Founding Family Heritage, Social Background and Risk Taking by Family Firms

This paper analyzes the relation between founding family’s heritage, social background and total firm risk using a sample of Indian firms from 2001 to 2015. We show that family firms have lower equity, cash flow and earnings volatility. This is particularly true of firms managed by older business families. There is some evidence that firms managed by family CEOs belonging to a business community are riskier. We document a non-monotonic relation between total firm risk and family ownership. We show that this is due to the non-linear relation between the extent of diversification, leverage, cash flow volatility, cash holdings and family ownership. Our results are generally robust to various tests for endogeneity, including instrumental variables regression, propensity score matching and firm fixed effects.