Abstract

This study examines whether and how family ownership enhances or damages firm value using a sample of Canadian companies listed on the Toronto Stock Exchange (TSX) 1999 to 2007. We identify family companies as firms in which the founder or founding family hold more than 20 percent of outstanding shares and are the largest shareholders, or firms in which family members work as CEOs and/or serve as Chairman of the board of directors. In addition, we construct a sample of matching firms which are in the same industry, have a similar size as the family companies, and whose sales range within +/- 25 percent of the sales of family companies. We use Tobin's Q and return on asset (ROA), measured by either net income or EBITDA divided by total assets, as proxies of firm value. Our results suggest that family companies are generally superior to non-family companies. In addition, we find that control-enhancing mechanisms which are often employed by family companies add values to companies. Furthermore, we find that agency conflicts between ownership and management are more costly than those between majority and minority shareholders, suggesting that family ownership helps resolve the agency conflicts between ownership and management and in turn enhances firm value. Finally, we find that family companies with founders as CEOs outperform those with descendants as CEOs.