Restructuring in Family Firms: A Tale of the Two Crises

This chapter focuses on how family-controlled firms respond to economic and financial crises. Because of their longer investment horizons, families are a category of controlling blockholder whose decisions potentially differ from those of other blockholders. We use both crisis and non-crisis periods to test the behaviour of family firms in booms and busts, exploiting two exogenous shocks (the dotcom bubble and the 2001 terrorist attacks (2001-2003) and the credit and sovereign debt crisis of 2008-2010), in order to examine the response of family firms to crisis compared to non-family firms. Findings show that family firms generally outperform non-family firms, with differences in performance between the two groups during economic crises. Concerning investment decisions, family firms tend to invest less and are more prone to downsize during economic crises. Our evidence suggests that family firms adjust their investment decisions to changes in the investment opportunity set quicker than non-family firms. However, this could be a signal of the problems faced by small and closely held firms in obtaining outside financing during periods of crises. Overall, our results stress the necessity of broader access to outside capital for small and medium sized firms in Europe, in particular through the establishment of a small-cap corporate bond market.