The Origin of Familism

Most firms in the world are controlled by their founders or by the founders’ families and heirs. Family ownership is nearly universal among privately held firms, but is also dominant among publicly traded firms (Claessens et al., 2000; Faccio and Lang, 2002; La Porta et al., 1999). Even in the United States, where ownership dispersion is at its highest, families exercise a significant degree of control over a third of the 500 largest corporations (Villalonga and Amit, 2009), and over more than half of all public corporations (Villalonga and Amit, 2010). Not surprisingly, the family firm literature is huge (e.g., Berrone, Cruz and Gomez-Mejia, 2012; Salvato and Aldrich, 2012). However, no study addresses determinants of family ownership so far. What is the origin of familism in corporations? Why family firms are dominant in continental Europe rather than in the United States? What leads entrepreneurs to look for partners within the family members rather than outsiders? This paper is devoted to answer these questions.
Our key conjecture is that family bonds are substitutes for the institutional and legal obligations that define the partnerships in business. More specifically, we posit the likelihood to give birth to a family firm increases with the strength of father-son ties. In addition, we predict this relation is more pronounced the lower is the shareholder protection.
To test these conjectures we merge datasets on private and listed firms (519,822 firm-year observations) over 2005-2010 in 14 European countries. We capture the strength of the parent-child relation by introducing an index based on the national-average parents’ geographical proximity to the nearest living child. In addition, we control for the father’s frequency of contacts to the most contacted child. As predicted, we find the strength of parent-child relations positively affects the likelihood to establish a family firm. Furthermore, the power of this relation decreases with the shareholder protection.
We contribute to family firm literature at least for two. First, this is the first study that addresses the origin of family capitalism: The strength of parent-child relations explains family firm birth and family firm cross-country variability. Second, our findings help explaining family firm performance (e.g., Cucculelli and Micucci, 2008; Miller et al., 2007; Villalonga and Amit, 2006). Existing literature agrees family firms over-perform as long as founders are involved in the business, while family firm performance decreases with descendants and with the number of generations working in the firm (e.g., Smith and Amoako-Adu, 1999). However, why descendants underperform with respect to founders is still at issue. Family bond strength is also decreasing with family generations: Descendant under-performance is related to the weakening of within-family obligations which is not offset by strong enough institutional obligations.