Professionalization of Family Business and Performance Effect

Abstract

This study seeks to understand the governance of post–initial public offering (IPO) family firms and its impact on performance. Using an analysis of a balanced panel data set of 205 publicly listed firms in Taiwan spanning 10 years (2,050 firm-years), we found that extensive family control has a negative impact on the post-IPO performance and that nonfamily block shareholders may divest their stockholdings in these firms to protect their investments. To sustain equity support from their block shareholders, post-IPO family firms should combine the use of family control with professional management in their corporate governance structure.

Keywords

family controlled professionalization post-IPO performance corporate governance

Introduction

Family business is an important issue in management literature (Craig & Salvato, 2012; Sharma, 2004; Zahra & Sharma, 2004), with many studies examining the link between family control and corporate governance (e.g., Carney, 2005; Dyer, 2006; Morck & Yeung, 2003). According to Steier, Chrisman, and Chua (2004), family ownership has a large impact on firm performance, and family owners play a significant role in determining how their firms perform throughout the organizational lifecycle (Nelson, 2003). However, the dynamics of this relationship may change when family firms undertake initial public offerings (IPOs) to grow their business, resulting in a governance challenge during the post-IPO stage.

From the perspective of the corporate governance lifecycle (Filatotchev, Toms, & Wright, 2006), when a family firm succeeds in listing its equity in a public market (IPO), it will come under immense pressure to maintain growth. Specifically, the interests of the controlling family are not aligned with the interests of the outside shareholders during the post-IPO stage (Backman, 1999; Chang & Hong, 2000; Faccio, Lang, & Young, 2001; Khanna & Rivkin, 2001), thereby negatively affecting the resource commitments of the outside shareholders to the firm and hindering firm development and growth (Daily & Dalton, 1992; Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). To surmount this obstacle, the family firm will be forced to engage in a process of professionalization (Dyer, 1989; Zahra & Filatotchev, 2004), whereby the founding family renders its management rights to nonfamily managers (Chua, Chrisman, & Sharma, 2003; Daily & Dalton 1992; Sharma, Chrisman, & Chua, 1997).

Despite such pressures to professionalize, a significant number of publicly listed firms in emerging markets are still managed by their founding families (Martínez, Stöhr, & Quiroga, 2007; Schulze, Lubatkin, Dino, & Buchholtz, 2001; Stewart & Hitt, 2012). One reason for this might be that, unlike advanced markets, emerging markets tend to have underdeveloped and weak legal and judicial institutions to provide investor protection (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1997; Li, 2005; Peng, 2003, 2004). Without effective legal institutions, the professionalization of family businesses by ceding management control to outsiders will increase the firms’ exposure to agency problems (Jensen & Meckling, 1976). Therefore, most founding families in emerging economies prefer to retain management control to safeguard their investments, even during the post-IPO stage (Claessens, Djankov, & Lang, 2000; Dharwadkar, George, & Brandes, 2000). In light of the specific institutions in the emerging economies and also the particular firm governance challenges during the post-IPO stage, the question of under what circumstances family owners will cede their control to nonfamily managers remains unresolved. More important, the impacts of these corporate governance changes on firm performance have not yet been explored.

Grounded in the context of the emerging economies, this study seeks to examine the professionalization of family firms and the related performance impact during the post-IPO stage (Demers & Joos, 2007; Gulati & Higgins, 2003; Jain & Kini, 1994). Specifically, drawing on the perspective of the corporate governance lifecycle (Filatotchev et al., 2006), we argue that in order to be effective, corporate governance practices should coevolve with a firm’s strategic needs as it matures. Our analysis contributes to the existing research in the following ways. First, previous studies have developed a conceptual model to demonstrate how family firms make the transition to professional management in the post-IPO stage (Filatotchev et al., 2006; Gedajlovic, Lubatkin, & Schulze, 2004; Zahra & Filatotchev, 2004). The results of our empirical tests help validate these conceptual models. Second, unlike most existing studies that examine the conflictual relationship between the controlling family and the minority shareholders in publicly listed firms in the emerging economies (e.g., Young, Peng, Ahlstrom, & Bruton, 2002, Young et al., 2008), this research examines how the interactions between the controlling family and other block shareholders (i.e., nonfamily directors and institutional investors) affect firm value. Third, by integrating the literature on IPOs and corporate governance, this study helps further understanding of the challenges that family firms face during the post-IPO stage by examining the role of corporate governance mechanisms on performance outcomes (Jaskiewicz, González, Menéndez, & Schiereck, 2005; Mazzola & Marchisio, 2002). Finally, previous studies on the professionalization of family businesses were mostly carried out in the advanced Western economies (e.g., Chua et al., 2003; Ebrhardt & Nowak, 2003; Jaskiewicz et al., 2005; Stewart & Hitt, 2012), disregarding the fact that inefficient corporate governance legal institutions in the emerging economies may lead to specific problems of agency appropriation and affect professionalization decisions. To deal with the multiagency problems arising from the appropriations of controlling family and professional manager (Child & Rodrigues, 2003; Filatotchev, Zhang, & Piesse, 2011), we argue that family firms in the emerging economies will transform their governance systems into incorporated structures (Chua, Chrisman, & Sharma, 1999; Dyer, 1989), whereby family owners hold a controlling stake in the firm and management is left to a cadre of nonfamily managers.

Theoretical Background

IPO Underpricing and the Threshold for Family Business

From an organization life cycle perspective, an IPO not only represents a crucial threshold in a firm’s development, but it also creates an impetus for firms to change their corporate governance structures (Ebrhardt & Nowak, 2003). A large body of literature has attempted to explain the reasons why firms go public. For example, Ritter (1984) asserts that IPO activities are very much influenced by the macroeconomic environment. He observes that firms tend to launch IPOs in bull markets to take advantage of investor overoptimism regarding higher stock prices. Moreover, Mazzola and Marchisio (2002) argue that family firms go public because it enables them to deal more effectively with firm succession and firm professionalization. Firms that go public will have access to more financial alternatives, such as obtaining the equity that is needed to grow, thereby lowering the debt equity ratio (Ravasi & Marchisio, 2001). Given these benefits, family firms have a strong motivation to go public through IPOs.

After an IPO, family owners can still retain control over firm management (Nelson, 2003). Several studies examining the performance of family firms during their post-IPO stage find that family-controlled firms do not perform as well as their nonfamily-controlled counterparts during the post-IPO stage (Daily, Certo, Dalton, & Roengpitya, 2003; Jaskiewicz et al., 2005). They observe that investors tend to shy away from family-controlled firms because of the high levels of information asymmetry that exist between family owners and external shareholders, leading to an “underpricing” in the IPOs of these family businesses (Certo, Covin, Daily, & Dalton, 2001, Ritter & Welch, 2002). To allay the fears of potential investors, Filatotchev and Bishop (2002) recommend that family firms considering an IPO should professionalize their management structures.

Control Right Transitions for Family Business

Several corporate-governance studies have focused on the family business professionalization process that transits the governance system from family control to nonfamily management (e.g., Gedajlovic et al., 2004; Zahra & Filatotchev, 2004; Zahra, Filatotchev, & Wright, 2009). Specifically, based on the corporate governance life cycle perspective, researchers have argued that after an IPO, family firms will eventually reach a juncture when stagnation will set in, making the private resources of the founding family insufficient to support continued growth (Daily et al., 2003; Jaskiewicz et al., 2005). In addition, Zahra and Filatotchev (2004) argue that when family firms encounter such a juncture, they must create new capabilities by acquiring access to new resources that are radically different from those they already own. To revive the firms’ resource base, the controlling family should turn over management rights to professional managers (e.g., Gedajlovic et al., 2004; Zahra & Filatotchev, 2004; Zahra et al., 2009). Professional managers not only have better access to capital and labor markets but they also are much more adept in managing mature family IPO businesses in an increasingly munificent, complex, and stable environment (Dyer, 1989; Zhang & Ma, 2009).

The succession plan may also trigger family owners to professionalize management (Dyck, Mauws, Starke, & Mischke, 2002). Specifically, family owners that professionalize their firms can minimize the problems associated with intergenerational succession, that is, rivalries among heirs (Grote, 2003), as well as the self-dealing tendencies of family management that keep nonfamily members out of major corporate decisions (La Porta, Lopez-de-Silanes, & Shleifer, 1999; Schulze et al., 2001; Schulze, Lubatkin, & Dino, 2003).

