the various participants in the rm are
conducted on the basis of economic and non-economic preferences
(Chrisman, Chua, & Sharma, 2005; Sharma, Hoy, Astrachan, &
Koiranen, 2007). Schulze et al. (2001) argued that family relation-
ships tend to generate agency problems, mainly because control
over rm resources enables owner/managers to be generous to
their descendents and other relatives. Parental altruism is a trait
that positively links the controlling owners welfare to that of other
family members. Over time, however, the economic incentive to do
what maximizes personal utility can blur the controlling owners
perception of what is best for the rmor family (Schulze, Lubatkin,
& Dino, 2003).
A greater concentration of rm ownership in the rst
generation may bring the monitoring and expropriation hypothe-
ses into play, whereas rms in which subsequent generations have
joined may show a greater spread of ownership. As a family rm
enters second and later generations, the number of family
members involved often grows, including founders descendents
and in-laws. Sometimes, there is harmony and the possibility of
new talent coming into the businessbut as relatives proliferate,
so too does the potential for conict among those running the
B. Arosa et al. / Journal of Family Business Strategy 1 (2010) 8896 90
business, among the owners, and between the two groups (Miller &
Le-Breton-Miller, 2006). Schulze et al. (2003) argued that these
conicts are especially likely to occur when the distribution of
ownership is balanced between competing blocks, as often occurs
as later generations enter the business. Again, agency issues arise if
those in control or running the business exploit other family or
non-family owners, thereby serving as stewards not of the
business, but of their own nuclear family. Such exploitation may
be more common where rival ownership blocs among family
factions have different interests and roles (e.g., extracting
dividends vs. growing the business), and where there has been a
turbulent family history (Miller &Le-Breton-Miller, 2005). Another
potential problem as the generations progress is the growing
demand for dividends from a greater number of family members
who no longer directly work for the business.
In this sense, we expect an inverted-U-shaped relationship in
family rms managed by subsequent generations.
H
4
. There is an inverted-U-shaped relationship between family
ownership concentration and rm protability in family rms
managed by subsequent generations.
3. Empirical research: method, data and analysis
3.1. Population and sample
We conducted this study on Spanish rms included in the SABI
(Iberian Balance Sheet Analysis System) database for 2006. We
imposed certain restrictions on this group of companies to reach a
set that would be representative of the population. First, we
eliminated companies affected by special situations such as
insolvency, winding up, liquidation or zero activity. Second,
restrictions concerning the legal form of companies were imposed;
we focused on limited companies and private limited companies
because they have a legal obligation to establish boards of directors.
Third, we eliminated listed companies. Fourth, we studied only
Spanish rms with more than 50 employeesi.e., companies large
enoughtoensuretheexistenceof asuitablemanagement teamanda
controlling board to monitor rm performance. Finally, companies
were requiredto have provided nancial informationin2006. Based
on these conditions, the sample under study was comprised of 3723
non-listed Spanish rms.
There is no ofcial database of family rms, and the level of
difculty of collecting data on SMEs is high also. In addition, the
lack of an agreed denition of family rm leads to the use of
restrictive samples (Chua, Chrisman, & Sharma, 2003; Daily &
Dollinger, 1993; Miller et al., 2007; Schulze et al., 2001, 2003).
Given these limitations, detailed analysis of the information in the
databases and surveys are the only way to identify family and non-
family non-listed rms. This study involves a combination of these
two methods of identication.
Inthis study, a family rmis a rmthat meets twoconditions: (a)
a large body of common stock held by the founder or family
members, allowing them to exercise control over the rm, and also
(b) family members who participate actively inmonitoring the rm.
Like La Porta et al. (1999), we established 20% as the minimum
percentage of a rms equity considered as a controlling interest. To
ensure compliance with these two conditions, we conducted an
exhaustive review of shareholding structures (percentage of
common stock) and composition (name and surnames
1
of share-
holders) andalsoexaminedthecompositionof theboardof directors
of each of the 3723 selected companies in the database.
We accordingly classied a rm as a family rm if the main
shareholder was a person or a family with a minimum of 20% of
rm equity and there were family relationships between this
shareholder and the directors based on the coincidence of their
surnames. The composition of the management was also reviewed
in search of family relationships between shareholders and
managers.
