Family-controlled firm and performance

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losing control of their firms, which impede them to seize the opportunity for growth and development.

As discussed above, different owner identities display varying financial logic inherently.

However, until now, so-call “family effect” in these researches mixes up family firms’

financial logic, governance, and other contingencies. In order to shed light on the differences in performance and innovativeness between family and non-family firms, we need to separate family effect from different types of control structure. Our focus on Taiwan business groups gives us the advantage to identify different types of ultimate controllers and control structure, by which we can distinguish the sources of firm performance and innovativeness between family and non-family firms.

1.1 F

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Family firms as the most common type of organization around the world still dominant the world economy (Claessens, Djankov, & Lang, 2000; Faccio & Lang, 2002; La Porta, Lopez-de-Silanes, & Shleifer, 1999). For example, among listed Western European firms, the percentage of family firms is around 44% (Faccio & Lang, 2002) and more than half of listed firms In East Asia are controlled by families (Claessens et al., 2000). Even in the United States, the representative of the competitive managerial capitalism described by Chandler, there is one third of S&P 500 and Fortune 500 firms owned by families (Anderson & Reeb, 2003). Since the separation between ownership and control rights are common among family firms worldwide, the presence of large family firms can attribute to the exercise of control-enhancing mechanisms (Morck & Yeung, 2003; Villalonga &

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Amit, 2006). Through a variety of control-enhancing mechanisms, families can control a firm without making a commensurate capital investment (Claessens et al., 2000;

Villalonga & Amit, 2010); this allows family firms to go public to raise fund from the capital market.

Nevertheless, the separation between ownership and control can lead to so-called principal-principal agency problems (Claessens, Djankov, Fan, & Lang, 2002; Morck, Wolfenzon, & Yeung, 2005; Villalonga & Amit, 2006). Different from traditional agency problems, this kind of agency problems stem from the conflict of interest between family and non-family shareholders. High separation between ownership and control gives family shareholders the incentives to pursue private benefits at the expense of outside shareholders and then impair firm value. Principal-principal agency problems are ubiquitous (La Porta et al., 1999). Although the consequences of which varies with different regimes of minority shareholder protection (e.g. Claessens, Fan, & Lang, 2006;

Maury, 2006; Amit & Villalonga, 2006), Villalonga and Amit (2009) still find that, even in the United States, control-enhancing mechanisms which may cause the conflict between family and non-family shareholders are also prevailing among family firms.

Therefore, for the inclination to maintain control or pursue private benefit at the cost of firms’ profitability (Gomez-Mejia, Haynes, Nunez-Nickel, Jacobson, & Moyano-Fuentes, 2007; Morck & Yeung, 2003), family firms are supposed to perform worse than non-family firms. Gomez-Mejia, Nunez-Nickel, and Gutierrez (2001) demonstrate that family owners can’t effectively monitor their CEOs when there are family ties between them. Schulze, Lubatkin, Dino, and Buchholtz (2001) also exhibit that, without agency

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control mechanism, nepotism and noneconomic preferences in family firms will cause serious agency problem which harm firm value.

On the other hand, families still have incentives to maximize firm value since firm welfare are associated with family’s wealth (Anderson & Reeb, 2003) and reputation (Bertrand & Schoar, 2006). In addition, their lengthy tenure confer them longer investment horizon which can help avoid managerial myopia. From this perspective, family will, by contrast, promote firm value. Empirical evidences from most large or listed family firms show that they perform better, at least, not worse than non-family firms (e.g. Anderson and Reeb, 2003; Corstjens, Peyer, & Van der Heyden, 2006; Maury, 2006; Sraer and Thesmar, 2007).

To address the controversial issue discussed above, Villalonga and Amit (2009) further investigate the effect of different types of control-enhancing mechanisms on firm value.

Similarly, Maury (2006) try to scrutinize family effect by separating active family control, in which the family members are involve in management or policy-making in the enterprise, from passive family control. Villalonga and Amit (2009) find that only dual-class stock and disproportionate board representation negatively impact firm value.

Based on the data from 13 Western European countries , Maury (2006) exhibit that family control not only mitigates conflict of interest between owner and manager but also raises principal-principal agency problems. Accordingly, whether or not family control is beneficial depends on different types of control. (Dyer, 2006; Villalonga & Amit, 2009).

However, Maury (2006) also shows that family firms with higher level of divergence between control rights and ownership have lower market value in non-financial industries,

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but the financial industries exhibit the opposite result. His finding implies that the influence of the possible connection between environmental fit and family control may be significant. Therefore, our research question is when and how do different ways for family to control a firm affect group affiliated firms’ value?

Dyer (2006) argues that the obscure mechanism between family control and firm performance can be disentangled when the family effect or preference per se is isolated from firm governance and other common variables affecting firm performance. Since families’ wealth is strongly and directly linked to their firms’ welfare, family owners are potentially more risk-averse than well-diversified shareholders. Nevertheless, family controlled firms are still advantageous in certain industries. Villalonga and Amit (2010) argue that families “are more likely to retain control when doing so gives the firm a competitive advantage.” They further demonstrate that family firms are prevalent in industries where efficient scale is small, with less skilled employees, and lower risk (e.g.

profit volatility). Gallo et al. (2000) also describes similar differences. Since certain industries are more attractive for families to initial an enterprise (Dyer, 2006), industry effect can be used as a proxy for family preference or financial logic and the difference in preference between family and non-family firms can be imputed to the interaction between family effect and industry.