Family affairs – Corporate governance involvement of families and stock market returns

This study explores the association between family influence in firms and stock market returns in Germany, a country with a less investor-friendly corporate governance system where shareholders cannot directly influence top managers. The study forms portfolios of firms with and without the influence of families as shareholders or members of the firm’s legal bodies. The models estimate portfolio returns from 2003-2013 using a four-factor model. Results suggest that corporate governance is highly correlated with stock returns in Germany. Specifically, they document a significant relationship between family influence and firm valuation. Firms with stronger family influence via voting rights and board-participation are found to have a higher firm value (annualized excess return: 0.48%-6.00%). The study interprets this to mean that families may improve a firm’s internal corporate governance, as their strong motivation and ability to become actively engaged in a firm’s daily operations or to assume a monitoring role distinguishes them from other corporate blockholders. The results add to those of an increasing number of publications finding a positive association between strong family governance and performance. They contribute to a year-long scholarly exploration of performance differences among family and non-family businesses, mainly by defining the former by mere ownership. The study combines a large set of governance provisions into a novel, transparent, and replicable index of family involvement and then estimates the empirical relation with market performance. The index captures influence via shareholder voting rights, considers direct influence of owners on day-to-day operations, and controls for indirect influence via supervisory board.
AcknowledgmentThe authors acknowledge support by the Open Access Publication Funds of the HTWK Leipzig.


INTRODUCTION
A country's shareholder structure is significantly impacted by its legal and constitutional setting (La Porta et al., 1998Porta et al., , 1999. Due to the relatively low level of shareholder protection, German firms tend to exhibit fairly concentrated structures (Faccio & Lang, 2002;Becht & Boehmer, 2003; Barontini & Caprio, 2006;Achleitner et al., 2009Achleitner et al., , 2019. Despite the fact that large shareholders may be more effective at firm monitoring (Shleifer & Vishny, 1986), recent studies note these blockholders differ in their impact on corporate policies and corporate performance (Cronqvist & Fahlenbrach, 2009;Mietzner & Schweizer, 2014).
In contrast to prior studies on other regions, recent research documents blockholder`s heterogeneity in Europe and Germany (Andres, 2008;Mietzner & Schiereck, 2016;Schüler et al., 2019). Capital markets, however, react differently to shareholders who actively handle agency problems. Consider, for example, private equity investors. They have been shown to create higher abnormal returns than hedge funds -presumably due to their long-term orientation and better adaptability to the given corporate governance framework (Mietzner & Schweizer, 2014).
Differences in the performance of family firms and non-family firms, as well as the means of family influence on firm performance, are the prominent points of a year-long discussion in the literature (Mazzi, (Corstjens et al., 2006), or the imprecise application of dummy-variables for the management participation of a family member (e.g., Cella, 2009).
None of the previously cited publications consider the degree of family-shareholder involvement in the company's legal bodies. Thus, the real influence of the family on the firms' corporate governance is under-researched. This research gap is particularly severe in states with a minor level of shareholder protection like in Germany, where minority shareholders' influence is mainly limited to the annual shareholders' meeting. Gompers et al. (2003), Bebchuk et al. (2009), and other authors have shown that the stock market performance of listed firms in general may be significantly influenced by corporate governance differences between firms. However, these publications focus on an outsider-controlled system in the United States (results are therefore not directly transferrable to the corporate governance system of Germany), and, most important, they do not at all focus on family investors. Due to their previously argued features, this paper posits that corporate governance systems characterized by family ownership and family board presence may explain these differences in corporate governance and subsequently stock market returns in Germany.
The sample employed for this study embodies a unique research opportunity as it identifies every family shareholder as well as the (family-) background of every single member of the executive and the supervisory board of every firm-year by hand. To the best of the authors' knowledge, no such fine-graded data set exists in Germany, since the build-up of this data is extremely time-consuming and costly. The paper argues that in the corporate governance framework of Germany (Becht & Boehmer, 2003), such a depth of information is inevitable to assess the influence of family investors throughout the shareholder structure and legal bodies of listed firms, while solely considering voting shares would be insufficient. 1 A significant share of a family' s capital is tied-up in the family business, which is why families often have poorly diversified portfolios (Anderson & Reeb, 2003). For this reason, family shareholders have an inherent interest in affecting firm policies and control managers (Anderson & Reeb, 2004).

Families as blockholders
The legal and institutional framework of a country has major effects on its ownership structures (Becht & Boehmer, 2003;Djankov et al., 2008 (Ampenberger, 2010). Hence, the corporate governance system of firms may profit from family blockholders by reducing agency conflicts between managers and shareholders through advanced monitoring.
At the same time, the prominent influence of family members in the firm may hamper firm value due to costs arising from agency conflicts between the majority shareholder (e.g. the family blockholder) and other minority shareholders that may fear expropriation (

