*4.3. Robustness Test*

"The endogeneity of ownership structures of firmsbe theyfamily or non-family, post an important concern regarding the validity of the result obtained. Several authors fail to consider ownership as endogenous, and have reported a positive, negative, insignificant, nonlinear reverse relationship between ownership and firm performance. No study so far has provided evidence for the risk profile of Spanish family firms. Meanwhile, other authors have tested ownership as endogenous to obtain theconclusion of there being no significant relationship using either a panel-fixed effect or instrumental variables" (Ntoung et al. 2016a).

In this study, we argue that family ownership and control can be motivated by the lower leverage and risk aversion of family businesses as opposed to the school of thought that says thatfamily ownership and control is responsible for most family businesses adopting a more risk averse structure and the tendency to avoid high risk activities. This is indeed true because the use of less debt and lower risk strategies makes the founding family's aversion to the risk of loss of control. Also, imagine that high leverage and high risk are associated with family ownership, this will either result to bankruptcy or disintegration of the family ownership and control. As usual, every business is characterized byboth ups and downs. To see if high leverage and high risk is the sole cause of family firms changing to non-family firms or to be categorised as bankrupt, or the reason why family businesses in Spain don't attain the second and third generation, we sampled a series of bankruptcy filings of small and medium size firms in SABI from 2002 to 2014, evaluating the ratio of family to non-family companies in the sample. We selected a longer horizon time because these years represent the financial crisis of 2008–2014, as well as 2005 to 2007, and stable (2002–2004) markets in the Spanish economy. These different cycles in the economy will have a huge effect on family firm's bankruptcies, due to the high inherent risk. The sample includes 534 companies that have been declared bankrupt in SABI. We collect information over the period 2002–2014. Big and listed firms were eliminated from the list. Only small and medium size firms are considered, giving us a total 526 small and medium firms that filed for bankruptcy from 2002 to 2014. We collected data on bankruptcy date, industry, year founded, number of employees, debt level at bankruptcy, a list of large shareholders at bankruptcy, as well as information about ownership and control. The ownership and control information helped us to categorize which firm is a family firm or non-family firm.

In Ntoung et al. 2017, "according to SABI, the shareholder ultimate voting rights across these firms differs from the ultimate cash flow rights. In cases where information was available about the ownership structure of a company, we search this property directly on the company websites. Family firms in Spain were classified through the aid of the BvD independence indicator available in SABI." "The BvD independence indicator has five levels, namely "A", "B", "C", "D", and "U". According to SABI, independent indicator "A", denotes that a company independent if the shareholder must be independent by itself (i.e., no shareholder with more than 25% of ownership of ultimate voting rights), whereas independent indicator "B" is when no shareholder with more than 50% but one shareholder with voting rights between 25.1% to 50% exist. For a company to be classified with independent indicator "C", the company must have a recorded shareholder with a total or a calculated ownership of 50.1% or higher, whereas a company is classified with "D" when a recorded shareholder has direct ownership of over 50% with branches and foreign companies".

"Independent indicator "U" is applied when a company does not fall into the categories "A", "B", "C" or "D". Based on the above features and prior studies, a company with a shareholder having more than 25% is classified as a family firm while firms with no shareholder with more than 25% areclassified as widely held firms. This threshold of 25% allows shareholders to have a significant

influence on the firm. Therefore, firms categorized with "A" are widely held firms while firms in "B", "C", "D" are family firms. Our next criterion for a family firm is that an individual or a family must be the largest shareholder, and be categorized in "B", "C", and "D". The individual must be part of the founding family. If this is not the case, the controlling shareholder must have had the largest percentage of ultimate voting rights over a long time period. After building a database by classifying which firm is family or non-family firm, Figure 1 shows the filingsforbankruptcy over 2002 to 2014".

**Figure 1.** Number of Bankrupt firms over the period 2002–2014. Source: Authors' elaboration.

Analysing Figure 1 shows that family firms are less likely to file for bankruptcy in the years of difficult financial pressure and economic downturn, as opposed to the years of growth or stagnation. This is because family firms are characterised with lower debt and are less risky. The proportion of firms that filed for bankruptcy during the financial crisis 2008 to 2013 is relatively lower than those that filed in for bankruptcy during 2003–2004 for family firms. Also, the proportion of family firms that filed for bankruptcy isrelatively lower than their counterpart firms. Thus, high leverage and high risk cannot be the sole cause of family firms changing to non-family, or to be categorised as bankrupt, or the reason why family businesses in Spain don't attain the second orthird generation.Therefore, the hypothesis that family firms have lower debt and manage their operations in a less risky manner is true.

We also back up the analysis in Figure 1 by running a *t*-test. The *t*-test evaluates whether there are significant differences between family and non-family firms with respectto four variables, namely the number of employees, age of firms, debt level, andratio of amortization over cash flow.The number of employees is a proxy for company size, while age distinguishes between younger and older firms, as well as being a proxy of generational succession.The ratio of amortization and cash flow is a proxy for the risk ofbankruptcy, while debt levels show the level of debt at bankruptcy.

Table 6 shows that the ratios of family/non-family firms in the sample in each year are 0.00 for 2012, 0.29 for 2008, 0.32 for 2004, and 0.44 for 2002, and statistically significant at the 5% level.This initial observation rejects the hypothesis that high debt and high risk cause family firms to file for bankruptcy, or causes family ownership to dissolve. Family firms have lower debt and are less risky thantheir counterpart firms. The ratio of family firms filing for bankruptcy is higher for 2004 (32.2%) and 2002 (44.2%) and lower for 2014 (0.0%), 2012 (0.0%), and 2008 (29.4%). This shows that family ownership involvement, in the management or ownership ofa significant holding, in the firms reveals a unique characteristic of the firms and thus maintains a lower percentage of bankruptcy cases. Comparing thisproportion of bankruptcy cases, we conclude that family firmshave lower debts and are less risky than non-family firms.


**Table 6.** Bankrupt Firms over the period 2014–2002.

According to the difference between family and non-family with regards to number of employees, the age of firm, debt at bankruptcy, and the ratio of amortization/cash flows, our findings are significant at 5% and 10% levels. However, when evaluating the age of the firms that file for bankruptcy, it is apparent that family firms are younger on average. A potential explanation for this significant difference is that many of the firms categorized as family firms following the definition are start-ups or in their early stage in their life cycle. Such young firms are at greater risk to fail as compared to more established firms as in Table 7.


**Table 7.** Bankrupt Firms over the period 2014 to 2002.

Note: \*\*\*, \*\*, \*, significance levels1%, 5%, and 10% of the difference of family and non-family bankrupted firms. Number of employees refers to the latest number of employees available at bankruptcy date.

Younger firms tend to have founders present due to their phase in the cycle and therefore are categorized as family companies in this sample. However, these firms do not necessarily share the characteristics associated with family firms, such as long-term time horizon, succession planning considerations, and risk aversion. To eliminate this bias, we re-runa *t*-test for firms that filed for bankruptcy with the age of 10 years and above. Table 8 shows a duplicated version of Table 7, but only includes firms with an age above 10 years before declaring bankruptcy. As expected, the sample of family firms decreases in each of the years except for 2004. Specifically, in the year of financial crisis (2008–2013), the ratio of family firms filing for bankruptcy waslower than in the years of economic prosperity (2004–2007). This confirmed the fact that family businesses filing for bankruptcy is not due

to the high debt and riskiness of the business. Using this sample, we can validate our hypothesis that family firms have lower leverage and are less risky than their counterpart firms.


**Table 8.** Firms older than 10 years.
