Family Ownership Helps Cope with Political Uncertainty
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Family Ownership Helps Cope with Political Uncertainty

IN A STUDY ON FAMILY BUSINESSES, AMORE AND MINICHILLI EXPLAIN WHY THESE TYPES OF COMPANIES ARE BETTER EQUIPPED

The nexus between uncertainty and firms’ investment policies has been discussed at length in literature. Uncertainty is considered detrimental for investments because it increases the benefit of delaying irreversible decisions. Are there exceptions to this rule? Does family ownership  shape the relationship between uncertainty and investments? This is the question that Mario Daniele Amore and Alessandro Minichilli addressed in “Local political uncertainty, family control, and investment behavior,” recently published in the Journal of Financial and Quantitative Analysis. Policy uncertainty is shaped by the electoral cycle: it spikes at every new election and tends to recede once the winning party clarifies and implements its policies. “Most of the literature so far has been concerned with national elections. We focused on regional elections instead because local politics can be a much more important arena for small and medium-sized enterprises,” Mario Amore says. “We found out that political uncertainty leads to declining investment, but also that family control neutralizes this effect.”

The family firms  better-equipped to invest during uncertain times are the ones that are highly reliant on public demand and/or are managed by family members. Why does this help deal with uncertainty? “First: family-centric firms are less sensitive to uncertainty because their owners are more adept at establishing connections with the political system. Having access to information and being better positioned to deal with the political system enables them to navigate through uncertainty. Second: family firms usually invest for the long term which may even exceed the lifespan of the current owners. This attitude makes them less sensitive to temporary uncertainty, and it translates into significantly greater profitability and growth once the uncertainty is over.”

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by Claudio Todesco

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