Corporate governance and stock market returns
Shareholders' direct influence on corporate decisions is limited in Germany. Unlike in Switzerland, the UK or US, the German stock corporation law prescribes a two-tier board corporate governance framework prescribing an executive and a supervisory board. The shareholders' meeting may not issue instructions to the executive board and can only appoint limited positions in the supervisory board, as due to the German concept of co-determination, some members of this board may be appointed by employees (Gorton & Schmid, 2000). The executive board is indirectly appointed by the supervisory board.
Hence, to safeguard their assets, family shareholders are commonly engaged in the legal bodies of their firms (Andres, 2008). Studies in Germany, for example, find that members of the shareholding founding families are present in more than two thirds of executive boards and more than one third of supervisory boards (Ampenberger, 2010; Achleitner et al., 2019). The means of engagement of shareholding family members may thus vary from voting as a shareholder during the annual stockholders'/general meeting to monitoring the firm as a supervisory board-member or to actively participating in the executive board of a company. With regard to these means, family involvement is expected to serve as a proxy for the particular corporate governance framework in German family firms.
Differences in accounting-, operational-and market 2 performance between family firms and non-family firms are found to be related to family management-involvement, although family involvement is often captured via the imprecise application of a dummy variable for the management participation of family members (i.a. Mazzi Following this literature review, the pivotal research objective of this paper is the notion that with regards to differences in market performance of family and non-family firms, the real-world influence of family shareholders and members on the firms' corporate governance has generally been under-researched. This is particularly the case in a less investor-friendly corporate governance system (like in Germany) where shareholders cannot exercise direct control over top executives (like in the US). Especially blockholder-specific incentive structures and monitoring abilities are assumed to explain differences in stock market performances. This factor is disregarded in the few existing studies that access the stock market returns of family firms primarily via ownership definitions. In their influential publication, Gompers et al. (2003) showed that stock market performance in general may be explained by differences in corporate governance of firms over a longer span of time. Subsequent articles such as by Bebchuk  The approach used in this study has two key elements: 1) It avoids dichotomous distinctions between non-family firms and family firms while allowing for a diverse assessment of family influence, and 2) it does not rely on companies' self-assessment of databases (e.g., the F-PEC scale), which may be imprecise or out of date. The dataset provides for uniquely fine-graded information on the corporate governance influence of families. While this paper considers such a depth of information inevitable against the backdrop of the German corporate governance system, to the best of the authors' knowledge, no such dataset on German listed firms exists, as the collection of this data is extremely time-consuming.
To begin, for each year in the observation period, company-specific information on each shareholder (with >5% of voting rights), the background of each member of the board of directors ("Vorstand"), as well as the supervisory board ("Aufsichtsrat"), is hand-collected from the yearly financial statements, information provided by the firm (e.g., web site, press releases), and the data provider Dafne. The general methodology of the paper then follows Gompers et al. (2003) in their construction of a governance index (G-index) to investigate the empirical relationship with stock market performance 4 . For each firm, one point is added for a characteristic of the family governance influence (maximum index score of 12), which keeps the index transparent, straightforward, and effortlessly replicable. A detailed list of index components and definitions is in Table 1. Note: This table reports the construction of the family index used to identify the firms attributed to the family portfolios. Company-specific information on each shareholder (>5% of voting rights), and the background of each representative in the executive board and supervisory board in each year is hand-collected from yearly financial statements, information provided by a firm (e.g. web site, press releases), and the data provider Dafne. One point is added for each characteristic of family governance influence that the firm meets (maximum index score of 12).
As the G-Index by Gompers et al. (2003), the family firm-index in this study consists of partial indices which are based on: 1) Ownership, 2) Management participation (via Executive Board), 3) Control (via the Supervisory Board), and 4) Founding Family Presence. These partial indices account for particularities of the German Corporate Governance System. The Ownership Index takes into account, for example, the fact that the German Stock Corporation Act (Aktiengesetz/AktG) stipulates that decisions such as the dismissal of a Supervisory Board member (Section 103 AktG) require a majority of more 4 In their popular study, Gompers et al. (2003) built a "Governance Index/G-Index" to assess the level of shareholder rights. The G-index is the sum of one scalar for the presence of each out of 24 governance rules and used as a proxy for the correlation of corporate governance on the one hand and performance on the other hand. 5 The use of portfolios to estimate differences among family/non-family firms and portfolio excess returns has been used before (e.g., Cella, 2009

Model
The empirical methodology uses the annual index scoring of the firms to model two separate portfolios 5 The study employs a four-factor model (Fama & French, 1993;Carhart, 1997)

Family influence and portfolio buy-and-hold returns
The companies in the sample are sorted into three portfolios based on their year-specific value in the family influence index. Table 2 lists the quantity of firms in portfolios. Table 3 gives summary statistics for the family influence index and its four subindices 1) Ownership, 2) Management participation (via Executive Board), 3) Control (via the Supervisory Board), and 4) Founding Family Presence over time.
Summary statistics find that, on average, 75.3% of firms in the sample exhibit a degree of family influence (index score ≥1, see Table 2). This finding confirms other research contributions that demonstrate that the share of family firms among publicly listed companies is relatively high com-

