Threshold effect in the relationship between family ownership and firm performance: A panel smooth transition regression analysis

Abstract

This paper examines the relationship between family ownership and firm performance over the period 2009–2017 for a large sample of French-listed firms. Previous research showed that family ownership can bring both benefits and costs to firms. Empirical results in whether it enhances or undermines firm performance are inconclusive. This paper aims to further our understanding of the complex relationship between family ownership and firm performance. It clarifies how family owners influence on firm performance depends on their ownership levels. By performing Panel Smooth Transition Regression model (PSTR), we find that the relationship between family ownership and firm performance is non-linear. The model has one threshold at the 37.62% of family ownership and two extreme regimes. The results show that below the threshold, the relation is negative. Family members have fewer incentives to bear the cost of effective monitoring. However, above the estimated threshold, family ownership has a positive impact on firm performance. This paper supports the view that family owners are more motivated to enhance performance when they hold large stake of capital in the firm as family wealth is closely related to firm profitability. These findings provide useful insights for investors seeking investment opportunities in firms with family ownership as the latter constitute a large proportion of publicly listed firms in the world.

Keywords

• firm performance
• family ownership
• agency theory
• pstr model
• threshold effect