Despite these benefits, founding families tend to resist the professionalization of their established firms, even during the post-IPO stage (see Chua et al., 2003; Sharma et al., 1997), one reason being that family owners, driven by “altruism,” are inclined to pass on their businesses to the next generation (Chrisman, Chua, & Litz, 2004). On the one hand, altruism can encourage behavior that minimizes the problems of managerial conservatism and strategic myopia (e.g., Li, 2009; Lien, Piesse, Strange, & Filatotchev, 2005; Schulze et al., 2001). On the other hand, altruistic actions taken by family owners to preserve control for future generation may also result in additional costs. For example, Tsang (2002) and Eddleston and Kellermanns (2007) observe that owners may limit the sharing of corporate knowledge to family members, or place family members in key positions to ensure that all strategic knowledge about the firm remains entrenched within the controlling family. The resistance of the controlling family to render firm control to nonfamily managers fundamentally conflicts with the interests of the nonfamily stakeholders (Young et al., 2008). The latter are therefore inclined to withdraw their investments (Gedajlovic et al., 2004).

Resource Dependence in the Emerging Economies

In addition to the inclinations of the controlling family, a decision by a family business to transit its governance system from family control to nonfamily control may also be determined by the firm’s need for external resources. This is because corporate governance not only functions as a mechanism to safeguard firm assets from agency appropriation, but it can also facilitate access to critical resources that are needed to remain competitive (Hillman, Cannella, & Paetzold, 2000; Hillman & Dalziel, 2003).

Essentially, a firm’s resource needs are influenced by its business environment. Firms that operate in the “relation-based” emerging economies often have to leverage on the connections of their large block shareholders to gain access to external resources (Li, 2005). Because of their resource dependence on these large block shareholders (Filatotchev, Lien, & Piesse, 2005; Peng & Jiang, 2010) and the particular resource needs of the firm during the post IPO stage (Filatotchev et al., 2006; Zahra & Filatotchev, 2004), family owners of firms in the emerging economies may be forced to adapt their corporate governance structures to satisfy the demands of such large block shareholders (Filatotchev et al., 2006, Ingram & Simons, 1995; Tolbert, 1985).

Development of the Hypotheses

Family Ownership and Control

Many publicly listed firms in the emerging economies are family owned and family controlled (e.g., Claessens et al., 2000; La Porta et al., 1999). From an agency perspective, combined ownership and management may reduce the threat of agency problems related to information asymmetries and managerial appropriations (Anderson & Reeb, 2003; Jensen & Meckling, 1976). In addition, the weak financial institutions in the emerging economies (La Porta et al., 1997; La Porta et al., 1999) magnify the significance of family ownership because the private investments of the controlling family are the key source for capital in emerging-economy firms (Ireland, Hitt, & Sirmon, 2003).

Despite the benefits of ownership concentration for the performance of emerging-economy firms (Carney & Gedajlovic, 2003; Chang, 2003; Joh, 2003; Martínez et al., 2007), several scholars have argued that this set up, in the absence of efficient governance institutions, will render the firm more susceptible to conflicts between the controlling family and the nonfamily shareholders (Morck, Yeung, & Yu, 2000; Peng & Jiang, 2010). This principal–principal conflict will become exacerbated when the family firms are listed publicly in the market (Young et al., 2008). This is because, unlike start-ups, mature firms must survive in significantly more sophisticated environments. Therefore, on reaching the mature stage of their life cycles, in order to sustain their competitiveness, firms will need to access a diverse array of resources that the founding families are unable to provide (Filatotchev et al., 2006).

To gain access to external resources (i.e., financial, human, and social capital), family firms must become more transparent to their potential nonfamily investors. However, in order to safeguard their investments, and to achieve greater governance efficiency, nonfamily investors will impose extensive discipline on the controlling family. Therefore, family firms need to become more transparent and adopt higher corporate governance standards to revive their resource bases in the post-IPO stage.

Although capital investments by the controlling family are positively associated with the performance of emerging-economy firms, contingent on the firm’s specific needs for external resources during the post-IPO stage, we propose that this positive effect will gradually diminish and then become negative as ownership concentration and family control increase. Hence, we propose the following:

Hypothesis 1: When the extent of family control in post-IPO firms in the emerging economies increases, the effect of the controlling family on firm performance will change from positive to negative (known as an inverted U-shaped effect).

Ownership by Nonfamily Board Members

The board of directors plays a central role in company governance (Dalton, Daily, Johnson, & Ellstrand, 1999; Forbes & Milliken, 1999). In the literature, board independence is essential to ensure board governance effects (Hillman et al., 2000; Hillman & Dalziel, 2003), which in turn is positively associated with firm performance (Brickley, Coles, & Terry, 1994; Xie, Davidson, & DaDalt, 2003). In addition, given that family-controlled firms are prevalent in most emerging economies, the independence of the boards of local companies should be determined by the extent to which the board members are independent from the controlling family. Under this circumstance, the presence of nonfamily directors is relevant to whether or not the board is independent (Filatotchev et al., 2005; Lefort & Urzúa, 2008).

For family firms that have reached a threshold of development in the post-IPO stage, nonfamily directors can provide access to external resources that are otherwise unavailable to the company (i.e., skills, expert advice, knowledge, and connections). More important, board members independent from the controlling family will help the family firms increase potential investor confidence in the quality of their corporate governance (Daily, Johnson, & Dalton, 1999; Hillman & Dalziel, 2003; Zahra & Pearce, 1989). Based on these arguments, we assert that nonfamily board members play a crucial role in ensuring the performance of mature family businesses in the post-IPO stage.

Effective family control of the firm can lead to skepticism about whether nonfamily directors are actually chosen by the controlling family and whether they are merely passive performers in terms of corporate governance (Luan & Tang, 2007). This is of particular concern in the relation-based environment of most emerging economies (Li, 2009). Accordingly, in this study, we define the nonfamily directors as individuals who not only serve on the board but also hold equity stakes in the firms. We argue that nonfamily board members who have a vested interest in the success of their firms will tend to more vigilant in safeguarding shareholder interests and will be more liberal in committing resources to support the firm’s continued development. Hence, we suggest the following:

Hypothesis 2: Equity held by nonfamily directors has a positive effect on the performance of post-IPO family firms in the emerging economies.

Domestic Bank Ownership

The extant literature on corporate governance highlights the role of institutional investors in promoting good corporate governance (Hoskisson, Johnson, & Moesel, 1994; Young et al., 2002). However, the corporate governance advantages associated with institutional investors are often realized through longer term investments (Kochhar & David, 1996; Tihanyi, Johnson, Hoskisson, & Hitt, 2003). Specifically, researchers have found that money market fund investors, whose investment strategy is to seek out companies that will provide the highest possible returns in the shortest amount of time, are less likely to participate in the governance activities of their investee firms. In contrast, banks, which tend to have a longer term investment horizon, not only forge close relationships with their investee firms (Shu, Yeh, & Yamada, 2002) but also actively monitor firm management. Several empirical studies have found that substantial equity holdings by banks have led to the following improvements in the governance of their invested firms: (a) more effective schemes for executive compensation (Hartzell & Starks, 2003), (b) monitoring and preventing managerial opportunism in their reported earnings (Chung, Firth, & Kim, 2002), (c) facilitating the ouster of the CEO in their invested firms, and (d) facilitating the recruitment of independent directors (Parrino, Sias, & Starks, 2003).

Claessens and Fan (2002) indicate that, in addition to the controlling family, bank affiliation is another important feature of corporate governance in the emerging economies of Asia. Unlike controlling families, banks have no controlling rights over the invested firm and thus their interests should be more aligned with the firm’s value. This alignment of interests gives banks an incentive to participate in the firm’s corporate governance. Furthermore, banks not only hold significant equity in the invested firm but they also lend it substantial capital (Shleifer & Vishny, 1997), resulting in a multidimensional governance effect. Specifically, within the relationship-based societies of the emerging economies (Hoskisson, Eden, Lau, & Wright, 2000; Peng & Heath, 1996), banks play a critical role as the structural medium between the holders of surplus capital and those in need of financial resources (La Porta et al., 1997). As banks tend to have close relationships with the borrowing firms (Kroszner & Strahan, 2001), they often feel obligated to support the firms’ strategic management. Banks therefore are passive participants in the governance of their borrowing firms (Tihanyi et al., 2003). However, because of the lack of banking fundamentals standards in credit checking in the emerging markets (Yeyati, Peria, & Schmukler, 2004), banks lack the necessary information to assume their debt when the borrowing companies violate their contracts. This effectively constrains the governance roles that banks can play in their borrowing firms in the emerging economies.

