Abstract
Family businesses are a common organisational form worldwide. Issues such as forms of family business governance, reasons for adopting this specific form of governance, and the governance efficiency of family businesses have attracted extensive attention from economics researchers. After reviewing relevant studies, we find that Western scholars focus primarily on the governance efficiency of family businesses, and offer insufficient empirical evidence explaining the reasons for adopting various forms of governance. By contrast, Chinese scholars have conducted extensive research on listed and unlisted family businesses in China, presenting multi-perspective studies of the economic consequences of family governance for listed companies. Building on the basic ideas of property economics, we develop a theoretical framework for analysing family governance and use it to explore the possible influence of uniquely Chinese institutional variables on family business governance. The results can serve as a reference for future research on Chinese family businesses.
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* This project is supported by the Program for New Century Excellent Talents in University (No. NCET-12-0899), the NSFC (No. 71372041; 71572100), the MOE Project of Key Research Institute of Humanities and Social Science in University (No. 13JJD790019), and the MOE Project of Humanities and Social Science (No. 13YJA790057).
1 Zengquan Li, PhD, School of Accounting, Institute of Accounting and Finance, Shanghai University of Finance and Economics, 200433, Shanghai, China; email: zqli@mail.shufe.edu.cn. Guoliang Zhou, PhD, School of Accounting, Institute of Accounting and Finance, Shanghai University of Finance and Economics, 200433, Shanghai, China; email: glzhou211@mail.shufe.edu.cn. Corresponding author: Feng Guan, PhD, Lixin Accounting Research Institute, Shanghai Lixin University of Commerce, 201620, Shanghai, China; email: jesseguan@163.com. Junxia Liu, Hang Seng Management College, Hong Kong; email: julialiu@hsmc.edu.hk.
CLC codes: C91, F2, F830.91
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Appendix
Appendix
1. Summary of Prior Research
Studies | Definition of family business | Theoretical basis | Main findings |
---|---|---|---|
I: Definition of family business | |||
Anderson and Reeb, 2003 | Founding families hold shares in the firm. | Agency theory (agency problem between family shareholders and outside managers). | Family firms perform better than non-family firms. |
Ali et al., 2007 | Founding family members hold positions in top management or on the board, or are among the firm’s largest shareholders. | Agency theory (agency problem between family and outside shareholders). | To reduce the Type II agency problem, family-controlled firms report better quality earnings, are more likely to give a warning for a given magnitude of bad news, but make fewer disclosures about their corporate governance practices. |
Smith and Amoako-Adu, 1999 | Family members hold the largest voting block, which is at least 10% of the total votes, and the president and/or CEO is a family member. | Agency theory (agency problem between family and outside shareholders). | The stock market reacts negatively to the appointment of family member successors, because of their lack of management experience and established reputation. |
Gomez-Mejia et al., 2003 | Two or more directors have a family relationship and family members own or control at least 5% of the voting shares. | Agency theory (agency problem between family shareholders and outside managers). | Family-member CEOs receive lower total income than outsider CEOs. Their pay tends to be more insulated from firm-specific business risk. The presence of institutional investors plays important moderating roles in these relationships. |
II: Efficiency of family governance | |||
Morck et al., 1988 | A member of the founding family is among the top two officers. | Agency theory (agency problem between shareholders and managers). | Older family firms exhibit a lower market value than non-family firms. |
Villalonga and Amit, 2006 | Founding family members hold positions in top management or on the board, or are among the firm’s largest shareholders. | Agency theory (agency problem between family and non-family shareholders). | Family ownership creates value only when the founder serves as CEO or as Chairman with a hired CEO. When descendants serve as CEOs, firm value is destroyed. |
Pérez-González, 2006 | The incoming CEO is related by blood or marriage to the departing CEO, to the founder, or to a large shareholder. | Resource endowment theory (managerial competence of family members). | Using a sample of CEO successions in publicly traded US firms, the study finds that firms that appoint family CEOs underperform in terms of accounting and market performance relative to firms that promote unrelated CEOs. Lower performance is prominent in firms that appoint family CEOs who have not attended high-quality undergraduate institutions. |
Bennedsen et al., 2007 | The incoming and the departing CEOs are related by blood or marriage. | Resource endowment theory (managerial competence of family members). | Using a sample of 5,334 CEO successions in Danish limited liability firms, the study shows significant declines in firm performance around family CEO appointments: operating profitability on assets falls by at least four percentage points around CEO transitions. |
Bertrand and Schoar, 2006 | Concentration of family ownership and control; and often key management positions among family members. | Cultural view (low efficiency of family culture). | The cross-country evidence links stronger family ties to worse economic outcomes and to organisational structures that are tilted towards smaller firms, less employment of professional managers, and less reliance on external finance. |
Fan et al., 2011 | Entrepreneurial firms that are founder-managed before succession. | Resource endowment theory (reputation and networks of founders). | Using a sample of 231 chairman successions in HK, Singapore, and Taiwan, the study finds that firms’ unsigned discretionary accruals are lower while their timely loss recognition is higher than pre-succession levels, indicating significant increases in accounting information quality. |
Bertrand et al., 2008 | Descendants of the founder hold shares in the firm. | Agency theory (agency problem between descendants of the founder, and between family and non-family shareholders). | Using a sample of 93 of the largest business families in Thailand, the study finds that the greater the number of descendants of a founder, the lower the firm-level performance. This effect is due to conflicts of interest between descendants, which creates a “race to the bottom” in tunnelling resources out of the group firms. |
