Why are Family Firms so Small ?

In this paper, I ask whether family firms provide stability to their stakeholders at the expense of economic growth. I build a model where current owners of dynastic firms derive private benefits from keeping the control of the firm within the family over the generations. Because these preferences limit the recourse to external finance, they induce family-minded entrepreneurs to invest in smaller and less risky projects. Predictions of the model are tested using a newly constructed firm-level panel dataset covering both private and listed French firms for the period stretching from 1994 to 2006. The main finding is that family firms are on average 30% smaller than regular firms in terms of sales. However, these firms also choose significantly less volatile sales and employment growth paths. The empirical pattern of financial management in family firms is consistent with the model : family firms incur less debt and hold more cash than their regular counterparts, and these differences are statistically and economically very significant. The results hold in both cross-sectional and longitudinal analysis, after careful control for potential confounding factors. ∗Paris School of Economics (PSE), 48 Boulevard Jourdan, 75014 Paris. E-mail : [email protected]. I thank Ève Caroli, Bruno Crépon, David Margolis, Thomas Philippon, Thomas Piketty, Jean-Laurent Rosenthal, Sébastien Roux, Nicolas Serrano-Velarde, David Thesmar and seminar participants at CREST and the Paris School of Economics for useful comments. All remaining errors are mine.