Based on the 3723 companies preselected, the original sample
used in this study is a 2958 rm random sample. Of these rms,
586 responded the questionnaire correctly: 217 non-family rms
(37%) and 369 family rms (63%) for which there were data on
ownership structures, accounting variables and boards of direc-
tors. The 586 rms are a representative sample with a condence
level of 95% (Malhotra & Birks, 2007).
3.2. Data
Data were collected by means of telephone interviews, a
method that ensures a high response rate, and nancial reporting
information was obtained from the SABI database. The question-
naire collects information on the variables required for study that
could not be obtained from the SABI database and that would be
captured more reliably through a survey. In particular, this
included information regarding the ownership structure, the
composition of the board of directors and company management.
To guarantee the greatest possible number of replies, managers
were made aware of the study in advance by means of a letter
indicating the purpose and importance of the research. In cases
where they were reluctant to reply or made excuses, a date and
time were arranged in advance for the telephone interview. The
nal response rate was approximately 19.81%, and the inter-
viewees were persons responsible for the management of the rms
(nancial managers in 56.48% of cases, chief executive ofcers in
31.06%, presidents in 1.54%, and others in 10.92%).
3.3. Measurement of variables
In this section, we present the variables used in the empirical
analysis. Access to information is limited in the case of non-listed
rms; as a result, the information used comes from two different
sources: the SABI database, which collects nancial information
from the Spanish Ofcial Register; and a survey used to obtain
information about variables not in the SABI database.
3.3.1. Dependent variable
Following Anderson and Reeb (2003), Sciascia and Mazzola
(2009), and Chu (2009), we use protability as the dependent
variable that examines the effect of non-listed ownership structure
on rm performance. Protability is measured by the accounting
measure Return on Assets (ROA). ROA measures the ability of the
assets of the company to generate prots and is considered a key
factor when taking into account future rm investments. It is
considered, therefore, an indicator of rm protability.
As suggested by Anderson and Reeb (2003), we have
constructed ROA as Earnings before Interest and Taxes (EBIT)
scaled by the book value of total assets, leaving aside the nancial
performance of the rm. EBIT is a traditional method of
measurement that does not include capital costs and, instead,
includes only the operating margin and operating prot.
3.3.2. Independent variables
3.3.2.1. Family rm. We classied a rmas a family rmif the main
shareholder was a person or a family with a minimum of 20% of
rm equity and there were family relationships between main
shareholder and directors based on the coincidence of surnames.
1
The Spanish surname system, whereby women never take their husbands
surnames and children take both surnames (fathers and mothers surname) makes
second-degree relationships (uncles, aunts, rst cousins, and so on) easier to
identify.
B. Arosa et al. / Journal of Family Business Strategy 1 (2010) 8896 91
Toward this end, following the methods of Anderson and Reeb
(2003) and Wang (2006), we created a dummy variable (FD) that
takes the value 1 if the rm meets the criteria for being considered
a family rm and a value of 0 otherwise.
3.3.2.2. Generation managing the rm. The different characteristics
attributed to family rms depending on the generation managing
the rm make it necessary to classify family rms according to the
generation managing it. Consistent with Miller et al. (2007) the
GENvariable takes the value of 1 if the company is managed by the
rst generation and 0 otherwise. In this sense, we analyze whether
the behavior of family rms varies depending on which generation
manages the rm.
3.3.2.3. Ownership concentration. To measure the ownership
structure as an internal control mechanism, we use the ownership
concentration variable. Consistent with Pindado et al. (2008), we
have created two variables to measure the ownership concentra-
tion: Family ownership concentration (FOC) for family rms and
Ownership concentration (OC) for non-family ones. Each of these
variables measures the percentage of ownership in the hands of the
largest shareholder, which, in the case of family rms, is a family
shareholder.
3.3.3. Control variables
3.3.3.1. Insider ownership. The INSOWN variable shows the per-
centage of ownership of the insider directors and the chief
executive ofcer (Anderson &Reeb, 2003; Villalonga &Amit, 2006).
