Do family businesses perform better than non-family businesses? The situation in Czech companies

Adam P. Balcerzak & Ilona Pietryka (Eds.) Proceedings of the 11 th International Conference on Applied Economics Contemporary Issues in Economy: Entrepreneurship and Management Olsztyn: Instytut Badań Gospodarczych // Institute of Economic Research 2021 DOI: 10.24136/eep.proc.2021.2 (eBook) ISBN 978-83-65605-43-6; ISSN 2544-2384 (Online) 137 Pavla Srbová ORCID ID: 0000-0003-4076-9829 Brno University of Technology, Czech Republic Michal Karas ORCID ID: 0000-0001-8824-1594 Brno University of Technology, Czech Republic Jan Pěta ORCID ID: 0000-0001-6309-3601 Brno University of Technology, Czech Republic Mária Režňáková ORCID ID: orcid.org/0000-0002-7261-607X Brno University of Technology, Czech Republic Do family businesses perform better than non-family businesses? The situation in Czech companies JEL Classification: L25, L26, M21 Keywords: family businesses; performance; Welch’s t-test; Czech Republic Abstract Research background: Recent research conducted in the field of entrepreneurship focuses on a better understanding of specific features of family businesses, which, according to estimates, make up 55–90 % of all business entities in EU member states. Foreign studies emphasise the greater resilience of family businesses in the face of adverse changes in their business environment, their ability of long-term survival and a higher degree of socially responsible behaviour. Purpose of the article: The main objective of this article is to find out whether there are statistically significant differences in performance between family and non-family businesses. The results will be used to determine whether the performance of family businesses differs from that of non-family businesses and to identify the specific features of family business. This information will also be used to enhance our knowledge of family entrepreneurship and to determine whether the Proceedings of the 11 th International Conference on Applied Economics Contemporary Issues in Economy: Entrepreneurship and Management 138 conclusions of foreign studies are also valid for family businesses in the Czech Republic. Methods: We compared the results of two sets of data with financial results to identify differences in the performance of family and non-family businesses. Due to the fact that there is currently no register of family businesses, we first had to identify which are family businesses and complement them with non-family businesses. We used the accounting data of almost 8,000 businesses from the years 2014–2018 for this analysis. We defined 44 indicators and tested them using Welch’s t-test. Findings & value added: The analysed sample consists predominantly of small businesses. We identified a total of 30 ratios whose values differ statistically at a significance level of 5 %, for example current assets to sales, retained earnings to total assets and labour cost to sales. We can deduce from the results that there are differences in performance between family and non-family businesses. Introduction Family businesses are often assessed on the basis of their financial performance and the factors influencing this performance are investigated. The term financial performance indicates the effectiveness of the activities of the company generally measured by financial ratios such as the return on assets (ROA) or return on equity (ROE). Most previous research has led to the conclusion that family businesses achieve higher performance or at least the same level of performance as non-family businesses. A conclusion often stated by these studies is an inverted U-curve depicting the development of the performance of family businesses depending on the size of the influence of the family in the business. This indicates that performance increases with the increasing influence of the family in the business until the moment at which a negative effect resulting largely from conflict between family members begins to predominate. A survey study by Williams (2018) shows the most widely used indicators measuring the performance of family businesses to be the return on investment (ROI), the return on equity (ROE), Tobin’s Q, the return on assets (ROA), sales and their growth, profit and its growth, and the return on sales (ROS). Williams (2018) states that private family firms are extremely widespread, but that less attention is devoted to them in spite of the fact that they could better reflect the differences between family and non-family firms because private business leaders are less encumbered by outside stakeholders and regulation. It is, however, difficult to obtain data on private family firms, because the owners of private family businesses hesitate Proceedings of the 11 th International Conference on Applied Economics Contemporary Issues in Economy: Entrepreneurship and Management 139 to provide information and very few countries have a database of family firms. Most of the published studies devoted to performance confirm the positive effect of the family on the performance of the business. According to Anderson & Reeb (2003), the performance of family businesses is at least as good as that of non-family businesses, if not better (the ROA shows significantly higher values in the case of family businesses). The same conclusions about the greater profitability of family firms were also reached by Erbetta et al. (2013). They also found that the factors profitability depends on are productivity and efficiency, and they revealed a systematic lower efficiency and a tendency to overuse capital and labour in family businesses (a lower cost of labour). One of the criteria often mentioned in the analysis of performance is investigation of the influence of the family’s control over the business. Anderson & Reeb (2003) found that performance is better if the CEO is from the family than it is with an outside CEO. Many other authors studying the issue of performance have followed up from this study. Chu (2009), for example, also came to the conclusion that ownership of the business by the family has a positive effect on its performance primarily when members of the family hold senior positions, i.e. that an essential condition to achieving this positive effect is for members of the family to play an active part in the management and control of the business. Concentrated ownership also has a positive effect on the long-term