The link between household and firm finance: family firms, family networks, and family resource constraints

We examine how negative liquidity shocks to households propagate to the firms they own. Our main tool for identification is a tax-driven shock to the household’s personal liquidity that is independent of the firm and of the household’s income and preexisting liquidity. We find that higher wealth tax payments on the personal home of a private firm’s controlling shareholders are associated with higher payments from the firm to the shareholder and with lower cash holdings, investments, sales, and performance in the firm. A one percentage-point increase in the shareholder’s wealth-tax-to-liquidity ratio is on average followed by a half percentage-point increase in the firm’s dividends-to-earnings ratio, a one-third percentage-point decrease in investment, and a half percentage-point decrease in sales growth and profitability. These findings suggest that even strictly personal liquidity shocks to shareholders have causal effects on firm behavior. We find the strongest effects when small and medium-sized firms are controlled by shareholders with relatively low wealth. This result suggests the negative spillover from shareholder illiquidity to firm behavior might be mitigated by increasing the wealth-tax payment threshold rather than excluding corporate assets from the tax base. In a separate study, we find that the difference between the mean return on assets of all Norwegian family firms and nonfamily firms is 1.4 percentage points and positive every year over twenty years. This profitability premium increases when the controlling family holds a higher equity stake, has less owners, and participates more actively in the firm’s governance. The premium also increases when the family has less personal wealth, less diversified wealth, and less liquid shares. This evidence suggests that family firms have unique governance advantages and financial disadvantages. Both increase the profitability premium, and both depend on personal characteristics of the controlling family. In a follow-up study we examine the impact of the COVID-19 shock on the universe of family firms in Norway and compare it to the effect on nonfamily firms. We find that the COVID- 19 crisis led to sharp drops in revenues concentrated in industries such as tourism, but it was also a growth opportunity in other industries such as retail. In terms of employment, we find that firms were significantly more likely to furlough rather than fire their employees. Furloughs, decreased working hours and especially firings are less likely for family than for nonfamily firms.

In recent years, there has been a growing literature at the intersection of corporate finance and household finance. Better and larger datasets have allowed researchers to address important questions about financial constraints, firm growth and entrepreneurial talent (Hurst and Lusardi 2004, Hvide and Møen 2010, Schmalz, Sraer and Thesmar, 2017). This literature has provided new evidence on the returns to entrepreneurship, financial constraints facing startups, and the factors that influence entrepreneurial success. In this project, we aim to contribute to this new and growing literature. We will focus on the interface between the personal and the corporate sphere. We plan to examine two main research questions: 1. How are personal liquidity shocks transmitted to the firm level? 2. How important are a family’s financial and human resources for the success of the family firm?