3.3.3.2. Composition of the board of directors. The OUTSIDERS
variable is calculated as the percentage of external directors out
of the total number of directors (Anderson & Reeb, 2003; Barontini
& Caprio, 2006). The aim of this variable is to measure the
monitoring capacity of the board of directors and to analyze its
inuence on the protability of the rm.
3.3.3.3. Firm size. The SIZE variable can also inuence the
relationship between ownership and rm performance (Anderson
& Reeb, 2003; Barontini & Caprio, 2006; Carter, Simkins, &
Simpson, 2003; Wang, 2006; Chu, 2009; Santalo & Diestre, 2006).
To avoid the problems of extreme values, we construct it using the
natural logarithm of total assets.
3.3.3.4. Growth opportunities. According to Scherr and Hulburt
(2001), the GROWTHOP variable has been calculated as Sales
0
/
Sales
1
. In this case, the rms that grew more in the past will have
the most growth opportunities in the future.
3.3.3.5. Debt. The LEV variable is controlled because ownership
structure may inuence rm nancial structure (Demsetz & Lehn,
1985). This variable has been measured as the ratio of total debt to
total assets (Coles, Daniel, & Naveen, 2005; Wang, 2006).
3.3.3.6. Firm age. AGE is measured as the natural logarithm of the
number of years since the establishment of the rm.
3.3.3.7. Industry. SECT is measured using dummy variables fol-
lowing the Spanish industrial classication (CNAE).
3.4. Summary statistics
Table 1 presents descriptive statistics for the variables in the
analysis. We shown mean values for family and non-family rms.
The average ownership stake in family rms is nearly 69%; in non-
family rms, it is around 74%. As different generations jointhe rm,
that capital is diluted signicantly, which may explain the
difference that occurs between the two types of organizations:
42% of the family rms in the sample are part of the second
generation and 19% are part of the third and successive ones. The
Spanish non-listed rms generally have three signicant partners
who control around 90% of the equity; this analysis lets us identify
who has the control in the company and determine its level of
representation in government bodies.
Family rms in the sample show signicantly more diversica-
tion, with nearly 64% reporting only one line of business compared
to 88.46% of non-family ones. Insider ownership levels are higher
in family rms, mainly due to the CEOs percentage of ownership,
which is on average 5% in non-family rms and 20% in family rms.
Board of director composition, return on asserts, growth oppor-
tunities and leverage are not signicantly different in family and
non-family rms. Non-family rms are larger than family ones
and, with regard to age, we note that family rms are on average 40
years old and non-family ones only 33, suggesting that the former
are well established.
As shown in Table 2, the correlation coefcients are weak and
do not violate the assumption of independence of the variables. To
test for multicollinearity, the VIF was calculated for each
independent variable. Myers (1990) suggests that a VIF value of
10 and above is cause for concern. The results indicate that all of
the independent variables had VIF values of less than 10.
4. Results and discussion
Table 3 presents the results of our linear regression evaluating
the inuence of ownership concentration on business performance
for family and non-family rms.
In rst regression, we examined the inuence of ownership
concentration on rmperformance. As noted in Table 3 (column I),
the overall model is signicant (F statistic = 1.95; p < 0.01). Our
results show a nonsignicant relationship (b
1
= 0.0172) between
ownership concentration and rm performance. Thus, rm value
seems to be insensitive to this variable. The results were not
expected, and Hypothesis 1 was not supported. Instead, we divide
the sample up into family rms and non-family ones.
A positive coefcient is found between family ownership
concentration and the protability of rms (Table 3, column II), but
the relationship is not signicant. This lack of signicance leads us
to conclude that there is effectively no relationship between the
variables of family ownership concentration and protability, so
we do not accept Hypothesis 2.
If we compare the behavior of family and non-family rms, the
results are not signicant (Table 3, column III). In this case, neither
b
1
, which reects the relationship between ownership concentra-
tion and rm protability in non-family rms, nor b
2,
which
Table 1
Descriptive statistics of sample rms: mean values for variable measures.