performance of the business. The effect of family ownership on the firm’s performance is also influenced by its size. Cruz et al. (2012) focused directly on the performance of MSEs (micro and small enterprises). They found that employing family members in small and micro firms contributes to an increase in sales, but decreases profitability as measured by ROA. Similarly, the large survey study conducted by Wagner et al. (2015) reached the conclusion that the positive effect of family on performance is more pronounced in samples of public and large firms, measured principally by ROA. No effect of the family on performance was demonstrated with the use of ROE, i.e. an indicator that takes account of the effect of the financial structure. Family firms take in a wide range of businesses that are difficult to compare with one another. This leads to inconsistent research conclusions. Research on the given topic has been conducted by, e.g., Basco (2013). One of the conclusions he reached was that family business relations can have a detrimental effect on performance. Another argument for inconsistent findings he states is that family management involvement does not necessarily directly affect economic performance, in view of the fact that the aim of family business is long-term sustainability, and the relationship between Proceedings of the 11 th International Conference on Applied Economics Contemporary Issues in Economy: Entrepreneurship and Management 140 family involvement and the performance of the firm is curvilinear. As a final argument, he states that family management may affect a firm’s behaviour and its performance. The research to date focusing on the Czech Republic indicates that family firms are more profitable, use less debt and keep more liquid assets than other Czech firms (e.g. Machek et al., 20191). Research methodology This paper aims to identify differences in the performance of family and non-family businesses in the Czech Republic. We formulated the following research question to meet this goal: “Are there statistically significant differences in individual ratios in the group of family and non-family businesses?” Welch’s test, a two-sample t-test with independent estimates of distributions, was used for its verification. Statistically significant differences between family and non-family firms at a significance level of 5% were found using this test. Data used In view of the fact that there is no exhaustive database of family businesses in the Czech Republic, it was first necessary to identify family businesses. The Czech Register of Family Businesses was established just last year (when this research was underway) and records 500 businesses (as of March 2021). In view of the estimates of a high proportion of family businesses in the Czech Republic, it was necessary to identify both family business and non-family businesses among all businesses. We addressed 76,980 businesses and asked them if they were family businesses or not. A business entity in which one family has an absolute majority of the number of partners or exercises a majority of the voting rights is considered a family firm. At least one member of the given family is a member of the statutory body of the company. At least two members of the given family must be engaged in the company for it to be considered a family firm. The replies received were used to create a database containing 10,684 businesses (6,354 family businesses and 4,330 non-family businesses). We obtained financial statements from the company Bisnode (currently part of the Dun 1 The paper focuses on eponymous firms. Eponymous firms bear the name of the owners, which is one of the characteristics of family business. Proceedings of the 11 th International Conference on Applied Economics Contemporary Issues in Economy: Entrepreneurship and Management 141 and Bradstreet company). We were unable to obtain data on all these companies – the true numbers are given in Table 1. The subject of analysis was data for the years 2014 to 2018 (please note that the majority of the data was not available for the years 2014–2015). Almost all the given companies are micro and small businesses, with just 3 % comprising medium-sized companies. Large companies were not primarily addressed for co-operation within the research, for which reason they are almost unrepresented in the set. More than half of the companies operate in the services sector, while more than 10 % of the set is made up of businesses in manufacturing and construction (see Table 2). Forty-four indicators, primarily financial ratios, indicators of year-onyear growth and cost indicators, were quantified for all the companies comprising the research set. A list of these indicators is given in Table 3. Results Statistically significant differences were found for 30 ratios on the basis of the t-test (see Table 4). The results indicate a statistically significant difference at the one-percent level for 27 ratios and at the five-percent level for 3 ratios. The majority of the ratios used confirm the existence of differences in the performance of family and non-family businesses. The difference between these ratios is not, therefore, random and the probability of error is extremely low. Statistically significant differences were found for liquidity indicators, which confirms the previous finding that the proportion of liquid assets is different in family and non-family businesses. A statistically significant difference was also found between turnover ratios (debtor collection period, trade creditors payment period, etc.) including the cash conversation cycle. Differences were found between profitability ratios in the case of the return on capital employed and return on sales, though the return on assets and return on equity do not show statistically significant differences. The authors of foreign studies often compare the performance of family and nonfamily businesses using the ROA. A number of these authors concluded that the ROA is higher in family businesses (e.g. Anderson & Reeb, 2003). Our findings did not demonstrate statistically significant differences in the ROA between family firms and non-family firms. In view of the fact that the sample we analysed is comprised primarily of micro and small firms, the results may have been influenced by the size of the companies (e.g. Wagner et al., 2015). Our findings to date lean towards the conclusions of Proceedings of