In contrast, the banks’ roles in corporate governance can be improved if the scale of their equity holdings in the invested firms is increased (Maug, 1998; Shleifer & Vishny, 1997), even if the investor-protection institutions have not yet been well established (Filatotchev et al., 2005). Specifically, if the bank’s scale of shareholding is large, it may be forced to hold the shares for a longer period of time because it will be difficult to quickly sell a huge number of shares. In this case, there is a greater incentive for banks to monitor their invested firms so that they will reap the returns on their investments. Moreover, substantial equity holdings enable the banks to hold effective voting rights in their invested firm, by sitting on the board and accordingly holding the power and information to engage in effective governance. Based on these arguments, we propose the following:

Hypothesis 3: Equity held by domestic banks has a positive effect on the performance of post-IPO family firms in the emerging economies.

Corporate Governance Challenges in the Post-IPO Stage

One of the most important challenges that family firms face when they go public is to ensure the transparency and accountability of the firm’s corporate governance (Filatotchev et al., 2006). Specifically, apart from operating under the close scrutiny of market regulators, the controlling families of firms in the post-IPO stage must also maintain a delicate balance with the interests of the firm’s nonfamily shareholders (e.g., nonfamily directors and domestic banks) with their own interests so as to sustain the equity investments of their external shareholders (Gedajlovic et al., 2004). According to the literature, the interest conflicts between family owners and nonfamily shareholders will be particularly acute as the company matures, becomes stagnant developmentally, and holds excess cash (Jensen, 1986). The distrust and potential conflicts of interest among the block shareholders will depreciate firm value and will necessitate corporate governance reform of family businesses in the post-IPO stage. Moreover, mature family-controlled firms tend to be more rigid and risk-averse, and they are less capable of renewing their resource base (Gedajlovic et al., 2004).

To surmount the development difficulties during the firm’s post-IPO stage, nonfamily stakeholders will exert more pressure to move toward professional management (Ebrhardt & Nowak, 2003; Stewart & Hitt, 2012). However, the controlling families usually resist such a transition (see Chua et al., 2003; Sharma et al., 1997). In addition, information asymmetries and ownership entrenchment may block any professionalization of the family business and exacerbate distrust and tensions. For example, in their study of family-controlled publicly listed firms in Taiwan, Tsai, Hung, Kuo, and Kuo (2006) found that long-tenured CEOs tend to have a negative effect on firm value. Similarly, Filatotchev et al. (2011) observed that the risk of private information abuse in Hong Kong is significantly higher among family-controlled publicly listed firms.

Frustrated by the remnant family control, nonfamily block shareholders (i.e., nonfamily directors and domestic banks) may respond by withdrawing their investments, which in turn will have a negative impact on firm value (Gedajlovic et al., 2004). Specifically, as noted above, ownership by independent directors can help engender the confidence of potential investors in the quality of the firms’ governance (Daily et al., 1999; Hillman & Dalziel, 2003; Zahra & Pearce, 1989). However, the withdrawal of their investments will adversely disperse potential investments and, in turn, will obstruct the firm’s access to external capital. Hence, we develop a hypothesis regarding the interaction between the controlling family and nonfamily directors during the post-IPO stage:

Hypothesis 4a: The interactions between ownership by nonfamily directors and the controlling family will have a negative effect on the performance of post-IPO family firms in the emerging economies.

Moreover, in addition to their financial investments, domestic banks also provide critical nonfinancial resources that support firm expansion (La Porta et al., 1997). In particular, most of the domestic banks in the emerging economies are affiliated with local governments (Claessens & Fan, 2002; Lee, Lee, & Lee, 2000), and such affiliations may be beneficial to their invested firms in terms of accessing network resources. For example, according to statistics released by the Central Bank of Taiwan, of the five largest domestic banks in Taiwan, three are wholly state-owned and two are partially state-owned. Therefore, through their bank shareholders, family firms may become politically connected with other state-owned firms. This will help the family firms gain access to more resources (Peng & Heath, 1996) and will solidify their network positions in the given industry (Yiu, Bruton, & Lu, 2005; Yiu, Lu, Bruton, & Hoskisson, 2007). However, the withdrawal of the bank investments will have a negative effect on these resource advantages, and this will be particularly harmful to those companies that need resources in the post-IPO stage. Based on these arguments, we suggest that the interactions between the controlling family and the domestic bank shareholders have a negative effect on the firms’ post-IPO performance:

Hypothesis 4b: The interactions between domestic bank ownership and the controlling family have a negative effect on the performance of post-IPO family firms in the emerging economies.

Professional Management and Agency Problem

In general, there are two ways a controlling family derives benefits from the firm: through appropriation of the firm’s interests for private family gains and through capital appreciation of family equity holdings when the market value of the firm increases (Johnson, Boone, Breach, & Friedman, 2000). However, these two are essentially contradictory (Jensen & Meckling, 1976) because increasing appropriations of the controlling family will diminish firm value and therefore cut family interest from capital investments. Moreover, in the post-IPO stage of family firms, appropriations by the controlling family will negatively affect the interests of potential investors and thus block the firm’s access to external resources. Without access to such resources the firm will need to surmount the critical juncture in the post-IPO stage, and these family firms will stagnate and eventually fail. This in turn will terminate all family interests pertaining to these firms.

To preserve the private interests of the controlling firm, controlling families may agree to reform the firm’s governance system to enhance governance efficiency and to restrict controlling-family appropriations. Numerous sources in the literature suggest professionalization as the corporate governance reform in the post-IPO stage, whereby the founding families render their control rights to nonfamily managers (Gedajlovic et al., 2004; Zahra & Filatotchev, 2004). According to the literature, professionalization not only facilitates the recruitment of resources in family businesses but also enhances the firms’ productivity and competitiveness (Chua, Chrisman, & Bergiel, 2009; Tsao, Chen, Lin, & Hyde, 2009), enabling the family firms to surmount the junctures in their post-IPO development. Therefore, we suggest the following:

Hypothesis 5a: The appearance of a nonfamily manager has a positive effect on the performance of post-IPO family firms in the emerging economies.

Although professionalization may help solve the principal–principal interest conflicts, it may simultaneously aggravate the principal–agent problems of corporate governance (Jensen & Meckling, 1976). There is substantial evidence in the literature to demonstrate that professional managers fail in their fiduciary duty to act in the best interests of the firm’s shareholders. For example, based on a sample of acquired companies in the United States, Ryngaert (1988) tests whether a decision by professional managers to resist a takeover is in line with the interests of the shareholders. He finds that such resistance is significantly related to a fall in the price of corporate shares. Moreover, Trillas (2001) provides evidence that the agency problem of professional management can also affect investment decisions, as the bidding company tends to pay a higher price to acquire other firms and the transaction usually turns out to be valueless for the corporate shareholders. This threat of managerial appropriation will be particularly worrisome in the case of firms in the emerging economies because the inefficient legal and judicial systems in these countries cannot provide investors with sufficient protection against agency problems (Dharwadkar et al., 2000; La Porta et al., 1997, La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1998).

With substantial equity investments, every block shareholder in an emerging-economy family firm (i.e., the controlling family, the nonfamily director, and the domestic bank) will be threatened by the agency problems associated with professional managers. These shareholders may therefore resist a governance transition and thus block the positive effects of nonfamily management on firm performance. Hence, we suggest the following:

Hypothesis 5b: Equity held by block shareholders (i.e., the controlling family, nonfamily directors, and domestic banks) negatively moderates the relationship between the appearance of a nonfamily manager and the performance of post-IPO family firms in the emerging economies.

