Circuito CMA

Family ownership is increasingly prevalent in emerging markets around the world (La Porta et al., 1999). The existence of such big percentage of share-ownership and rights on hand of such majority shareholders may lead to the exacerbate and extend the traditional conflict between principals and agents to more complicated and severe conflict between majority (controlling) and minority shareholders (Silva & Majluf, 2008). In particular, the ability of expropriating minority shareholders’ wealth depends on the national governance quality that those firms are embedded in i.e., the strength of minority investors indices and the rule of law enforcement levels. It is worthy to note that, emerging markets are generally characterised by weak legal protection and absent of external governance forces i.e., market for corporate control. This in turns make the situation much worse than in developed countries.

In fact, prior literature suggests that family control has two-main controversial effects on firm performance in general i.e., negative and/or positive. However, most of prior related literature states that family control can have several important beneficial advantages and implications on firm performance supporting the agency theoretical arguments on ownership concentration- performance relationship. For example, Aguilera & Jackson, (2003) argue that, families as a controlling shareholders in corporations will have the highest incentives to increase their firm performance as they will gain much benefits from doing so. Beside financial benefits, families will gain other intangible important benefits such as reputation, and other competitive sustainable advantages.

Huang et al., (2015, p. 108) stated that “family control affects firm value through capital investment, debt financing, M&A activities, and governance structure”. Accordingly, most of the empirical literature regarding family firm’s performance document superior family firm’s financial performance compared to other counterparts. For example; Anderson & Reeb, (2003) examine the influence of family ownership on corporate financial performance using US firms data. Their results indicate that family business outperform the non-family business in the US capital market. However, they highlighted the potential cost of family ownership in corporations, which centred about the potential profit exchange with private benefits. Also, Miralles-Marcelo et al., (2013)

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examined the stock performance of the Portuguese family firms. The results indicate that family business outperform non-family business.

Martínez et al., (2007) argue that family business is better in aligning business objectives between owner and manager –as usually being the same person or have kin relationship− that non- family business which may justifies the performance “superiority” of family business. However, they argue that such kind of business may suffer from weak governance system or have lower level of professionalism. Similarly, Erbetta et al., (2013) examined family ownership effect on firm’s financial performance measured by Data Envelopment Analysis (DEA). Interestingly, they report that family business outperforms the non-family counterpart in Italia. Furthermore, they argue that family business has lower systematic efficiency in overuse labour and capital in investments which in terms impose benefits and justifies higher levels of financial performance and efficiency.

Shyu, (2011) utilize a Taiwanese panel data of five years to examine the influence of family ownership on corporate financial performance measured by both accounting and market value measures. The results indicate positive significant relationship. Also, they argue that firm performance increases as family ownership increase to max of 30% only, then it falls suggesting an inverted U-shaped relationship. Moreover, Walker et al., (2013) report a superior financial performance to family firms compared to other non-family firms in the Canadian capital market. Additionally, they argue that the existence of family ownership may help in reducing and solving the traditional agency conflict between managers and owners by presenting a unique leadership style. However, they showed that corporate financial performance decreases when a family descendant acting as CEO rather than the founder himself.

Other scholars such as Burkart, Panunzi, & Shleifer, (2003) have argue that sometimes and in some cases, family extensive control over corporations has perceived as undesirable. Family founder and their heir managers can spoil other shareholders’ wealth by taking private benefits investment decisions. Additionally, Fama & Jensen, (1983) noted that combining ownership and control will allow shareholders to extract private benefits. This view has been supported by different scholars9. Furthermore, there is much debate in corporate finance literature that families as a controlling shareholders usually tie executive managerial positions to same family members,

9_{Demsetz (1983) argue that in some cases the controlling blockholders may choose nonfinancial consumptions, and}

thus, draw scarce resources away from profitable investment projects. In a similar vein, Byun et al. (2011) stated that the divergence between cash flow rights and voting rights provides controlling blockholders (families) with opportunistically advantages to retain control in managerial decisions, especially in emerging markets where the external market for corporate control and the rule of law is weak.

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which in terms may question the capabilities of those candidates compared to highly skilled talents in other non-family business, this may reduce the competitive advantage of these firms in the market (Anderson & Reeb, 2003).

Given the above-presented empirical and theoretical discussion, family ownership as a majority shareholders (blockholders) variable could be an endogenous variable from econometrics’ point view, as family member-owner may have more internal information than any other minority shareholder (Shyu, 2011). In other words, the presence of family control may signal positive prospects for the firm and enable easier decision-making regarding company holdings. Thus, the willingness of a family to exercise control over a firm may be affected by firm performance itself. Accordingly, most of the prior empirical studies which fail to address the endogeneity issues that inherent in the relationship between family ownership and firm performance may plague with statistical bias.

Furthermore, it should be noted that in most of the MENA emerging markets i.e., Jordan and UAE, most of the publicly listed firms are controlled by their founders, or the founder’s family and heirs. Even the financial institutions including (banks) are dominated by families and/or individual investors. Thus, it could be argued that due to the lack of regulatory environment and weak investors' protection shield, families as a majority (controlling) shareholders keep control the firm's resources and may use it for their private benefits in these capital markets, which implies that expropriating minority shareholder’s wealth may exist in these capital markets, and hence, firm performance of such listed firms may be harmfully affected (la Porta et al., 2002). This research is the first to examine the relationship between family ownership and firm performance in the Jordanian and the UAE’s nonfinancial listed firms, while simultaneously controlling the issue of endogeneity by applying the dynamic system GMM. According to the aforementioned theoretical and empirical discussion, the below hypothesis is formulated pretending that:

𝐇𝐲𝐩𝐨𝐭𝐡𝐞𝐬𝐢𝐬𝟏: There is a negative relationship between family ownership and firm performance.