the 11 th International Conference on Applied Economics Contemporary Issues in Economy: Entrepreneurship and Management 142 Cruz et al. (2012), who found that employing family members in small and micro firms contributes to decreased profitability as measured by ROA. In contrast, no statistically significant difference was demonstrated in the majority of ratios evaluating year-on-year change, i.e. capital growth, earnings growth, sales growth and total assets growth. Similarly, no difference was found in the investment to sales or investment to fixed assets ratios. Conclusions This paper presents the results of analysis into the differences in financial ratios, indicators of year-on-year growth and cost indicators between family and non-family businesses. This is part of a wider research that also takes in non-financial factors. A total of 44 indicators were included in the analysis. A statistically significant difference was found for 30 ratios on the basis of Welch’s test. In addition to the aforementioned indicators of liquidity and cost, there are also demonstrable differences in current assets to sales, retained earnings to total assets and labour cost to sales. We will subsequently be conducting a search for the causes of these differences. The diverse conclusions of research into the performance of family and non-family businesses may be caused by the varying definition of the research sample, as no universally valid definition of family businesses exists and there is no database of family businesses. This also depends on whether the research focuses on publicly listed companies or private companies, as publicly traded companies achieve better performance and it is easier to obtain data on them. As has already been mentioned, the size of the businesses studied is also important, as larger companies achieve better performance, and differences also arise due to the differences in various sectors. Last but not least, differences are also caused by the use of various ratios for the assessment of performance, as studies that use ROA present better performance for family businesses than those that use ROE (Dyer, 2018). The results of studies are also influenced by the specifics of the country in which the research is conducted. The set we analysed is comprised of small and newly formed businesses in which there is evidently a greater connection between ownership and company management, i.e. the family is identified with the firm (an emotional bond) and promotes various nonfinancial goals in addition to financial goals. Shareholders are involved in decision-making in publicly traded companies, and this may lead to a pressure to achieve greater performance, and ownership is also separated from Proceedings of the 11 th International Conference on Applied Economics Contemporary Issues in Economy: Entrepreneurship and Management 143 management and a smaller emotional connection between the family and the firm can also be expected. These companies gradually lose their family nature. To answer the question as to whether family firms are characterised by higher performance than non-family businesses it is, therefore, necessary to investigate the conditions under which this assertion holds true and which factors affect their performance, and this will form the subject of our further research. 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). Basco, R. (2013). The family's effect on family firm performance: A model testing the demographic and essence approaches. Journal of Family Business Strategy, 4(1). Cruz, C., Justo, R., & De Castro, J. O. (2012). Does family employment enhance MSEs performance?: Integrating socioemotional wealth and family embeddedness perspectives. Journal of business venturing, 27(1). doi: 10.1016 /j.jbusvent.2010.07.002. Dyer, W. G. (2018). Are Family Firms Really Better? Reexamining “Examining the ‘Family Effect’ on Firm Performance”. Family Business Review. 31(2). doi: 10.1177/0894486518776516. Erbetta, F., Menozzi, A., Corbetta, G., & Fraquelli, G. (2013). Assessing family firm performance using frontier analysis techniques: Evidence from Italian manufacturing industries. Journal of Family Business Strategy, 4(2). Gupta, J., Gregoriou, A., & Ebrahimi, T. (2018). Empirical comparison of hazard models in predicting SMEs failure. Quantitative Finance, 18(3). doi: 10.1080/14697688.2017.1307514. Chu, W. (2009). Family ownership and firm performance: Influence of family management, family control, and firm size. Asia Pacific Journal of Management, 28(4). Machek, O., Machek, M., & Stasa, M. (2019). Financial performance of eponymous firms in the Czech Republic. Acta Oeconomica Pragensia, 27(2). doi: 10.18267/j.aop.620. Wagner, D., Block, J. H., Miller, D., Schwens, C., & Xi, G. (2015). A metaanalysis of the financial performance of family firms: Another attempt. Journal of Family Business Strategy, 6(1). Williams R. I. Jr. (2018). Measuring family business performance: research trends and suggestions. Journal of Family Business Management, 8(2). doi: 10.1108/JFBM-12-2017-0047. Proceedings of the 11 th International Conference on Applied Economics Contemporary Issues in Economy: Entrepreneurship and Management 144 Acknowledgements This research has been carried out within the project “Family firms: Value drivers and value determination in the process of succession”, ID Number TL02000434, co-financed by the Technology Agency of the Czech Republic. Annex Table 1. Number of businesses included in the analysis and their division by size 2014 2015 2016 2017 2018 FF NFF FF NFF FF NFF FF NFF FF NFF micro 4 6 335 225 2804 2069 2920 2233 2906 2207 small 0 0 69 48 1130 839 1257 939 1341 1008 medium 0 0 5 4 196 197 228 223 238 238 large 0 0 0 1 11 7 7 3 10 7 total 4 6 409 278 4141 3112 4412 3398 4495 3460 Note: FF means family firms, NFF means non-family firms. Micro firm: total assets < 9 million CZK or turnover < 18 million CZK. Small firm: total assets < 100 million CZK or turnover < 200 million CZK. Medium firm: total assets < 500 million CZK or turnover < 1 billion CZK. Table 2. Numbers of analysed companies in 2018 NACE code Family firms Non-family firms A agriculture, forestry & fishing 109 120 B mining & quarrying 7 7 C manufacturing 869 505 D electricity, gas, steam & air conditioning 13 67 E water supply, sewerage, waste management & remediation activities 38 76 F construction 549 370 G-U services 2532 2262 unclassified 378 53 total 4495 3460