Family business risk-taking and financial performance: Is it easier said than done?
Introduction
Risk-taking in family firms has been debated by researchers for years (Gentry, Dibrell, & Kim, 2016). Literature has found that family firms are conservative and risk-averse compared with their non-family counterparts (Carney, Van Essen, Gedajlovic, & Heugens, 2015; Zahra, 2005). Higher risks are associated with higher returns, which is referred to as risk-return trade-off (Bonilla, Sepulveda, & Carvajal, 2010). Hence, family firms are expected to have lower risk and, thus, lower returns than non-family firms. However, family firms risk aversion level and its relationship to key performance indicators also have shown contradictory results compared with non-family firms (Kempers, Leitterstorf, & Kammerlander, 2019; Naldi, Nordqvist, Sjöberg, & Wiklund, 2007; Zahra, 2018).
Although different assumptions explain these contradictory results, several questions remain. In a recent review of his seminal article on risk-taking in 2005, Zahra calls for “…deeper and more carefully constructed empirical analyses…, relating actors and context in ways that clarify … [risk-taking] genesis, evolution, manifestations, and consequences across organizational levels and time” (Zahra, 2018, p. 225). In addition, Kempers et al.’s (2019) review on heterogeneity in family firms’ risk-taking, discuss how risk-taking behaviors of family firms should be understood in context. Therefore, future studies are needed to analyze contradictory theoretical perspectives and evidence on risk-taking in diverse environments. This study aims to explain these contradictory results by identifying the differences between family firms’ risk-taking orientation (RTO) and entrepreneurial risk-taking (ERT) of their entrepreneurial activities and the relationship of both factors with financial performance. This study also explores the impact of family firms’ business environment on those relationships (Wright, Chrisman, Chua, & Steier, 2014) to explain the differences between RTO and ERT.
This study has three contributions to the literature. First, we theoretically analyze whether family firms should be expected to be more or less risk-averse and the reasons of such a condition. Based on agency theory and socioemotional wealth (SEW), our results clarify the theoretical perspectives and their conflicting results on family firms’ risk-taking disposition and risk-taking activities. Our results confirm that family firms’ RTO has a nonlinear relationship with financial performance, thus partly explaining the contradictory results mentioned above. Furthermore, even though we suggested a nonlinear relationship between ERT and performance, our results show that ERT only positively affects family firms’ financial performance.
Second, our study differs from prior work as we directly study private companies based on data collected by the Successful Transgenerational Entrepreneurship Practices (STEP) Project for Family Enterprising (STEP Project for Family Enterprising, 2015). Most published works on family firms rely on data of publicly traded companies controlled by families and individuals in developed countries (Amit & Villalonga, 2009; Amit, Ding, Villalonga, & Hua, 2010). Thus, mainstream research on family business performance relies on samples with bifurcated ownership structure of family owners and private investors.
Third, this study considers moderating effects of the environment as explanatory variables, suggesting that family firms’ disposition toward risk is not unidimensional, linear, and isolated from the environment. Our results show that contextual factors, particularly the industry, market, and country’s institutional development, and innovativeness, affect the relationship between RTO and family firms’ financial performance, further explaining the nonlinear relationship found.
In the following sections, we review the literature on family firms’ risk-taking and present the differences between RTO and ERT and their relationship to financial performance. Based on these discussions, we formulate our hypotheses on the former relationships and on the environmental factors influencing them. Then, we present our methods and results, followed by discussion, limitations and implications for future research and conclusions.
Section snippets
Risk-taking in family firms
As mentioned above, family businesses are often perceived as risk-averse (Carney et al., 2015; Kempers et al., 2019; Zahra, 2005). From an agency theory we know that family firms have centralized decision-making, are concerned about losing control of the business and are reluctant to invest in new ventures or to undertake entrepreneurial activities (Schulze, Lubatkin, Dino, & Buchholtz, 2001; Schulze, Lubatkin, & Dino, 2003; Zahra, 2005). In other words, owner–managers can prevent family
Data and methodology
This section is divided into three parts that present description of the sample and procedure used in this study, the measurements used, and our model, respectively.
Results
Table 4 shows the descriptive statistics and correlations in the perceived financial performance variables and control variables. On average, respondents’ perceptions about companies’ current ROE and ROA (3.61 and 3.54 years, respectively) were higher than those of their competitors over the last 3 years (2011–2013). Regarding family involvement in management, a family member is the CEO in 40 % of family firms and CEO–chairperson in 14 %. On average, respondents represent 2.5 generations in the
Discussion
This paper aims to determine the differences between family firms’ RTO and ERT and their relationship with performance to reconcile the contradictory evidence of previous studies on risk-taking (Zahra, 2005, 2018). In addition, we study the effects of contextual factors at the industry/market and country levels on the RTO–performance and ERT–performance relationships.
Regarding RTO, we found a nonlinear relationship between RTO and performance. This finding indicates that agency arguments
Author statement
Ana Cristina González L.: Conceptualization; Writing - Original Draft; Writing - Review & Editing.
Yeny E. Rodríguez: Conceptualization; Writing - Original Draft; Methodology; Software; Formal analysis; Writing - Review & Editing.
Juan M. Gómez: Methodology; Formal analysis; Software; Writing - Review & Editing.
Helmuth Chávez: Conceptualization; Writing - Original Draft.
Jaly Chea: Resources.
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