The Effect of Family Control on Corporate Performance

What the paper says

generated by the corporate cash flows from operations or by the attraction of new firm shareholders, is considered as the most important source of the business continuance over the long-run. Thus, profitability, defined as the capacity to generate resources or performance, has been one of the indicators most commonly used to define the success or failure (right or wrong decision making) of company management. It allows one to evaluate the efficiency of the implemented strategy and, therefore, to assess the company's competitive position. This indicator has become a concern for shareholders, who have invested their resources in the company, and a worry for the directors (managers/executives) of the companies because this result reflects on their capacity to keep the business running. Adequate profitability both compensates shareholders for their risk taking and may finance the growth of a company through internally generated funds, which, according to Gonzalez-Perez and Correa (1998), constitutes one of the preferred funding alternatives for a firm's expansion. At the same time, profitability facilitates efficient resource allocation as investors devote their resources to more promising alternatives. That is, unless a company reaches at least its competitors' profitability level, it will find it difficult to attract new capital. The alternative of involving financial institutions in the financing of the company's growth may impose certain limitations, as lenders would require compensation in the form of higher interest rate to cover the higher risk born.47