ESG factors and performance in small and mid-caps

Asset Management - 2/14/2017

Jamil Jaballah, Assistant Professor of Finance at Grenoble Ecole de Management, shares with us his research project, which involves an empirical study of corporate behaviour, focusing on small to mid-sized capitalisations. The idea is to understand which factors affect the performance of these companies, both financially (profitability and market valuation) and in terms of corporate social responsibility (Environment, Social and Governance – ESG considerations).

One of the reasons that lead us to believe that small or mid cap companies are different from their larger counterparts is their governance structure.
This structure often includes the presence of the founder or his/her descendants in the role of partner or director (Adams, Almeida, and Ferreira, 2005, and Fahlenbrach, 2009).

We argue that the presence of a family in the capital structure, or at the very least within the governance set up, ensures a long-term vision and a heightened propensity for durable engagement, which can have positive upshots for the company’s business.

To develop innovative
environmental strategies requires short-term efforts, but will be beneficial in the
long run.

For example, the heightened level of engagement shown by the directors or shareholders could enable small and mid-cap companies to implement innovative human resources strategies – for instance, providing their employees with a form of insurance in the event of a slowdown or a business failure – in turn increasing their level of involvement and creativity (Sraer and Thesmar, 2007).

Furthermore, a long-term horizon could help these companies develop innovative environmental strategies that require short-term efforts, but will be beneficial in the long run (Benabou and Tirole, 2010).

Long-term vision

The project therefore aims at understanding which of the features - specific to small and mid-caps - drive the long-term vision and the engagement needed to implement high-performance strategies, both from a financial and an extra-financial perspective. To limit the scope of the study, we have concentrated our research on French small and mid-caps.

The study’s main constraint is the availability of extra-financial performance (see methodology). This data was used to ascertain whether the rate of return (on assets and equity), the market valuation (relative to the size of assets), and the degree of social responsibility of a company, have any correlation with a number of variables: the fact that the founder or one of his/ her descendants hold a sizeable share of the capital, the fact that the CEO is the founder (or a descendant), the importance of employee shareholding, the presence of institutional investors etc.

We have defined family-owned businesses as companies where the founding family, or a single family, own more than 20% of the stock (Sraer and Thesmar, 2007). Our database therefore includes 163 family-owned and 78 non-family owned companies. 52% of family-owned businesses are still managed by the founder, and 25% by a descendant. Interestingly, the return
on equity (ROE) seems higher for companies that are family-owned. These
companies also appear to be smaller and older that their non-family owned

Stronger extra-financial performance

First, family-owned companies, when still owned by their founder or descendant, appear to perform better financially. This result is valid in several cases: whether the economic performance is measured based on the Return on Assets (ROA) or the ROE. Furthermore, the volatility of daily stock market returns seems to be lower for family-owned companies still managed by their founder or descendants.

Stock markets have factored in the ability
of family-owned businesses to outperform.

Second, it seems that stock markets have factored in the ability of family-owned businesses to outperform. Nevertheless, the stock market value of family-owned companies managed by a descendant appears to be lower, despite delivering a better Return on Equity than non-family owned businesses.

Furthermore, and consistent with our assumption on the impact of long-term
commitment, if a larger share of the capital is held by employee shareholders,
companies seem to deliver strong returns on equity and lower stock market volatility. However, stock market valuations do not appear to reflect these superior returns.

Finally, if a company is controlled by a family and if it is chaired by the founder or by one of his/her descendants, it tends to deliver stronger extra-financial performance. This also holds true for companies that have a larger proportion of employee shareholders, or a larger number of employees on the Board of Directors.  

It seems that companies enjoying a long-term perspective – as a result of being family-owned or because employees own a significant share of their capital – deliver stronger performances, both financial and extra-financial.



To have access to a wide-ranging database covering small and mid-caps, we obtained data from Ethifinance which covers 241 small and mid-caps over a period ranging from 2009 to 2013.
74% of these companies feature in the CAC Mid&Small index.
The accounting data was sourced from the Infinancials Database. The FactSet database provides details on capital ownership and institutional shareholders. Information on the identity of directors and the percentage of stock held by the founding families was gathered manually.