By Adam Minson, SIPA '08
On March 3, 2008, Yupana Wiwattanakantang presented the results of a fascinating study of family firm performance in Japan. Wiwattanakantang, an Associate Professor at Hitotsubashi University coauthored the study with Vikas Mehrotra, Randall Morck, and Jungwook Shim. The study surpasses a simple comparison of family and non-family firm performance, examining the differences between firms owned and controlled by founders, blood relatives, adopted relatives, and outsiders. It points to the role of unique succession practices in Japan, where families may adopt adult males or marry their daughters to selected men in order to secure a capable heir. Family firms dominate private enterprise in many parts of the world, according to Professor Wiwattanakantang. This is especially true outside of the US and UK. Yet, by now, many people have dispensed with the idea that business acumen and intelligence are hereditary. Accordingly, family businesses should likely fail when they pass from a visionary founder to an "idiot son." On the other hand, family control may solve an agency problem of non-family businesses: managers from within the family may better attend to the family’s interests than outside managers, however talented. Still, the empirical evidence shows that heir-managed firms underperform their non-family counterparts. It would seem that the "idiot son" is a real problem.
Professor Wiwattanakantang and her coauthors argue that Japanese family firms may not face the "idiot son" problem, and this may explain why so many family firms endure there. A tradition of Japanese succession allows for families to adopt or marry their daughter to a talented man in order to secure a capable male heir. The adoption strategy has become less popular than the marriage strategy since the Second World War, yet both strategies continue, and theoretically offer family firms a way around the "idiot son."
The authors’ hypothesize that the option to adopt or marry a capable heir makes the family firm more meritocratic. First, family firms are not bound to choose between keeping the firm in the family or recruiting a more talented non-family manager. They can actually recruit the more talented manager into the family, aligning his interests with their own. Second, because blood heirs are no longer guaranteed to succeed the father, this gives them incentives to develop the talents and business know-how to make themselves fit managers.
Indeed, the empirical results of the study, based on a sample of 1,356 Japanese firms that went public between 1950 and 1969, confirms that non-blood heirs—adopted or married sons—outperform blood heirs as managers of Japanese family firms. Performance is measured by annual Return on Assets and the Tobin Q-ratio (ROA is defined as the ratio of operating income to book assets. The Q-ratio is defined as the market value of equity plus book value of all other liabilities divided by the book value of assets) from 1962-2000. On that basis, the authors argue that the Japanese succession tradition can explain why Japan’s family firms outperform non-family firms, the opposite of what is found in other advanced economies.