Family firms, share liquidity, and the effect on firm value

Abstract

The main objective of this master’s thesis is to discover how the share liquidity of family firms affects firm value. First I investigate the impact concentrated ownership has on firm performance. After that I heighten my investigation and take share liquidity into account.

The first half of this master’s thesis discusses the comparisons between the performance of family and non-family firms according to existing literature. I present the results of previous studies about family firm’s performance and how active or passive control can affect it. The investigation of stock liquidity is also based on current literature. I discuss liquidity measures and liquidity adjusted capital asset pricing model.

The second half of this master’s thesis consists of the empirical part. I use a regression analysis in which firm value is measured with Tobin’s q or the P/E-ratio. Share liquidity is measured with the Amihud liquidity measure. Finally I investigate a Finnish family firm, Lemminkäinen, and find out how the results that I get in my empirical analysis can be applied to their case.

My dataset is a panel of 108 firms listed on the Helsinki Stock Exchange from 1997 to 2008. I restrict the panel to non-financial firms only. I found that Finnish family firms are worse market performers than non-family firms. The coefficient estimate for family firms is statistically significant at the one-percent level. I also found a strong negative relationship between a family firm’s share illiquidity and firm value. The coefficient estimate for a family firm’s share illiquidity is statistically significant at the one-percent level as well. However, I did not find a statistically significant effect of a non-family firm’s share illiquidity on firm value. As a conclusion, it is evident that family firms suffer the effect of share illiquidity on firm value.