The Attractiveness of Investments in Listed German Family Firms: Reality or Deception Caused by Indexes Applying Backtest Data?

Abstract

Taking the example of Germany, this article analyzes whether listed family firms are an asset class on their own with attractive diversification properties. Family firms have become increasingly popular since the most recent financial crisis because they are assumed to do business in a more honorable manner and with a longer-term perspective. Family firm research has collected some theoretical and empirical evidence substantiating that family firms could indeed behave differently compared with their non-family peers, thus supporting the expectation of attractive diversification properties. The empirical analysis applies available family firm stock indexes for an inexpensive quick check. At first sight, the results for the longest time series seem to support the premise that family firm shares indeed do have favorable diversification properties. However, they seem to have disappeared in the more recent time frame. The reason for this is unclear, as the practice of index providers to lengthen the time series of their indexes with simulated past performance based on the launch date portfolio might have also affected the results (survivorship bias), thus demonstrating the potential pitfalls of a quick check. Nevertheless, the findings of family firm research indicate that it could be worthwhile to go beyond this quick check. Recommendations as to how to advance the analysis of investments in listed family firms to the next level are provided.