Anderson and Reeb, 2004 | Founding families hold shares in the firm. | Agency theory (agency problem between family and outside shareholders). | Family firms with relatively few independent directors performed significantly worse than non-family firms. The most valuable public firms are those in which independent directors balance family board representation. |
Anderson et al., 2009 | Founders or heirs hold shares in the firm. | Agency theory (agency problem between shareholders and managers, and between controlling and outside minority shareholders). | In large, publicly traded US companies, both founder- and heir-controlled firms are significantly more opaque than diffuse shareholder firms, and exhibit a negative relation to performance, because controlling shareholders exploit opacity to extract private benefits at the expense of minority investors. The results suggest that Type II agency problems have a greater impact on firm performance than Type I. |
Bertrand et al., 2002 | Founding family-controlled firms. | Agency theory (agency problem between controlling and outside minority shareholders). | Using data on Indian pyramid-structured business groups, the study finds that owners of business groups expropriate minority shareholders by tunnelling resources from firms where they have low cash flow rights to firms where they have high cash flow rights. |
Claessens et al., 2002 | Study on business groups and no specific definition of family business. | Agency theory (agency problem between controlling and outside minority shareholders). | Using data for 1,301 publicly traded corporations in eight East Asian economies, the study finds that firm value falls when the control rights of the controlling shareholder exceed his cash-flow ownership. |
Bae et al., 2002 | Study on Korean business groups and no specific definition of family business. | Agency theory (agency problem between controlling and outside minority shareholders). | When a firm belonging to a Korean business group makes an acquisition, its stock price normally falls. This evidence supports the tunnelling hypothesis. |
Baek et al., 2006 | Study on Korean business groups and no specific definition of family business. | Agency theory (agency problem between controlling and outside minority shareholders). | Equity-linked private securities offerings are used as a mechanism for tunnelling among firms that belong to Korean business groups. The issuers set the offering prices to benefit their controlling shareholders. This evidence is consistent with tunnelling within business groups. |
Joh, 2003 | Study on Korean business groups and no specific definition of family business. | Agency theory (agency problem between controlling and outside minority shareholders). | Firms with a high disparity between control rights and ownership rights show low profitability. The negative effects of control-ownership disparity and internal capital market inefficiency are stronger in publicly traded firms than in privately held ones. |
Johnson et al., 1985 | Founder is among the senior corporate executives (mainly CEO). | Resource endowment theory (authority of founders). | The common stock price reacts to unexpected deaths of senior corporate executives. The size and direction of the price adjustments are associated with the executive’s status as a corporate founder, with measures of the executive’s “talents”, and of the transaction costs related to renegotiating or terminating the employment agreement. |
Morck et al., 2000 | Descendants of the founder hold shares in the firm. | Agency theory (agency problem between controlling and outside minority shareholders). | Heir-controlled firms are associated with lower accounting performance, lower human capital investment, and lower R&D spending than other comparable firms. |
III: Causes of family governance | |||
Burkart et al., 2003 | Founder-owned and -managed firm. | Agency theory (agency problem between controlling and outside minority shareholders). | The theoretical model of succession shows that the founder’s decision to hire a professional manager or leave management to his heir depends on the degree of legal protection enjoyed by outside minority shareholders. As the level of legal protection increases, the founder is more likely to hire professional managers, and vice versa. |
Bhattacharya and Ravikumar, 2001 | Theoretical model and no specific definition of family business. | Agency theory (agency problem between family and outside shareholders). | Families tend to bequeath the family business to the next generation in an economy with a less developed capital market. |
Morck and Yeung, 2004 | Founder- and founder family-controlled firms. | Agency theory (agency problem between family shareholders and managers). | Corporate groups controlled by families are associated with political rent seeking and absence of trust. |
IV: Chinese family business research | |||
Su and Zhu, 2003 | The ultimate controlling shareholder is a person or a family. | Agency theory (agency problem between shareholders and managers). | The separation of control rights from cash flow rights has a negative effect on firm value. The percentage of family members on the board of directors is positively associated with firm value in the early stages of firm life, while the effect is negative in the developed stage. |
Wang and Zhou, 2006 | The ultimate controlling shareholder is a family. | Agency theory (agency problem between shareholders and managers, and between controlling and outside minority shareholders). | The Type I agency problem is found in founding family businesses while the Type II agency problem is more severe in non-founding family businesses. Firm value declines as divergence between control rights and cash flow rights increases. |
He et al., 2011 | The ultimate controlling shareholder is a person or a family. | Agency theory (agency problem between family members). | The study examines the relationship between internal structure and performance in family firms. An inverted U-shaped relationship between power concentration and performance is found. |
He and Lian, 2009 | The ultimate controlling shareholder is a person or a family. | Agency theory (agency problem between family shareholders and managers, and between family members). | The relationship between family authority and firm value is found to be non-linear, and firm value decreases at very low and high levels of family authority. Concentrated family ownership enhances value creation while concentrated family management negatively affects firm performance. |
