Measuring the impact of financial cycles on family firms: how to prepare for crisis?

Financial cycles have sizeable economic effects, as witnessed during the 2008 financial crisis. However, despite the topic’s research importance, there is limited literature on how financial cycles and financial crises affect individual family firms. To the best of our knowledge, our study is among the first to measure the impact of financial cycles and crises on family firms. To study the impact of financial cycles on family firms, we use the Amadeus database on European companies. We identify family firms following the Global Family Business Index methodology 2019 (EY and the Center for Family Business of the University of St. Gallen). To measure the impact of financial cycles, we use the credit-to-GDP gap indicator from the Bank for International Settlements. Using the credit-to-GDP gap as a proxy for financial cycles, we use panel structural vector autoregression (Abrigo and Love 2016), Wald tests of Granger causality (Granger 1969), and impulse response functions (Lütkepohl 2010; Lütkepohl et al. 2015). We prove that family firms are less vulnerable than non-family firms to financial cycles during both financial booms and busts. Family firms perform better when financial cycle shocks have a less pronounced impact on firms’ performance. Non-family firms are highly vulnerable to financial cycles, performing worse during both booms and busts. The adoption of family firm management and governance policies should improve non-family firms’ performance and help the economy recover rapidly in times of crisis (exogenous shocks). Our study is the first to explore the impact of financial cycles on the micro level with a focus on family firms. The results could help managers and practitioners better form their business policy by looking at family firms’ experiences. Targeting economic policy more towards family firms in good and bad times will allow policymakers to prepare for future economic crises.