Performance and Behavior of Family Firms: Evidence from the French Stock Market∗

This paper empirically documents the performance and behavior of family firms listed on the French stock exchange between 1994 and 2000. On the French stock market, approximately one third of the firms are widely held, while the remaining two thirds are family firms. We find that, in the cross section, family firms largely outperform widely held corporations. This result holds for founder-controlled firms, professionally managed family firms, but more surprisingly also for firms run by descendants of the founder. We offer explanations for the good performance of family firms. First, we present evidence of a more efficient use of labor in heir-managed firms. These firms pay lower wages, even allowing for skill and age structure. We also find that descendants smooth out industry shocks and manage to honor implicit labor contracts. Second, we present evidence consistent with outside CEOs in family firms making a more parsimonious use of capital. They employ more unskilled, cheap labor, use less capital, pay lower interest rates on debt and initiate more profitable acquisitions. ∗For their helpful comments, we are grateful to Francisco Pérez-González, Thomas Piketty, Jean Tirole, Xavier Vives (the editor) and especially three anonymous referees. We also thank seminar participants at CREST (Paris), the Federation Jourdan Lunch Seminar (Paris), the University of Toulouse, the ECGI conference on Family Firms in Istanbul, the 2004 European Economic Association meeting in Madrid (Spain) and the Conference on Corporate Governance in Family/Unlisted Firms in Thun (Switzerland). All errors are our own. †INSEE-CREST-LEI, Paris and GREMAQ, Toulouse. Email: [email protected]. Corresponding Author: CREST-INSEE, 15 Bd Gabriel Péri, 92245 Malakoff Cédex, France. ‡HEC School of Management and CEPR. Email: [email protected]