Zhao et al., 2008 | The ultimate controlling shareholder is a person or a family. | Agency theory (agency problem between controlling and outside shareholders). | The study examines the impact of the quantity and quality of independent directors on firm value. Independent directors play a significant role in family firm governance. Their industry expertise, academic background, government connections, management experience, and international background enhance firm value while their educational background, banking work experience, accountant/lawyer qualifications, employment history, social prestige, age, and sex have no significant impact on firm value. The results support the need for a minimum percentage requirement of independent directors, but do not support the requirement of directors’ accounting expertise. |
Zheng, 2007 | No specific definition of family business. | Agency theory (agency problem between controlling and outside shareholders). | Increasing a family firm’s debt-to-asset ratio increases its market value and growth, which is consistent with the notion that creditor monitoring improves the efficiency of family business governance and thus reduces the agency problems between family and minority shareholders. |
Chen and Li, 2008 | The ultimate controlling shareholder is a person or a family. | Agency theory (agency problem between family and outside shareholders). | The level of market development affects the relationships between family ownership concentration, risk preference, and firm value. |
Feng et al., 2011 | A person or a family ultimately controls at least 10% of the total votes. | Agency theory (agency problem between controlling and outside shareholders). | Separation of family control rights and cash flow rights leads to Type II agency problems and improving governance efficiency mitigates these problems. An inverted U-shaped relationship between family ownership and firm value is found (i.e. firm value declines as family ownership increases and divergence between control rights and cash flow rights decreases), which is consistent with the entrenchment effect rather than the incentive effect. |
He et al., 2008 | Non-listed family businesses in Guangdong province. | Agency theory (agency problem between family members). | No direct relationship exists between professional manager shareholding and the quality of family business decision-making in China. Furthermore, professional manager shareholding may result in family member-perceived unfairness, thereby reducing the decision-making commitment of family members, ultimately undermining the quality of family business decision-making. Constructing a pan-family to build a basis of trust before allocating reasonable shares to professional managers is an ideal approach in the current Chinese environment. |
Zhuo and Zhang, 2004 | No specific definition of family business. | Agency theory (agency problem between shareholders and managers). | Based on the effect of legal environment and characteristics of business assets on the Type I agency cost, the study explores the factors that influence a family firm’s decision to hire professional managers. It shows that large-scale family firms tend to hire a professional manager. |
Han et al., 2005 | Business founder is a person or a family. | Agency theory (agency problem between shareholders and managers). | Based on a survey of 17 family firms in Zhejiang Province, the study finds that founders generally consider their children the best successors while a strong trust relationship between non-family managers and founders is crucial for professional managers’ success. |
Liu et al., 2006 | Descendant-man aged firms. | Resource endowment theory (managerial competence of descendants). | Using exploratory factor analysis and confirmatory factor analysis, the study develops a competency model for family firm successors, which consists of 8 factors (i.e. organisational commitment, integrity, decision-making, learning and communication, self-awareness and innovation, relationship management, scientific management, and professional strategies). Among them, the commitment and integrity factors are significantly associated with family firm succession performance. |
Wang and Liu, 2007 | Descendant-man aged firms. | Agency theory (agency problem between managers and family members). | Of the two dimensions of top management team cohesion, social cohesion has a stronger predictive power for the family business succession performance than task cohesion, in terms of objective and subjective succession performance measures. Task cohesion significantly affects subjective succession performance while its influence on objective succession performance is relatively weak. In the context of strong collectivist cultures in China, it is most important to ensure harmony, psychological compatibility, and smooth transition of power within top management team for the success of succession in family businesses. |
Dou and Jia, 2008 | Family members hold over 50% (absolute control) of voting shares in a firm and at least one family member participates in firm management. | Resource endowment theory (proprietary knowledge transfer in succession). | From the individual entrepreneur level, family business succession includes transfer of three major elements (tacit knowledge, connections, and entrepreneurship). Entrepreneurs and successors, as well as successors in different stages of the succession process, differ in their emphasis on the three elements. |
Dou et al., 2009 | Family members hold over 50% (absolute control) of voting shares in a firm and at least two family members participate in firm management. | Resource endowment theory (proprietary knowledge transfer in succession). | Investigating the effect of family characteristics on the success of entrepreneurial tacit knowledge succession, the study finds that family intimacy plays an important role in tacit knowledge transfer. |
2. Worldwide Governance Indicators (Source: World Bank 2014 database)
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Li, Z., Zhou, G., Guan, F. et al. Family Business Governance: An Economics Interpretation and Research Implications in China. China Account Financ Rev 18, 6 (2016). https://doi.org/10.7603/s40570-016-0006-5
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DOI: https://doi.org/10.7603/s40570-016-0006-5