Return Differences Between Family and Non-Family Firms: Absolute and Index Differences

Abstract: The objective of the paper is to determine if family firms are able to provide a return premium compared to their non-family counterparts. The assumption is that some of the benefits and costs related to family ownership can be absorbed into the business model. This may mean that family characteristics could actually impact the perception of the market and in turn affect their returns. We test this by using a unique sample of 152 family firms and matching them with non-family firms on the basis their sector, stock market index and size. Three models (CAPM, Fama-French 3-factor model and Carhart model) are used to test a trading strategy, i.e. buying family firms and selling short non-family firms, on the FTSE All Share, Fledgling and AIM Index. The results showed that the strategy is able to generate an abnormal profit for the firms on the FTSE All Share and Fledgling but fails to do so on the AIM in the presence of the "momentum" factor-mimicking portfolio. It is far more profitable to use a trading strategy of buying past winners and selling short past losers on the AIM. We further investigate into the factors that drive the returns of family and non-family firms. Using factors related to risk, price-level, liquidity and growth-potential, we find that family firm returns are driven by their growth potential where as non-family firms' need to balance their risk in order to increase returns. A similar application on the 3 indices mentioned above reveals that the AIM and the Fledgling index behave similarly but differ from the FTSE All Share portfolio of firms.