Despite the potential agency costs regarding professional management, block shareholders will still need to implement corporate governance reforms to help family firms overcome the critical juncture in their development so as to preserve their private interests. According to the literature, the introduction of professional management to a principal–principal governance framework may result in multiple agency problems, whereby the firm’s investors are subjected to the risks of appropriations from the firm’s controlling family and professional managers (see Child & Rodrigues, 2003; Filatotchev et al., 2011). However, in practice, the coexistence of family ownership and professional management may serve to mitigate multiple agency problems by promoting mutual monitoring by the corporate agents (Arthurs, Hoskisson, Busenitz, & Johnson, 2008; Ramakrishnan & Thakor, 1991; Varian, 1990). Therefore, from the perspective of the nonfamily block shareholders (i.e., nonfamily directors and domestic banks), it may not be in their best interest for family owners to fully relinquish control of the firm, as this may have a detrimental effect on firm value (Filatotchev et al., 2005; Filatotchev, Strange, Piesse, & Lien, 2007). Instead, block shareholders might prefer that family firms professionalize their management to a moderate extent (Stewart & Hitt, 2012), incorporating the nonfamily management so as to prevent controlling family appropriations and to preserve the ownership concentration of the controlling family to guard against agency problems. As such, we expect the nonfamily block shareholders will respond favorably to governance reforms and this will enhance their willingness to make follow-up investments in the firm. Hence, we suggest the following:

Hypothesis 5c: The interactions of block shareholder ownership (i.e., nonfamily directors and domestic bank) and the combination of family ownership concentration and nonfamily management positively affect the performance of post-IPO family firms in the emerging economies.

Data and Methodology

Empirical Setting

A number of studies that test the governance effects of the controlling family on firms in the emerging economies are ground in the context of Taiwan (e.g., Filatotchev et al., 2005). In line with these studies, we used a balanced dataset of 205 publicly listed Taiwanese companies, spanning over 10 years (2000-2009), to examine the effects of corporate governance on the performance of family firms.

Taiwan was selected because it is a typical emerging economy (Filatotchev et al., 2007; Hoskisson et al., 2000) and a large proportion of the publicly listed firms in Taiwan are family-controlled (Filatotchev et al., 2005; Liu, Ahlstrom, & Yeh, 2006; Luan & Tang, 2007), representing a typical corporate governance characteristic of emerging-economy firms (Claessens et al., 2000; Johnson et al., 2000). Furthermore, after four decades of economic development since 1949 (the year that Taiwan separated from mainland China after the civil war), the majority of local companies in Taiwan have approached the time when their founders are preparing to retire, and the controlling families need to decide whether to transit firm control to the next generation or to render it to nonfamily managers. Such cases provide a unique and ideal setting to analyze our research issues. However, despite the fact that the effect of family involvement on firm performance has been widely researched in studies of family business, most studies are based on samples of small privately owned firms (e.g., Dyer, 2006; Tsao et al., 2009). With timely, accurate, and reliable information about publicly listed family firms in Taiwan, we are able to carry out more thorough analysis of the factors that influence governance decisions in family businesses and the resultant performance effects (Chen & Hsu, 2009; Tsai et al., 2006).

Data and Sample

To ensure reliability, consistency, and the comprehensiveness of our data, this study used both the firm-level database from Taiwan’s Securities and Futures Commission and the Taiwan Economic Journal (TEJ).

Taiwan’s Securities and Futures Commission, commonly known as the SFC, regulates stock markets and listed companies in Taiwan. The SFC regularly collects reports from all publicly listed companies on the Taiwan Stock Exchange to monitor their activities. Therefore, all information provided by the SFC is deemed to be reliable, timely, comprehensive, and accurate. Furthermore, the TEJ is a well-established provider of data on companies throughout Asia. Information obtained from the TEJ has been widely used in previous studies to test corporate governance effects on Taiwanese firms (e.g., Chang, Chung, & Mahmood, 2006; Liu et al., 2006).

To examine our research hypotheses regarding governance reform in mature family businesses in the post-IPO stage, we included only nonfinancial Taiwan firms that were listed for at least 5 years prior to and 10 years after 2000. Our final sample is a balanced panel data set from 2000 to 2009, equivalent to 2,050 firm-years. Our focus on the 10 post-IPO firm years will help prevent any short-term abnormal pricing of new IPO firms. This is commonly done in studies of inefficient emerging markets (see Arthurs et al., 2008; Daily et al., 2003).

Variables

As preferred in the literature, in our examinations we used Tobin’s Q as the measure of firm performance and the dependent variable. From the TEJ database, Tobin’s Q in our study is measured annually by the averaged market price of the firm divided by its net book value of assets. This is a forward-looking measure for firm performance and it is particularly robust to make comparisons among companies because it represents the present value of future cash flows divided by the replacement costs of tangible assets (Anderson & Reeb, 2003).

For the independent variables, we began by measuring the extent of family control on each firm. Unlike previous studies, which merely use family ownership to measure the extent of family control of the company (e.g., Chen & Hsu, 2009; Liu et al., 2006), this study measures the extent of “family control” by subtracting the criterion ownership level of the firm to determine effective control from the controlling family ownership. We obtained the information about family ownership and the criterion ownership level directly from the TEJ database. As revealed in the database, it is based on Cubbin and Leech (1983), which accounts for the firm’s ownership dispersion in determining the criterion ownership level of effective control. Last, we defined the governance transition of professionalization by the appearance of nonfamily management in these family firms. Accordingly, a dummy variable of nonfamily management was used to indicate whether the family business appointed a CEO with no blood ties to the controlling family. Sourced from the TEJ database, this variable was based on the annual survey of the firm’s controlling family, thereby verifying whether the CEO was related to the family.

Additional independent variables were included to control for other factors that may affect firm performance. First, the panel data for this study were based on the 10-year period from 2000 to 2009, and nine annual dummies (2001-2009) were used to control for any changes in the external business environment relative to the base year of 2000. Next, similar to previous corporate governance research (e.g., Filatotchev et al., 2005; Filatotchev & Toms, 2006; Lien et al., 2005), we constructed a number of firm-specific variables to control for annual sales, annual sales growth, the capital intensity ratio, the debt-to-assets ratio, and a dummy for the 100 major business groups in Taiwan. The annual sales variable represents revenue from firm operations, and the growth rate of corporate sales represents the percentage change in sales from the previous year. The capital intensity ratio and the debt-to-assets ratio capture firm differences in terms of operational and financial structures and also their effects on firm performance. Finally, because firms that are affiliates of a business group tend to have more resources, particularly in the context of the emerging economies (Chang, 2003), we follow Chang et al. (2006) and use the results of the survey reported in the CCIS (China Credit Information Service Ltd.) database to indicate whether any firms in our sample are part of a business group.

Estimations

Both the time-series and cross-sectional information contained in our panel data set were used in our tests to account for the performance effect of any firm-level factor since it may change over time (Geringer, Tallman, & Olsen, 2000). Greene (2000) asserts that a panel-data analysis that incorporates both time-series and cross-sectional approaches allows the researcher to account for variations across firms and over time. This approach also increases the degree of freedom in the empirical model. To conduct the panel data analysis, either a fixed-effect model or a random-effect model can be considered (Greene, 2000). The fixed-effect model assumes each observation is independent, whereas the random-effect model assumes that the observations are drawn from a normal distribution. Thus, the random-effect model is preferred when making inferences about the population using the sample’s characteristics (Verbeek, 2000). Accordingly, we adopted the random-effect model to test how various corporate governance factors interact and subsequently affect the performance of post-IPO firms in the emerging economies.

Descriptive Statistics and Correlations

Table 1 summarizes the variables and provides descriptive statistics for the 2,050 observed cases. On average, the controlling family holds corporate shares 3.2% over the criterion level of effective control (26.4% on average). In contrast, nonfamily directors hold 2.6%, and domestic banks hold 1.5%, of the firm’s equity. Moreover, 53% of the firms in our sample have made the transition to professional management.

Table 1.

Variable Definitions and Descriptive Statistics.

