FINANCIAL PERFORMANCE OF FAMILY-OWNED BUSINESSES IN INDIA: A STUDY OF SELECT FIRMS

Abstract

The present study investigates the question of how family involvement in business impacts the financial performance of the firm. Engagement of family in the business is broadly observed through family ownership and management in the firm. This dissertation investigates the association between family involvement in business and firm performance and compares the financial performance of family and non-family firms. It uses the firms listed at the National Stock Exchange of India, NSE 500, during 2011 to 2021. It also explores the association between female directorship, female leadership, and the performance of family and non-family firms. The study explores various theories related to family firms, viz., agency theory, stewardship theory, and socio-emotional wealth theory to better understand their functioning. The study examines a sample of 301 Nifty 500 companies for 11 years (2011-2021), classifying them into family and non-family firms by adopting a definition of family firms in the context of Indian. The secondary data collected for the study is analyzed by using quantitative methods. Fixed effects panel data model is used to analyze the influence of family engagement in the business on firm performance. The study further uses system GMM Model of the Panel Data Analysis to investigate the impact of female directorship and female leadership on the performance in Indian listed family and non-family firms. The study also makes an attempt to judge the financial health of the top family firms in India in 3 different sectors and compare it with the non-family firms operating in the same industry/sector, with the longitudinal analysis of their ratios for the past ten years, from 2012-2021. STATA 16 software has been used to test the hypotheses of the study. The findings of the study reveal that the relationship between family ownership and firm performance is positive and non-linear. The study also reveals that the presence of outside large-block holders has a positive effect on Indian family firms’ performance. Further, the results show that engagement of family in management has a positive effect on firm performance; however, the empirical findings indicate that founder-managed firms perform better than the heir-managed or outside professionally managed family firms. These findings suggest that family firms are heterogeneous and consist of various components of family involvement which may have a non-linear association with the firm’s financial performance. It is observed that in the case of family firms, the founder generation adds maximum value to their firm because of their innovative zeal. But the lack of this entrepreneurial zeal among subsequent generations might cause the business to fall with the passage of generations. Thus, business families should work towards keeping entrepreneurial zeal alive among all generations through proper training and education. The study results also indicate that family firms must try to maintain a balance in their focus on socio-emotional and economic goals to compete better with their non-family peers. The findings further reveal that female directorship has a positive and significant effect on family firms’ performance. Further, there is empirical evidence to show that female leadership positively impacts family firms’ performance in comparison to non-family firms. Thus, in general, all firms in India can benefit more by increasing gender diversity on their boards and increasing the participation of women in their top management teams. The findings imply that senior family members must take notice of the skills and capabilities of the female family members and increase female participation in top positions in their businesses for enhanced performance. The dissertation makes a significant contribution to the expanding literature on family businesses by investigating various components of family engagement in business and their influence on firm performance. The study is unique in understanding how family businesses behave, perform, and add value to the shareholders by analyzing a listed company dataset for eleven years. The study further contributes to the literature on women in corporate India by examining empirically and describing the influence of participation of women on firm performance in a developing nation like India.