Family firms

Profitability and performance of family firms

How does the performance of family firms compare to other firms in the economy? What are their advantages and their constraints?

Norwegian family-owned firms generally outperform nonfamily-owned firms. Similar results have been documented in multiple other countries.

One might take this to indicate that family ownership is superior but this logic suffers from the chicken and the egg problem: do family firms perform better because they are governed better or are highly profitable firms able to retain control within the (founding) family? In the latter case, high profitability arises from some competitive advantage of the firm, which alleviate the family's need to sell equity to raise finance.

Moreover, a higher profitability can be an indication of superior performance (for instance, family firms have lower monitoring costs within the firm, hence better performance), but also a financial constraints (family firms with limited resources have to focus on their most profitable projects).