Variables	Min	Max	Mean	SD	Definition
Tobin’s Q	0.33	8.33	1.00	0.43	[(Beginning + Ending price)/2] divided by the book value of the firm
Year (2000-2009)	0.00	1.00	0.1	0.3	Annual dummy for 2000 to 2009; 1 = yes, 0 = no
Annual Sales	0.00	1959.18	25.08	98.07	Total revenue of the firm in a year
Annual Sales Growth	−99.29	2076.41	11.18	82.46	(Current year revenue − Last year revenue)/Last year revenue × 100%
Capital Intensity Ratio	−1.17	9.17	0.57	0.85	The logarithm of total assets divided by sales revenues
Debt-to-Assets Ratio	0.01	6.72	0.47	0.24	Total debt divided by total assets
Business Group	0.00	1.00	0.37	0.48	One of the 100 largest business groups in the CCIS survey, 1999; 1 = yes, 0 = no
Family Control Extent	0.04	51.22	3.24	1.97	Total shareholdings of the founding family minus the critical ownership level to achieve effective control of the firm
Nonfamily Director Ownership	0.00	35.57	2.61	3.58	Shareholdings of the board director not related to the founding family
Domestic Bank Ownership	0.00	32.60	1.53	3.08	Shareholdings of domestic banking institutions
Professional Manager	0.00	1.00	0.53	0.50	Corporate CEO is not a member of the controlling family; 1 = yes, 0 = no

Table 2 shows the correlation matrix for all our variables. Most of our control and explanatory variables are significantly correlated with Tobin’s Q, thus validating their explanatory effects on firm performance. These variables are included in our model.

Table 2.

Correlation Matrix.

	1	2	3	4	5	6	7	8	9	10
1. Tobin’s Q	—
2. Sales	.179**	—
3. Annual Sales Growth	.023	.032	—
4. Capital Intensity Ratio	−.018	−.182**	−.047	—
5. Debt-to-Assets Ratio	.183**	.046	.019	.210**	—
6. Business Group	.01	.113**	.032	−.090**	−.005	—
7. Extent of Family Control	.043	.148**	−.006	−.029	−.054*	.355**	—
8. Nonfamily Director Ownership	.000	−.023	.001	−.021	−.015	.006	.001	—
9. Domestic Bank Ownership	.176**	.159**	.004	−.033	.016	.189**	.083**	−.025	—
10. Professional Management	.095**	.000	.008	−.075**	.029	.229**	.028	−.006	.077**	—

Correlation is significant at the .05 level (2-tailed). **Correlation is significant at the .01 level (2-tailed).

Empirical Analysis and Results

Based on the data on family businesses in the post-IPO stage, Table 3 presents the results of our analysis on the effects of family control, ownership by nonfamily directors, and domestic banks on firm performance. In the first specification, we include only the control variables. As can be seen, all nine annual dummies show a positive effect on a firm’s Tobin’s Q relative to the base year of 2000, indicating positive economic growth in Taiwan during the period. However, the annual sales and the capital intensity ratios are significantly negative to Tobin’s Q, reflecting a stagnation in growth among family firms during the post-IPO stage. However, the debt-to-assets ratio and the business group affiliation are positively associated with the firm’s Tobin’s Q. These findings are consistent with our argument that financial and network resources are critical to sustain the growth of family firms in the emerging economies.

Table 3.

Random-Effect Model for Firm Performance during the Post-IPO Stage.

	Tobin’s Q
	Mode 1	Mode 2	Mode 3	Mode 4
Year 2001	.242*** [.032]	.172*** [.033]	.077** [.034]	.094*** [.033]
Year 2002	.292*** [.032]	.215*** [.033]	.121*** [.034]	.140*** [.034]
Year 2003	.362*** [.032]	.261*** [.034]	.179*** [.034]	.195*** [.034]
Year 2004	.387*** [.032]	.283*** [.034]	.204*** [.034]	.216*** [.034]
Year 2005	.293*** [.032]	.185*** [.034]	.109*** [.035]	.116*** [.035]
Year 2006	.465*** [.032]	.358*** [.034]	.276*** [.035]	.285*** [.035]
Year 2007	.449*** [.032]	.336*** [.034]	.250*** [.035]	.262*** [.035]
Year 2008	.246*** [.032]	.126*** [.035]	.042 [.036]	.056 [.035]
Year 2009	.576*** [.031]	.454*** [.034]	.361*** [.035]	.375*** [.035]
Annual Sales	−.003*** [.001]	−.003*** [.001]	−.003** [.001]	−.003** [.001]
Annual Sales Growth	.001 [.001]	.001 [.000]	.001 [.001]	.001 [.000]
Capital Intensity Ratio	−.032* [.017]	−.043** [.017]	−.053*** [.017]	−.047*** [.017]
Debt-to-Assets Ratio	.866*** [.043]	.795*** [.044]	.649*** [.046]	.666*** [.045]
Business Group	.287*** [.038]	.125*** [.043]	.038 [.044]	.033 [.043]
Extent of Family Control (FC)		.082*** [.010]	.123*** [.012]	.119*** [.011]
Extent of Family Control–square		−.002*** [.000]	−.001* [.000]	−0.003 [.002]
Nonfamily Director Ownership (NFO)			.053*** [.010]
Domestic Bank Ownership (DBO)				.046*** [.012]
			NFO × FC	DBO × FC
			−.013*** [.003]	−.011*** [.004]
Professional Management (PM)			.548*** [.053]	.473*** [.050]
PM × FC			−.119*** [.016]	−.109*** [.015]
			PM × NFO	PM × DBO
			−.066*** [.012]	−.041** [.016]
			PM × NFO × FC	PM × DBO × FC
			.016*** [.004]	.011*** [.004]
Lagrange multiplier	754.02***	747.57***	685.33***	620.61***

Note. GLS random-effects model for panel data analysis of 205 Taiwanese firms, 2000 to 2009. The value in brackets is the standard deviation. The Lagrange multiplier is distributed as chi-squared with one degree of freedom, exceeding the critical value and favoring the GLS random-effects model over the OLS (Greene, 2000).

p < .1. **p < .05. ***p < .01.

Specification 2 in Table 3 lists the exogenous effects of the extent of family control on a firm’s Tobin’s Q. To capture any curvilinear effect, we included a squared term of the variable. As shown in the table, the extent of family control has a significant impact on the performance of firms in the emerging economies, whereby an inverted U-shaped curve will reach a peak when ownership by the controlling family exceeds the designated criteria for the effective ownership control of firm at 20.5%. However, these positive effects will diminish when the ownership concentration of the family increases (the quadratic effect is negative). These findings provide effective support for Hypothesis 1.

Next, in Specification 3, we included the nonfamily directors’ ownership variable to test its governance and interaction effects on the controlling family and nonfamily management. As indicated in Model 3, ownership by nonfamily directors will significantly raise the firm’s Tobin’s Q, validating Hypothesis 2. Furthermore, when ownership by nonfamily directors is multiplied by controlling family ownership, their interaction has a significant, negative impact on the firm’s Tobin’s Q. This finding supports the argument in Hypothesis 4a. However, the appearance of nonfamily management has a positive impact on the performance of family business, validating the argument in Hypothesis 5a. But interactions between nonfamily management and the firm’s controlling and nonfamily directors had a negative impact on firm performance. This finding highlights the concerns of the firm’s block shareholders regarding agency appropriations by nonfamily managers (Hypothesis 5b). Last, the effects of the triple interactions reveal that the coexistence of family ownership concentration and nonfamily management will attract more investments from nonfamily directors, and this effect is positively associated with firm performance (Hypothesis 5c).

In Specification 4, we tested the domestic bank ownership variable and found that it has a positive effect on firm performance, thus validating Hypothesis 3. Furthermore, the negative coefficient of the interactions between a domestic bank and family control lend support to Hypothesis 4b. The results show that the appearance of nonfamily management enhances firm performance (Hypothesis 5a supported) and the bilateral interactions between nonfamily management and domestic banks are negatively associated with firm value (Hypothesis 5b supported). Meanwhile, the interactions of family control, domestic banks, and nonfamily management have a significant and positive impact on firm performance (Hypothesis 5c). All of these findings are statistically significant.

