When owning a firm would benefit from dividend

When I was nine years of age I lived with my parents
just outside Utrecht in the Netherlands. I was considered a pioneer in the
entertainment and multimedia world by my parents and fellow computer illiterate
moms and dads in the neighborhood. By using virus infested music download
applications I was able to listen to whatever music I liked without paying the
traditional fees. With parents supportive of every entrepreneurial initiative
they provided a small starting capital and before you know I was downloading
and recording music for the entire neighborhood. Although definitely operating
in a convenient time, the company never took off as hoped and efforts quickly
decreased until reaching the point of zero. Ever since I often wonder what
determines whether a firm perform successfully and grows, or whether a firm
fails and goes bankrupt. “What drives company performance?” is a scientific
question that many researches tried to contribute to already, and just as many
will try in the future. Diversity amongst employees should positively influence
firm performance. This diversity can project itself in a variety in cultures or
age, for example. Other key indicators of success which are often researched
are a firm’s dedication to innovation and it’s adaptability to change, or the
way a company is given leadership to.

As one can imagine; there is a large variety of
factors influencing firm performance. In this research, however, we will focus
on the following: “What is the relationship between enterprise ownership and
performance?”

Ownership of a firm can be claimed by several
entities. There are firms owned by employees, suppliers, investors or the
government for instance. Each form of ownership distinguishes itself from the
other in the goals that are deemed desirable. For instance, investors owning a
firm would benefit from dividend payouts and high returns on equity, whereas a
government owned firm is a not striving for profit but focuses foremost on
serving the public. On the other hand there are a lot of ways to describe firm
performance. A company is often considered successful when it yield high
revenues and profits, however, firm success can also be achieved in the field
of consumer satisfaction, employee satisfaction, market share, ROE, ROA and
many other areas. Therefore, this research question can be approached from many
different perspectives and has many indefinite outcomes.

 

 

Summary “Product quality in the agri-food chain: do
cooperatives offer high-quality wine?

 

There are a lot of ways in which company performance
can be measured. In this journal the relation between firm ownership and
product quality on the wine market is measured. More specifically, the
difference between product quality of wine manufacturers owned by investors as
opposed to cooperatives. The journal hypothesizes that cooperatives generally
produce a lower quality wine because it offers the opportunity for members to
overproduce and decrease the focus on quality. This statement can be determined
more precisely when the number of members in the cooperative, as well as the
quality levels of the delivered input products are known.

 

The focal unit of the research is therefore the
participants in the wine industry with either a cooperative or an investor
based ownership. The independent variable is the firm’s ownership structure and
the dependent variable is the quality of the product it delivers. The relation
between both concepts is probabilistic and negative and the domain entails all
wine manufacturers across the globe, in all submarkets available within the
wine market at all times.

 

In the table one can find the strength of the
relation between ownership form and product quality as researched in the paper.
As you can see, there is a negative correlation between the cooperative
ownership and the quality of the wine. The results of this test are measured up
to a one per cent statistical significance level, over a sample size of 488
wineries. The negative relation indicates that the cooperative wines are
between 0.57 and 0.93 Falstaff points lower than the wines of non-cooperative
wineries. The difference of one Falstaff point for example is quite
substantial. This result matches the journal’s hypothesis.

 

 

 

 

Summary
“Founding-Family Ownership and Firm Performance: Evidence from the S&P 500”

The research article “Founding-Family Ownership and
Firm Performance: Evidence from the S&P 500” investigates the effect of
partial ownership or board membership of the founding family of family
enterprises listed in the Standard and Poor’s top 500 American companies based
on market capitalization. The performance of these family enterprises is
compared to the performances of the other firms in the Standard and Poor’s top
500, with the exception of utility and banking firms. This leaves us with a
sample of 402 of the biggest companies in the United States of America.