Family rms Non-family rms
Number of observations 369 217
Number of business segments 2.47 1.36
Fraction of single-segment rms 63.60 88.46
Ownership concentration (%) 68.84 73.82
Insider ownership (%) 50.17 33.10
Board of Directors composition
(Outsiders %)
37.48 35.43
Return on assets (%) 6.42 6.41
Growth opportunity (Sales
0
/Sales
1
) 1.14 1.11
Leverage (total debt/total assets) 61.98 64.47
Firms size (total assets) 23709.48 63835.39
Firms age (years) 40 33
Data of ownership structure, board of directors and management from the survey,
and nancial information from SABI.
B. Arosa et al. / Journal of Family Business Strategy 1 (2010) 8896 92
reects the extent to which family rm status inuences the
relationship between ownership concentration and protability, is
signicant.
The presence of a majority shareholder in the company can
result in agency problems between controlling and minority
shareholders (Shleifer & Vishny, 1997). Following this argument,
there are studies that have found a nonlinear relationship between
ownership concentration and protability (Gedajlovic & Shapiro,
1998; Miguel, Pindado, & de la Torre, 2004; Thomsen & Pedersen,
2000).
Our study conducts further tests to examine the possibility of
nonlinearity between rm performance and ownership concen-
tration. So an inverted-U-shaped relationship is expected.
The results are shown in Table 3 (columns IV and V). For family
rms (column IV), a positive coefcient is found for concentration
of ownership and a negative coefcient for its square, but neither is
signicant. These results do not allow us to conrm whether there
is a nonlinear or inverted-U-shaped relationship between concen-
tration of ownership and protability in the case of non-listed
family rms. Therefore, we cannot accept hypothesis 3. If we
consider the whole sample and compare the behavior of family and
non-family rms, we can see similar results (column V).
Both family and non-family rms show positive coefcients for
ownership concentration and negative coefcients for its square,
which may indicate the existence of a nonlinear relationship
between ownership concentration and rmprotability. However,
these coefcients are not signicant in the case of the companies in
the sample.
No relationship is found between the ownership concentration
and rm protability. In addition, no evidence is obtained to
support the monitoring and expropriation hypotheses for the
companies analyzed. The arguments tested in relation to listed
rms do not arise for non-listed ones. In this case, the level of
ownership concentration does not appear to have any direct
inuence on the behavior of shareholders, which can be related to
the non-listed status of the rm and its similar ownership
structure.
Table 3 (column VI) shows the results for ownership
concentration and rm protability taking into account the
generation managing the family rm.
The results show that there is no relationship between
ownership concentration and protability in family rms not
managed by the rst generation because b
1
and b
3
are not
signicant. However, in the rst generation, family rms exhibit an
inverted-U-shaped relationship because the coefcients b
2
and b
4
are signicantly positive and negative, respectively. Once a family
has a sufcient ownership level for unchallenged control, share-
holders benet more from expropriating minority shareholders
than from maximizing company value.
Firms managed by the rst generation have more concentrated
ownership structures. As new generations join a rm, the
ownership structure becomes more dispersed, which may be
the reason for the results. These generational effects seem to be
critical to our understanding of the relationship between owner-
ship concentration and performance. In rst-generation family
rms, the classic ownermanager conict is mitigated due to the
large shareholders greater incentives to monitor the manager.
However, a second type of conict appears. The large shareholder
may use its controlling position in the rm to extract private
benets at the expense of the small shareholders. This increased
ownership concentration may be the cause of the different
behaviors observed. If the large shareholder is an individual or a
family, it has greater incentives for both expropriation and
monitoring, which are thereby likely to lead the problem between
Table 2
Correlation data.
Variables 1 2 3 4 5 6 7 8
1 ROA 1
2 Ownership concentration 0.061 1
3 Insider ownership 0.019 0.191*** 1
4 Outsiders 0.019 0.036 0.407*** 1
5 Growth opportunity 0.014 0.004 0.048 0.056 1
6 Leverage 0.277*** 0.037 0.049 0.049 0.000 1
7 Firms size 0.099** 0.002 0.053 0.016 0.032 0.106** 1
8 Firms age 0.006 0.022 0.022 0.014 0.004 0.022 0.013 1
*** and ** indicate signicance at 1% and 5% levels, respectively.
Table 3
Relationship between ownership concentration and company rm protability.
