The Ledger

When you think of a family business, your locally owned coffee shop might come to mind. And as you savor a cappuccino there every day, you might begin to feel your investment goes beyond the two dollars and tip you leave on the counter. You might begin to trust the owners as if they were family.

Does the same ring true when investors consider family-owned giants like Microsoft, Walmart and Nordstrom? In general, no, according to Shuping Chen, assistant professor of accounting. Investors tend to think that firms run by founding families are more likely to engage in activities that benefit them at the expense of public shareholders. “It’s human nature to wonder if wealthy and powerful families are looking out for number one,” Chen said.

But those assumptions are misguided, at least regarding aggressiveness in tax accounting, according Chen and her colleagues. “When we compare family-owned firms to non-family firms, we find they are actually less likely to engage in tax-saving activities,” Chen said. The study will be published in the Journal of Financial Economics.

“Tax-sheltering activities are usually opaque and very difficult to understand,” Chen said. Family owners could easily bundle-in self-serving actions with tax savings such as using tax sheltering as a cover for diverting corporate resources for personal use.

But when Chen and her colleagues examined average tax-sheltering behavior among family firms, they found that such companies who misused funds were few and far between. The reason? “Family-funded firms are cognizant that investors might question their motives for tax- sheltering activity, resulting in downward pressure on stock prices,” Chen said. Consequently, family owners view tax savings as less financially beneficial than avoiding the chance that stock prices would drop due to negative investor perceptions.

“Our conclusion is that family-owned firms act with the best interest of the firm in mind, rather than in finding a short-term way of extracting funds from shareholders,” she asserts.