In this journal the focal unit is the family firm and
the hypothesis that is composed covers the following: “Family firms generally
outperform non-family firms.” Performance is measured in terms of return on
assets; both before and after interest, tax, depreciation and amortization, and
in Tobin’s q. This method is estimated by a division of the total value of
assets divided by the replacement cost of assets. The returns on assets and
Tobin’s q therefore represent the dependent variable in this research, whereas
the (non)inclusion of founding family members on the firm’s board or their
fractional equity ownership represent the independent variable. Although the
sample merely consists of America’s greatest companies in the years between 1992
and 1999, the research does not state that the outcome is only applicable to
large scale firm. Moreover, the participating firms come from a wide variety of
sectors, namely 54. The sector in which a firm operates in does not influence
their participation in this research, so all sectors belong to the research
domain. However, only companies from the United States of America are included.

The unit of analysis in the hypothesis, namely family
owned firms, are thoroughly investigated in all following experiments and both
the dependent and the independent variable is carefully measured. A small side
note should be made regarding the dependent variable, since this variable is
measured in multiple methods, such as; firm age, (re)investment in research and
development, long-term debt over total assets and total assets for example. We
decided to conduct further research in the field of ROA and Tobin’s q. Besides,
a small amount of consideration is put in investigating the Return on Equity of
family firms as opposed to nonfamily firms.

The journal, published by Ronald Anderson and David
Reeb, provides both correlation data, as well as regression data. Both of which
will be used. Although research proved a negative correlation between family
firms and firm age or total assets, it did find a positive correlation between
ROA and Tobin’s q. The relationship is not extremely satisfying, but definitely
prevalent.

 

 

The table below resulted from regressing firm
performance on family ownership. As one can see, both young family firms (aged
below 50 years), and older family firms (aged over 50 years) are positively
correlated with ROA using net income and earnings before interest, tax,
depreciation and amortization. However, the effect is remarkably lower in older
family firms. The research suggests that the larger effect amongst young family
firms is often the result from the presence of the company founder.

The regression results gathered using Tobin’s q
reports better on market performance instead of accounting performance. This
result is significant at the one percent level and indicates that total asset
value divided by replacement of assets is generally ten percent higher at
family firms than at non family firms.

The effect size of all tests is standardized and have
a one percent significance.

Explanations given by the researchers for this overall
better performance of family firms involve a more long-term approach to company
undertakings. Whereas random shareholders busy themselves with project
profitability and ROE, family owners might regard the long term consequences
and company survival more thoroughly. Other factors include the effect of the
founder CEO on innovation and more personal relationship with stockholders such
as suppliers and debt financiers.

 

Summary
“Corporate Governance, family ownership and performance”

Quite contrary to the previous article, Renato
Giovannini published “Corporate Governance, family ownership and performance”
in 2009 in which he hypothesizes that family ownership negatively correlates
with corporate performance. The article states that board independence increases
when family involvement is not an issue and this, combined with the presence of
execution boards, negatively impacts share value.

The research entails a sample of 56 Italian IPO’s
issued between 1999 and 2005 and the independent variable is considered the
family involvement. This involvement is expressed as the percentage of shares
owned by the family of the firm founder. The dependent variable in the research
is the long-term firm performance (measured by “BHAR”)

 

The relation between both variables is determined and
negative, as shown in the conceptual model above. The focal unit is the
organizational form in the firm and although the research was done in Italy,
the model’s domain includes the whole world, every market and at all times.

In the table above, one can find that the relationship
between sustainable performance and the ownership of shares by family is
reasonably negatively correlated at a 0.047 statistical significance. An
explanation for this phenomenon can possible be found in the fact that
performance in terms of share price is more important to outsiders than for
family members. Family’s priorities lie in long term sustainable growth without
too much risk, whereas shareholders are more readily interested in positive net
present value projects carrying a higher degree of risk. 

 

 

References:

Anderson, R. C., & Reeb, D. M. (2003).
Founding-Family Ownership and Firm Performance: Evidence from the S&P 500. The
Journal of Finance, 58(3), 1301-1328. doi:10.1111/1540-6261.00567

Pennerstorfer,
D., & Weiss, C. R. (2012). Product quality in the agri-food chain: do
cooperatives offer high-quality wine? European Review of Agricultural Economics, 40(1), 143-162. doi:10.1093/erae/jbs008

 

Giovannini, R. (2009). Corporate governance, family ownership and
performance. Journal
of Management & Governance, 14(2), 145-166. doi:10.1007/s10997-009-9093-x

 

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