ROA
I II III IV V VI
Constant 0.1043 0.1652* 0.1161* 0.1704* 0.0700 0.1773*
FOC 0.0064 0.0775 0.0299
FOC*GEN 0.1941**
FOC
2
0.0577 0.0104
FOC
2
*GEN 0.1971**
OC 0.0172 0.0209 0.0084
OC*FD 0.0127 0.0181
OC
2
0.0029
OC
2
*FD 0.0287
INSOWN 0.0010 0.0130 0.0050 0.0166 0.0065 0.0103
OUTSIDERS 0.0198 0.0271 0.0307* 0.0250 0.0339* 0.0252
GROWTHOP 0.2241** 0.5836*** 0.2991*** 0.3971*** 0.4715*** 0.3591**
LEV 0.1138*** 0.0871* 0.1260*** 0.0787** 0.1146*** 0.0800**
SIZE 0.0048 0.0013 0.0009 0.0002 0.0014 0.0004
AGE 0.0098 0.0084 0.0086 0.0093 0.0065 0.0070
R
2
0.12 0.16 0.15 0.17 0.18 0.21
***,** and * indicate signicance at 1%, 5% and 10% levels, respectively. Models I, III and V contain the entire sample. Models II, IV and VI refer only to family rms.
B. Arosa et al. / Journal of Family Business Strategy 1 (2010) 8896 93
majority and minority shareholders to overshadow owner
manager conict (Villalonga & Amit, 2006).
Our ndings show that, up to a certain degree of ownership
concentration, the supervision hypothesis is predominant, provid-
ing that shareholders are focused on monitoring management.
However, when ownership concentration is high, shareholders try
to expropriate wealth from minority shareholders because of the
great inuence that a controlling family can exercise.
Up to a 49% ownership concentration for rst-generation family
rms, the monitoring hypothesis prevails. After this cut-off point,
the expropriation hypothesis prevails (Fig. 1).
McConaughy et al. (1998), Anderson and Reeb (2003), Adams,
Almeida, & Ferreira (2003), Villalonga and Amit (2006) and
Barontini and Caprio (2006) found a positive effect on protability
in rms where the founder is the chief executive ofcer. However,
our ndings show a nonlinear relationship; thus, beginning with a
certain level of ownership concentration, the positive effect does
not exist and the expropriation hypothesis prevails.
5. Conclusions
The aim of this study is to analyze the usefulness of ownership
concentration as an internal control mechanism that prevent or
reduce the potential conict of interest that arise between
different agents involved in non-listed SMEs and, in the case of
family rms, also to consider the generational effect. To test our
hypothesis that ownership concentration moderates conicts
between opposing groups in the rm, we examined the relation
between rm performance and ownership concentration in family
and non-family rms. Moreover, unlike most previous studies, our
study did not focus on large listed companies, but instead, adopted
a sample that includes mainly SMEs, none of which is listed. In an
ownership concentration context, we used a sample of 586 non-
listed Spanish rms, of which 217 are non-family rms and 369 are
family rms.
The main results of this research suggest that the ownership
concentration does not have a direct inuence on the behavior of
shareholders, which can be related to the non-listed status of rms.
Thus, this paper has not been able to conrm the relationship
between ownership concentration and rm performance for non-
listed rms. The results indicate that the arguments validated for
listed rms do not apply to non-listed ones.
However, for family rms, our results suggest that the
relationship between ownership concentration and rm perfor-
mance differs depending on which generation manages the rms.
In rst-generation family rms the results show a positive
relationship between ownership concentration and corporate
performance at low level of control rights as a result of the
monitoring hypothesis and a negative relationship of high level of
ownership concentration as a consequence of the expropriation
hypothesis. Both the monitoring and the expropriation effects are
conrmed.
This study contributes to the existing literature in several
different ways. First, we analyze the relationship between
ownership structure using the ownership concentration as an
independent variable and rm performance in comparing family
and non-family rms. Second, our ndings provide a new
perspective on the role that ownership concentration plays in
corporate governance as an internal control mechanism in family
rms. We consider the role of this internal control mechanism in
mitigating moral hazard conicts between shareholder groups
with diverging interests in family rms. Third, for rst-generation
family rms, our research shows that agency theory can be used to
explain the role of ownership concentration in balancing conicts
between shareholder groups. Fourth, previous family rm studies
(Anderson & Reeb, 2003) have focused on relatively large publicly
traded family rms (S&P 500). The shortage of studies on non-
listed rms is probably due to the difculty of collecting data on
SMEs as well as a lack of an ofcial database of family rms.
Nevertheless, this study has focused on non-listed family and non-
family SMEs and has chosen a combination of two methods of
identication of non-listed SMEs: the detailed analysis of the
information in databases and the survey.
Several implications arise from our ndings. These results
suggest that family ownership is related to higher rm perfor-
mance depending on the role the family plays in the rm. If the
family is a large shareholder with a board of directors or executive
representation, family rm behavior differs from other concen-
trated ownership structures and seems to face different agency
problems. In our analysis, in 94% of family rms, the chief
executive is a member of the family, and the boards of directors are
composed mainly of relatives, so their incentives to expropriate
wealth from minority shareholders are larger when they extend
beyond their ownership rights. It is much easier for family
shareholders to coordinate their actions and use their voting rights
to maximize their own wealth.
To reduce the expropriation effect, it could be considered
opening family rms equity to other shareholders but maintain
family control rights, which would secure the advantages of
concentrated ownership.
These results can be explained in several ways. On one hand, La
Porta, Lopez-de-Silanes, Shleifer, & Vishny (1998) showed that
Spanish rms have a higher percentage of ownership concentra-
tion in comparison with U.S., U.K., Japanese and German rms. In
addition, the presence of controlling shareholders with interests
different from those of minority owners would make it easier to
expropriate the latters wealth; on the other hand, the structure of
the boards of directors in Spain implies that board members
manage the company and also supervise its activity, so one might
question their role in monitoring management and controlling for
expropriation.
It must also be considered that the rules governing the
treatment of minority shareholders in a weaker investor protection
system such as in Spain could explain the likelihood of
expropriation.
This research has some limitations. First, it was very difcult to
obtain a database of non-listed rms and even more difcult to
obtain one for family rms. This lack of data has kept us from
distinguishing between lone founder and other family rms.
Second, our data are cross-sectional and they refer to 2006;
therefore, we cannot make clear inferences regarding causality.
Only a panel data sample will allowresearchers to test and support
our ndings. Third, data were collected exclusively in Spain,
therefore limiting the possibility of generalizing our ndings.
Several recommendations for future research can be formulat-
ed. First, researchers should analyze the usefulness of ownership
concentration as an internal control mechanism distinguishing,
like Miller et al. (2007), between lone founder and true family
rms. Second, a research design based on longitudinal data would
be more suitable for this kind of study because it would increase
Fig. 1. Relation between ownership concentration and rm protability.
B. Arosa et al. / Journal of Family Business Strategy 1 (2010) 8896 94
the reliability of ndings related to causality directionality. Third, a
similar study could be conducted in countries other than Spain to
increase the validity of our results.
We conclude that the relationship between ownership concen-
tration and rm performance differs depending on which
generation of the family manages the rms. In rst-generation
family rms the results show a positive relationship between
ownership concentration and corporate performance at low level
of control rights as a result of the monitoring hypothesis and a
negative relationship of high level of ownership concentration as a
consequence of the expropriation hypothesis. These results show
that agency theory can be used to explain the role of ownership
concentration in balancing conicts between shareholder groups.
Acknowledgements
The authors thank Ca tedra de Empresa Familiar de la UPV/EHU
for nancial support (DFB/BFA and European Social Fund). We also
thank two anonymous referees and the editors for their helpful
comments during the development of this article as well as four
anonymous referees and participants at The World Family
Business Research Conference of IFERA, June 2009, Limassol
(Cyprus) and the XIX Congreso Nacional, of ACEDE, September
2009, Toledo (Spain) for their helpful comments. All errors are our
responsibility.
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