In addition, we plotted the interactions between the extent of family control, nonfamily director ownership, and nonfamily management in Figure 1 to derive further insights. In the figure, we show the effect of the bilateral and trilateral interaction effects of these variables on a firm’s Tobin’s Q. Similarly, in Figure 2, we put the ownership equity of the domestic bank for the investee firm in place of nonfamily director ownership and plot its interactions with the extent of family control and professional management. The plots in both figures indicate that all bilateral interactions will negate the positive effects of any ownership variable (i.e., family control, domestic bank ownership, nonfamily director ownership, and nonfamily management) on firm performance, whereas the figure on the triple interactions suggests that family firms can retain the support of their external block shareholders (i.e., nonfamily shareholders and the domestic bank) by recruiting nonfamily managers and maintaining a high concentration of family ownership.

Figure 1.

Interactive effects of the extent of family control (FC), nonfamily director ownership (NFO), and nonfamily management (NFM) on firm performance.

Figure 2.

Interactive effects of the extent of family control (FC), domestic bank shareholders’ ownership (DBO), and nonfamily management (NFM) on firm performance.

Discussion and Conclusion

Theoretical Contribution

From a corporate governance life cycle perspective (Filatotchev et al., 2006), family businesses will encounter particular corporate governance challenges during their post-IPO stage. Specifically, mature family firms require access to substantial external resources to sustain their growth trajectory (Mazzola & Marchisio, 2002). However, the threat of controlling family appropriations (Young et al., 2008) may deter the resource commitments of nonfamily shareholders and therefore obstruct the continued growth of the company. Empirically, extant studies have revealed that the shares of family IPOs tend to be underpriced (e.g., Kim, Krinsky, & Lee, 1995; Klein, 1996), because these firms lack operational transparency, resulting in a negative effect of family control on their post-IPO performance (Smith & Amoako-Adu, 1999).

For mature family firms to overcome the critical juncture in their post-IPO development, researchers have prescribed a transition in their governance system, whereby the controlling family renders its control to nonfamily managers (see Daily & Dalton, 1992; Gedajlovic et al., 2004; Zahra & Filatotchev, 2004). However, little is known about how a decision by the controlling family to “relinquish or retain control” affects firm performance during the post-IPO stage. Our examination provides empirical evidence to understand the performance effects of such a governance decision.

Based in the context of an emerging economy, we empirically examine the performance effect of corporate governance transition. According to institutional theory, the environmental institutions will not only shape the resource needs of local companies (Hoskisson et al., 2000) but will also determine the extent of their dependence on specific resources (Ingram & Simons, 1995; Tolbert, 1985). In particular, in most emerging economies, a firm’s block shareholders usually play an important role in enabling their invested firms to acquire the critical resources in the social network (Li, 2005), resulting in local companies being highly dependent on their block shareholders for resources, especially during their post-IPO stage. However, because of their inefficient market institutions, most publicly listed firms in the emerging markets will depend on their founding families to provide the required resources, resulting in a significant dependence of local companies on family resources (Filatotchev et al., 2005; Nelson, 2003). Because of the conflicts of interest between the controlling family and other block shareholders (Young et al., 2008), simultaneous dependence on the resources of block shareholders and the controlling family will present a unique challenge for firms in the emerging markets to determine their governance transition during the post-IPO stage.

Our empirical analyses reveal that a U-shape relationship exists between the extent of family control and firm performance, whereby the positive effects of family control will diminish when the concentration of family ownership is high. Furthermore, we find that equity stakes held by nonfamily directors and domestic banks have a significant and positive impact on firm performance. This indicates that block shareholders (i.e., nonfamily directors and domestic banks) play a crucial role in enhancing the value of mature family firms in the emerging economies. In addition, our findings document a strong negative association between the interactions of family owners and block shareholders, and firm performance. This finding validates the governance challenges of mature family businesses in the emerging economies, as they need to harmonize these two important but conflicts-of-interest among these resource sources (i.e., the controlling family and the block shareholders) to support the continued growth of the firm during the post-IPO stage.

To deal with the governance challenge to family businesses during the post-IPO stage, previous studies have suggested that such firms should make a transition from family control to professional management (e.g., Daily & Dalton, 1992; Gedajlovic et al., 2004; Zahra & Filatotchev, 2004). In this study, we test how nonfamily management affects the performance of mature family firms, and we ascertain the role of nonfamily management when dealing with the governance challenges during the post-IPO stage. Our test results reveal that the bilateral interactions between nonfamily management and the firms’ block shareholders (i.e., the controlling family, nonfamily director, and the domestic banks) are all negatively associated with firm value. This finding contradicts our previous arguments about the positive governance effect of professional management. In addition, considering the inefficient legal systems in the emerging economies (Dharwadkar et al., 2000; La Porta, 1997, 1998), our findings indicate that the adoption of professional management in mature family firms will create a multiple agency problem (Child & Rodrigues, 2003; Filatotchev et al., 2011) and will lead to serious threats of managerial appropriation (Jensen & Meckling, 1976). Compared with previous evidence from the S&P 500, where the positive effect of founding family ownership on the firm’s Tobin’s Q diminishes at the 31.5% ownership level (Anderson & Reeb, 2003), our results show that the effect will diminish to the 46.9% ownership level (26.4% for the criterion level of effective corporate control, plus 20.5% exceeding the shareholdings of the controlling family). This finding confirms that family resources are particularly advantageous for a firm operating in an emerging-economy institutional environment (Lien et al., 2005; Young et al., 2008).

Moreover, our results regarding the interactions among family control, nonfamily block shareholders, and nonfamily management have a positive impact on the performance of mature family firms. This finding suggests that the coexistence of nonfamily management and firm ownership concentration on the controlling family effectively retains the support of the corporate nonfamily block shareholders and thus facilitates the continued growth of the family firm during the post-IPO stage. Contradicting the previous argument targeting family businesses in advanced markets (e.g., Daily & Dalton, 1992; Gedajlovic et al., 2004; Zahra & Filatotchev, 2004), the results of our examination reveal that professionalization may not be the best way to solve governance challenges during the post-IPO stage for mature family firms in the emerging economies. Instead, it may be more effective for these family firms to reform their governance system by incorporating nonfamily management into the effective family control over the firm’s ownership structure.

Practical Implications

The findings in this article have several practical implications for investors, firms, and market regulators. First, our findings can serve as a guide to help investors identify IPO firms that may yield higher potential returns. Second, since nonfamily block shareholders may play a significant role in the development of mature firms, it is in the firms’ best interest to retain the support of these block shareholders. Specifically, a controlling family firm can minimize its contentious relationship with other block shareholders by enlisting the services of a cadre of professional managers. Finally, we found that excessive family control will exacerbate tensions between the controlling family and other block shareholders, and this in turn will hinder firm growth during the post-IPO stage. Therefore, market regulators should develop policies and measures to mitigate these frictions and to encourage publicly listed family firms to reform their governance structures.

Limitations and Future Research

This study has several limitations that suggest avenues for future research. First, our data and examinations were based on a sample of publicly listed firms, even though many family firms remain privately owned at their mature stages. Future research should incorporate these privately owned family businesses in the analysis to ascertain the pattern of their governance transition. Second, although we focus on the post-IPO period, we do not control firm characteristics before the IPO. Future research may additionally consider how the pre-IPO characteristics of the firm will impact the governance transition during the post-IPO stage. Third, we focus on a sample from Taiwan to test the governance transition of family firms in an emerging economy. Because Taiwan is relatively advanced among the emerging economies in terms of economic development, this will affect any generalization of our findings to other emerging markets. We suggest that future studies focus on the large-scale emerging markets (e.g., the BRICs) to ascertain how the economic scale of the market affects transition of the corporate-governance system of local companies. Particularly, as the institutions in the emerging economies tend to change rapidly and frequently, future studies may incorporate the institutional transition into the research framework to study how firm-level corporate governance has evolved in response to such changes in the business environment. Fourth, our study suggests that the coexistence of nonfamily management and family control may be preferred by outside block shareholders of family businesses during the post-IPO stage. However, the process of recruiting an external manager may be complicated as it will require substantial resources, efforts, and time. An interesting future research question would be to explore how a family business can complete this recruiting process and what type of professional manager (e.g., characteristics, capabilities, and experience) are more effective in minimizing the conflicts of interest between the controlling family and the outside block shareholders. Fifth, although we do not consider it here, apart from the use of professional manager, there may be other options available for the controlling family to strengthen the effectiveness of governance and to sustain the support of block shareholders. For example, the board of directors may be an effective corporate governance mechanism to reconcile the distrust and conflicts between the controlling family and the outside block shareholder. Future studies could carry out more comprehensive analyses to identify other possible solutions and examine their effectiveness in dealing with the specific governance challenges for firms at the post-IPO stage. Finally, although we have validated that the coexistence of controlling family and professional manager helps reconcile the concerns of the external block shareholders, we know little about how the controlling family and the professional manager will interact, and how this interaction ultimately will affect firm performance. A longitudinal study may be required to explore such an issue. These new topics derived from this study require the attention of both family businesses and corporate governance scholars.