Ownership Index
This reasoning is also true for long-term performance differences between family and non-family firms, assuming that corporate governance in general, but the ability and motivation of specific shareholders to directly influence corporate policy, in particular, play a role but are not directly reflected in stock prices (Gompers et al., 2003;Bebchuk et al., 2009). As differences in long-term realized returns may be propelled by different risk factors or market sentiment, the study uses a four-factor model to examine the long-term cross section of stock returns on a risk-adjusted basis. Specifically, this model controls for different exposures to systematic risk (market risk premium), as well as company size (size factor), value characteristics (return on a book-to-market factor), and market sentiment (momentum factor). Analogous to Gompers et al. (2003), it is assumed that if the family firm portfolio differs significantly from the non-family firm-portfolio in these factors, long-lasting return drifts can be attributed, at least in part, to specific risk characteristics of family firms and non-family firms. Then again, once the study controls for specific risk and market characteristics, differences in long-term performance can to some extent be attributed to differences in governance characteristics. Table 4 presents the results on the four-factor model estimation. The returns are generally driven by the relative market portfolio performance, as well as by size. Regarding abnormal returns, the estimations for family portfolios and non-family portfolios exhibit significantly positive excess returns (columns (2)-(3)). A zero-investment strategy long on family firms and short on non-family firms continues to yield a 0.50% positive abnormal return that is significant at the 10% level (column (4)). This equals an annualized excess return of 6.00%.

Stock return regression
To control for any impact of small-cap firms, the study next re-estimates the four-factor model with value-weighted portfolios (Eugster & Isakov, 2019). As column 7 (Table 4) shows, the results for alpha report a 0.04% positive abnormal monthly return that is significant at the 1% level going long the family firm-portfolio and short the non-family firm-portfolio. Hence, the four-factor models widely confirm the return performances suggested   Non-Family-Risk-free Family-Risk-free Family-Non-family by the descriptive statistics. Portfolios with a significant corporate governance influence of families yield annualized excess returns between 0.48% (value-weighted) and 6.00% (equally-weighted).

Discussion
The model's results are consistent with those of other authors who find that 1) ownership structure and concentration influence stock market returns (Cella, 2009), and 2) family ownership is associated with higher stock returns (see Eugster & Isakov, 2019;Cella, 2009). The estimated annualized abnormal return (equally-weighted) is even higher than the excess return of 3.6% found by Cella (2009)  , who discover higher abnormal returns for acquisitions of family firms than for private equity firms. This suggests that market participants regard family business investors as more capable of managing and controlling acquired firms.
The findings further suggest that stock market return differences between family firms and 7 The study also ran four-factor models long on family portfolios with only a medium family influence on corporate governance (index value >1 and <7), and short on non-family portfolios. Neither the equally nor value-weighted model specifications revealed any significant excess returns (results available upon request).
non-family firms are due to perceptions of the differences in corporate governance systems between the two portfolios. The construction of the family portfolio containing firms with a minimum index score of 7 implies a severe degree of family influence throughout the firm's corporate governance bodies, as proscribed by German law 7 . Hence, the paper assumes that the market will view this high level of influence as beneficial for corporate governance.
Shareholding families are often poorly diversified (Anderson & Reeb, 2003b), since they are long-term-oriented in their shareholder positions (Anderson & Reeb, 2003a), as well as reputation-sensitive (Anderson et al., 2003;Tong, 2008). They are thus strongly incentivized to monitor corporate policies and performance. Given families' superior firm knowledge (founding families or founders are found to be present in 50% of the family firms), as well as their regulation-driven presence on executive and supervisory boards (in the case of Germany), the corporate governance system of these firms is assumed to be highly effective.

CONCLUSION
The purpose of this study is to explore the relationship between the influence of family shareholders on the corporate governance system of the firms they are invested in and stock market returns. In an environment of low shareholder protection, like in Germany, more concentrated ownership structures follow the increasing effectiveness of large shareholders in mitigating agency conflicts. However, blockholders vary in their effectiveness, and capital markets react differently depending on shareholder type. Employing listed German corporations and a replicable index of family influence on corporate governance in these firms, the results of the study show that portfolios with family firms generate significant abnormal returns in comparison to portfolios with non-family firms (annualized abnormal return: 0.48%-6.00%). In conclusion, the results show that, due to their monitoring incentives and long-term orientation, family blockholders are highly successful in reducing agency problems, while offering superior firm knowledge. Under German corporate law, corporate control must be carried out in various governance bodies. Families are often present in these bodies, thereby creating a significant family-shaped form of corporate governance. The paper suggests that the specific family-characterized governance systems of firms in family portfolios are beneficial for the monitoring and controlling of these firms. Regarding practical implications, these findings suggest that the engagement of family investors may serve as a signal to smaller investors, for whom the ex-ante analysis and ex-post monitoring of investments is relatively costly. Doing so, family blockholders may help to reduce information asymmetries for minority investors or single stockholders (e.g., for individual retirement provisions), since the wealth of family investors is largely tied up in the firm and they are strongly incentivized to exercise monitoring and control. Note: This table presents the median of selective financial figures of firms in the portfolios with no-family influence, intermediate-and high family influence, as well as the results of the test statistics on the medians of firms in the non-family vs. family portfolio (Wilcoxon rank test). ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively.