India Strategy To Be Part of the Family or Not : Morgan Stanley Research,

First, the Famous B C Forbes quote: “A young financial
writer once brought ridicule upon himself by stating that
a certain company had nothing to commend it except
excellent earnings. Well, there are companies whose
earnings are excellent but whose stocks I would never
recommend. In selecting investments, I attach prime
importance to the men behind them. I’d rather buy brains
and character than earnings. Earnings can be good one
year and poor the next. But, if you put your money into
securities run by men combining conspicuous brains
and unimpeachable character, the likelihood is that the
financial results will prove satisfactory”.

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Investors appear to have a certain bias about ownership
and its implication on stock returns. The widely held
view is that respect for minority shareholders is more
likely in a professionally managed company than in a
family-owned one. The rewards for governance (being
fair to the minority) far outweigh the gains from a poor
use of cash from the company’s operations as an
example of poor governance. After all, the market is
paying multiple times profits in market capitalization. To
that extent, and given the long-term horizon that families
tend to have about business, this bias is questionable.
How does the evidence stack up? We looked at the
returns from the top 100 stocks by market cap over 10
and 5 years classified by their ownership categories
(government-owned, family-owned, multi-national
subsidiary and professional) based on the shareholding
at the starting point of the two periods. The data show
that investor bias is not wrong – stocks of professional
managed companies outperformed those owned by
families. However, as usual, averages hide the details.
For instance, seven of the best performing 10 stocks in
the last five years are family-owned. The performance
of stocks where families own more than 40% is better
than the rest. The crucial takeaway is the dispersion of
returns in the stocks of family-owned companies. The
data prove the case for careful evaluation rather than
unambiguous predisposition.