Conclusion

From the perspective of the corporate governance life cycle, this study examines the governance challenge facing family firms in their post-IPO stage and determines whether the decision to professionalize helps these mature firms deal with this challenge and thus surmount the development threshold. Grounded in the setting of family firms in the emerging economies, our analyses show that excessive family control has a negative impact on a firm’s post-IPO performance because it increases the possibility of appropriation by the controlling family and the possibility that nonfamily block shareholders (i.e., nonfamily directors and domestic banks) will withdraw, both of which will be to the detriment of firm value. To regain the support of the nonfamily block shareholders, the controlling family should relinquish its control and adopt nonfamily management. Our examinations validate the effectiveness of a corporate governance reform aiming to incorporate nonfamily management into the effective family control of the ownership structure to achieve better performance in the emerging economies. Future research may look at how other contingency factors, such as the effects of institutional changes (i.e., legal or accounting) and changes in the competitive environment and internationalization, will affect the corporate governance decisions of family firms.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This research was supported by grants from the National Science Council in Taiwan (NSC-101-2420-H-002-004-MY2).

Author Biographies

Yung-Chih Lien is an associate professor of international business at National Taiwan University. He obtained his PhD in management from King’s College London. His research interests are concerned with the corporate governance effects on strategic decisions and organizational change, particularly with respect to the multinational firms from emerging economies.

Shaomin Li (PhD, Princeton University) is and eminent scholar and professor of international business at Old Dominion University and the 2008 winner of the Outstanding Faculty Award in Virginia. He is the editor of Modern China Studies. His research focuses on corporate governance, especially on the governance environment in societies undergoing rapid transformations.

References

Anderson

R. C.

Reeb

D. M.

(2003). Founding-family ownership and firm performance: Evidence from the S&P 500. Journal of Finance, 58, 1301-1328.

Arthurs

J. D.

Hoskisson

R. E.

Busenitz

L. W.

Johnson

R. A.

(2008). Managerial agents watching other agents: Multiple agency conflicts regarding underpricing in IPO firms. Academy of Management Journal, 51, 277-294.

Backman

(1999). Asian eclipse: Exposing the dark side of business in Asia. Singapore: John Wiley.

Brickley

J. A.

Coles

W. L.

Terry

R. L.

(1994). Outside directors and the adoption of poison pills. Journal of Financial Economics, 35, 371-390.

Carney

(2005). Corporate governance and competitive advantage in family-controlled firms. Entrepreneurship: Theory and Practice, 29, 249-265.

Carney

Gedajlovic

(2003). Strategic innovation and administrative heritage of East Asian family business groups. Asia Pacific Journal of Management, 20(1), 5-26.

Certo

T. S.

Covin

J. G.

Daily

C. M.

Dalton

D. R.

(2001). Wealth and the effects of founder management among IPO-stage new ventures. Strategic Management Journal, 22, 641-658.

Chang

S.-J.

(2003). Ownership structure, expropriation, and performance of group-affiliated companies in Korea. Academy of Management Journal, 46, 238-253.

Chang

S.-J.

Chung

C.-N.

Mahmood

I. P.

(2006). When and how does business group affiliation promote firm innovation? A tale of two emerging economies. Organization Science, 17, 637-656.

10.

Chang

S.-J.

Hong

(2000). Economic performance of group-affiliated companies in Korea: Intragroup-resource sharing and internal business Transactions. Academy of Management Journal, 43, 429-448.

11.

Chen

H.-L.

Hsu

W.-T.

(2009). Family ownership, board independence and R&D investment. Family Business Review, 22, 347-362.

12.

Child

Rodrigues

(2003). Corporate governance and new organizational forms: Issues of double and multiple agency. Journal of Management and Governance, 7, 337-360.

13.

Chrisman

J. H.

Chua

J. H.

Litz

R. A.

(2004). Comparing the agency costs of family and non-family firms: Conceptual issues and exploratory evidence. Entrepreneurship: Theory and Practice, 28, 335-354.

14.

Chua

J. H.

Chrisman

J. J.

Bergiel

E. B.

(2009). An agency theoretic analysis of the professionalized family firm. Entrepreneurship: Theory and Practice, 33, 355-372.

15.

Chua

J. H.

Chrisman

J. J.

Sharma

(1999). Defining the family business by behavior. Entrepreneurship: Theory and Practice, 23(4), 19-39.

16.

Chua

J. H.

Chrisman

J. J.

Sharma

(2003). Succession and nonsuccession concerns of family firms and agency relationship with nonfamily managers. Family Business Review, 16, 89-107.

17.

Chung

Firth

Kim

J. B.

(2002). Institutional monitoring and opportunistic earnings management. Journal of Corporate Finance, 8(1), 29-48.

18.

Claessens

Djankov

Lang

L. H. P.

(2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58, 81-112.

19.

Claessens

Fan

J. P. H.

(2002). Corporate governance in Asia: A survey. International Review of Finance, 3, 71-103.

20.

Craig

J. B.

Salvato

(2012). The distinctiveness, design and direction of family business research: Insights from management luminaries. Family Business Review, 25, 109-116.

21.

Cubbin

Leech

(1983). The effect of shareholding dispersion on the degree of control in British companies: Theory and measurement. Economic Journal, 93, 351-369.

22.

Daily

C. M.

Certo

S. T.

Dalton

D. R.

Roengpitya

(2003). IPO underpricing: A meta-analysis and research synthesis. Entrepreneurship: Theory and Practice, 27, 271-295.

23.

Daily

C. M.

Dalton

D. R.

(1992). Financial performance of founder-managed versus professionally managed small corporations. Journal of Small Business Management, 30(2), 25-34.

24.

Daily

Johnson

J. L.

Dalton

D. R.

(1999). On the measurements of board composition: Poor consistency and a serious mismatch of theory and operationalization. Decision Sciences, 30(1), 83-106.

25.

Dalton

D. R.

Daily

C. M.

Johnson

J. L.

Ellstrand

A. E.

(1999). Number of directors and financial performance: A meta-analysis. Academy of Management Journal, 42, 674-686.

26.

Demers

Joos

(2007). IPO failure risk. Journal of Accounting Research, 45, 333-371.

27.

Dharwadkar

George

Brandes

(2000). Privatization in emerging economies: An agency theory perspective. Academy of Management Review, 25, 650-669.

28.

Dyck

Mauws

Starke

F. A.

Mischke

G. A.

(2002). Passing the baton: The importance of sequence, timing, technique and communication in executive succession. Journal of Business Venturing, 17, 143-162.

29.

Dyer

W. G.

(1989). Integrating professional management into a family owned business. Family Business Review, 2, 221-235.

30.

Dyer

W. G.

(2006). Examining the “family effect” on firm performance. Family Business Review, 19, 253-273.

31.

Ebrhardt

Nowak

(2003). The effect of IPOs on German family-owned firms: Governance changes, ownership structure, and performance. Journal of Small Business Management, 41, 222-232.

32.

Eddleston

K. A.

Kellermanns

F. W.

(2007). Destructive and productive family relationships: A stewardship theory perspective. Journal of Business Venturing, 22, 545-565.

33.

Faccio

Lang

L. H. P.

Young

(2001). Dividends and expropriation. American Economic Review, 91(1), 54-78.

34.

Filatotchev

Bishop

(2002). Board composition, share ownership, and “underpricing” of U.K. IPO firms. Strategic Management Journal, 23, 941-955.

35.

Filatotchev

Lien

Y.-C.

Piesse

(2005). Corporate governance and performance in publicly listed, family-controlled firms: Evidence from Taiwan. Asia Pacific Journal of Management, 22, 257-283.

