Authors: Ramanathan Geeta; Krishna Prasanna
Addresses: Department of Management Studies, Indian Institute of Technology Madras, Chennai 600036, India ' Department of Management Studies, Indian Institute of Technology Madras, Chennai 600036, India
Abstract: This paper examines the role and impact of family ownership upon the idiosyncratic risk of Indian firms. The recent global financial crisis was primarily attributed to excessive risk taking, which raises pertinent questions on the effectiveness of firm-level risk management practices. As per the alignment theory, family firms with higher concentration of ownership would be able to mitigate excessive market risks during economic drifts and cycles. The impact of family/outside ownership on the risk-taking behaviour of firms has been examined using market-based risk measures. Utilising a sample of 404 firms with yearly data for 9 years from 2004 to 2013, 3,636 firm-year observations have been analysed using the panel data model. The results of this analysis confirm that family-controlled firms are associated with higher risks, especially with greater idiosyncratic risk. This finding holds true even after the data are segregated into pre-crisis and crisis-affected periods. An instrumental variable approach was adopted to control for endogeneity, which also supports and substantiates the results.
Keywords: corporate governance; family firms; financial crisis; firm performance; idiosyncratic risk; risk behaviour; family ownership; family business; India; risk taking; risk management; alignment theory; market risks.
International Journal of Corporate Governance, 2016 Vol.7 No.4, pp.325 - 352
Accepted: 17 Nov 2016
Published online: 17 Feb 2017 *