THE IMPACT OF FAMILY INFLUENCE AND PROMOTER HOLDINGS ON FIRM PERFORMANCE: EVIDENCE FROM INDIA

Abstract

I investigate the relation between family influence and promoter holdings on firm performance in India. I find that family firms are widely prevalent in India and presence of families was evident in 78% of my total sample of firms. Contrary to my conjecture, I find that family firms perform relatively poorly compared to nonfamily firms. Additional analysis reveals that regardless of whether the family firm is controlled by a family CEO or a hired-hand/nonfamily CEO, family firms perform poorer than nonfamily firms. I also investigate the differential response of family firms to the financial crisis relative to the nonfamily firms and find that again their performance is weaker compared to the nonfamily firms despite having potential access to pooled family resources during a negative shock. Further analyses reveal that the relation between promoter group holdings and firm performance is positive both in the overall sample and in the family firms. It suggests that the poorer performance of family firms is mitigated if there is a higher promoter stake in the firm. Overall, my results are inconsistent with the hypothesis that nonfamily firms are at a competitive disadvantage, suggesting that family ownership is not always an effective organizational structure.