Analyzing The Impact Of Varying Levels Of Family Involvement On Firm Performance

Abstract

This study explores the impact of family governance on firm performance, focusing on three key governance indicators: family board representation, family CEO presence, and full family shareholding. The theoretical foundation of the study analyzes the production function of a family firm incorporating the assumption that family members may have higher productivity in management roles for many reasons. While prior literature presents mixed findings, this study finds a weak statistically significant negative relationship between family board representation and firm performance. However, there was no statistically significant relationship between the other two governance variables and firm performance. Instead we find that firm size, industry and region play a significant role in determining the performance of firms. To ensure robust analysis, log transformations and a trimmed sample approach were applied to address non-normality and outliers. Additionally, three separate OLS regressions were conducted for each governance indicator, incorporating industry and region fixed effects to control for unobserved heterogeneity. The findings challenge the assumption that family governance inherently improves efficiency, instead highlighting its context-dependent effects. While the study provides valuable insights, limitations such as potential endogeneity remain. Future research should use panel data methods or instrumental variables to strengthen the validity of these findings. Lastly, this research underscores the need for balanced governance structures, where family influence is complemented by professional management. Family firms should be versatile and must be open to adopting new efficient strategies as they grow in size