Family Ownership and Trust During a Financial Crisis

Abstract: By facilitating business transactions, generalized trust may alleviate the impact of economic downturns on firm performance. We advance this literature by studying how trust influences a firm’s reaction to a crisis depending on the ownership structure. Exploiting geographic variations in trust across Italian regions and the occurrence of the financial crisis in a difference-in-differences setting, we show that while trust alleviates the negative effect of a crisis on the profitability of non-family firms, it aggravates the negative effect for family firms. Trust is especially harmful for the profitability of firms with a high level of family representation in board positions. Studying the financing channel, we show that trust impairs the ability of family firms to access debt from suppliers in times of crisis.