Financial Strategies and Family Firm Performance: Evidence from Japan

This paper examines whether the financial strategies of family firms in Japan differ from those of non-family firms, and whether financial strategies affect the relationship between family involvement and firm performance. Based on a dataset of 3,559 firms and 65,608 firm-year observations, our results show that Japanese family firms tend to issue more debt, pay lower dividends, and hold more cash than their non-family counterparts. These differences are largely driven by firms that are managed by a founder or an heir CEO. With regard to the effect of financial strategies on performance, we find that issuing more debt leads to inferior family firm performance in comparison with non-family firms, but that holding more cash results in superior performance for family firms. While paying higher dividends does not impact family firms’ profitability, it helps them achieve higher market value. These results are also primarily ascribed to firms run by a founder or heir CEO. We also find that the above effects are generally more pronounced for smaller firms and firms with a weak family legacy.