36.

Filatotchev

Strange

Piesse

Lien

Y.-C.

(2007). FDI by firms from newly industrialised economies in emerging markets: Corporate governance, entry mode and location. Journal of International Business Studies, 38, 556-572.

37.

Filatotchev

Toms

(2006). Corporate governance and financial constraints on strategic turnarounds. Journal of Management Studies, 43, 407-433.

38.

Filatotchev

Toms

Wright

(2006). The firm’s strategic dynamics and corporate governance life-cycle. International Journal of Managerial Finance, 2, 256-279.

39.

Filatotchev

Zhang

Piesse

(2011). Multiple agency perspective, family control, and private information abuse in an emerging economy. Asia Pacific Journal of Management, 28, 69-93.

40.

Forbes

D. P.

Milliken

F. J.

(1999). Cognition and corporate governance: Understanding boards of directors as strategic decision-making groups. Academy of Management Review, 24, 489-505.

41.

Gedajlovic

E. R.

Lubatkin

M. H.

Schulze

W. S.

(2004). Crossing the threshold from founder management to professional management: A governance perspective. Journal of Management Studies, 41, 899-912.

42.

Geringer

J. M.

Tallman

Olsen

D. M.

(2000). Product and international diversification among Japanese multinational firms. Strategic Management Journal, 21, 51-80.

43.

Greene

W. H.

(2000). Econometric analysis (4th ed.). Upper Saddle River, NJ: Prentice-Hall.

44.

Grote

(2003). Conflicting generations: A new theory of family business rivalry. Family Business Review, 16, 113-124.

45.

Gulati

Higgins

M. C.

(2003). Which ties matter when? The contingent effects of interorganizational partnerships on IPO success. Strategic Management Journal, 24, 127-144.

46.

Hartzell

J. C.

Starks

L. T.

(2003). Institutional investors and executive compensation. Journal of Finance, 58, 2351-2374.

47.

Hillman

A. J.

Cannella

A. J.

Paetzold

R. L.

(2000). The resource dependence role of corporate directors: Strategic adaptation of board composition in response to environmental change. Journal of Management Studies, 37, 235-255.

48.

Hillman

A. J.

Dalziel

(2003). Boards of directors and firm performance: Integrating agency and resource dependence perspectives. Academy of Management Review, 28, 383-396.

49.

Hoskisson

R. E.

Eden

Lau

C. M.

Wright

(2000). Strategy in emerging economies. Academy of Management Journal, 43, 249-267.

50.

Hoskisson

R. E.

Johnson

R. A.

Moesel

D. D.

(1994). Corporate divestiture intensity in restructuring firms: Effects of governance, strategy, and performance. Academy of Management Journal, 37, 1207-1251.

51.

Ingram

Simons

(1995). Institutional and resource dependence determinants of responsiveness to work-family issues. Academy of Management Journal, 38, 1466-1482.

52.

Ireland

R. D.

Hitt

M. A.

Sirmon

D. G.

(2003). A model of strategic entrepreneurship: The construct and its dimensions. Journal of Management, 29, 963-989.

53.

Jain

B. A.

Kini

(1994). The post-issue operating performance of IPO firms. Journal of Finance, 49, 1699-1726.

54.

Jaskiewicz

González

V. M.

Menéndez

Schiereck

(2005). Long-run IPO performance analysis of German and Spanish family-owned businesses. Family Business Review, 18, 179-202.

55.

Jensen

M. C.

(1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76, 323-329.

56.

Jensen

M. C.

Meckling

W. H.

(1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305-360.

57.

Joh

S. W.

(2003). Corporate governance and firm profitability: Evidence from Korea before the economic crisis. Journal of Financial Economics, 68, 287-322.

58.

Johnson

Boone

Breach

Friedman

(2000). Corporate governance in the Asian financial crisis. Journal of Financial Economics, 58, 141-186.

59.

Khanna

Rivkin

J. W.

(2001). Estimating the performance effects of business groups in emerging markets. Strategic Management Journal, 22, 45-74.

60.

Kim

J. B.

Krinsky

Lee

(1995). The role of financial variables in the pricing of Korean initial public offerings. Pacific-Basin Finance Journal, 3, 449-464

61.

Klein

(1996). The association between the information contained in the prospectus and the price of initial public offerings. Journal of Financial Statement Analysis, 2, 23-40.

62.

Kochhar

David

(1996). Institutional investors and firm innovation: A test of competing hypotheses. Strategic Management Journal, 17, 73-84.

63.

Kroszner

R. S.

Strahan

P. E.

(2001). Bankers on boards: Monitoring, conflicts of interest, and lender liability. Journal of Financial Economies, 62, 415-452.

64.

La Porta

Lopez-de-Silanes

Shleifer

. (1999). Corporate ownership around the world. Journal of Finance, 54, 471-517.

65.

La Porta

Lopez-de-Silanes

Shleifer

Vishny

R. W

. (1997). Legal determinants of external finance. Journal of Finance, 52, 1131-1150.

66.

La Porta

Lopez-de-Silanes

Shleifer

Vishny

R. W.

(1998). Law and finance. Journal of Political Economy, 106, 1113-1155.

67.

Lee

J. W.

Lee

Y. S.

Lee

B. S.

(2000). The determination of corporate debt in Korea. Asian Economic Journal, 14, 333-356.

68.

Lefort

Urzúa

(2008). Board independence, firm performance and ownership concentration: Evidence from Chile. Journal of Business Research, 61, 615-622.

69.

(2005). Why a poor governance environment does not deter foreign direct investment: The case of China and its implications for investment protection. Business Horizons, 48, 297-302.

70.

(2009). Managing international business in relation-based countries versus rule-based countries. New York, NY: Business Expert Press.

71.

Lien

Y.-C.

Piesse

Strange

Filatotchev

(2005). The role of corporate governance in FDI decisions: Evidence from Taiwan. International Business Review, 14, 739-763.

72.

Liu

Ahlstrom

Yeh

K. S.

(2006). The separation of ownership and management in Taiwan’s public companies: An empirical study. International Business Review, 15, 415-435.

73.

Luan

C. J.

Tang

M. J.

(2007). Where is independent director efficacy? Corporate Governance: An International Review, 15, 636-643.

74.

Martínez

J. J.

Stöhr

B. S.

Quiroga

B. F.

(2007). Family ownership and firm performance: Evidence from public companies in Chile. Family Business Review, 20, 83-94.

75.

Maug

(1998). Large shareholders as monitors: Is there a trade-off between liquidity and control? Journal of Finance, 53, 65-98.

76.

Mazzola

Marchisio

(2002). The role of going public in family businesses’ long-lasting growth: A study of Italian IPOs. Family Business Review, 15, 133-148.

77.

Morck

Yeung

(2003). Agency problems in large family business groups. Entrepreneurship: Theory and Practice, 27, 367-382.

78.

Morck

Yeung

B. W.

(2000). The information content of stock markets: Why do emerging markets have synchronous stock price movement? Journal of Financial Economics, 58, 215-260.

79.

Nelson

(2003). The persistence of founder influence: Management, ownership, and performance effects at initial public offering. Strategic Management Journal, 24, 707-724.

80.

Parrino

Sias

R. W.

Starks

L. T.

(2003). Voting with their feet: Institutional ownership changes around forced CEO turnover. Journal of Financial Economics, 68(1), 3-46.

81.

Peng

M. W.

(2003). Institutional transitions and strategic choices. Academy of Management Review, 28, 275-296.

82.

Peng

M. W.

(2004). Outside directors and firm performance during institutional transitions. Strategic Management Journal, 25, 453-471.

83.

Peng

M. W.

Heath

P. S.

(1996). The growth of the firm in planned economies in transition: Institutions, organizations, and strategic choice. Academy of Management Review, 21, 492-528.

84.

Peng

M. W.

Jiang

(2010). Institutions behind family ownership and control in large firms. Journal of Management Studies, 47, 253-273.

85.

Ramakrishnan

R. T. S.

Thakor

(1991). Cooperation versus competition in agency. Journal of Law, Economics & Organization, 7, 248-283.

86.

Ravasi

Marchisio

(2001). Family firms and the decision to go public: A study of Italian IPOs (Working Paper No. 01-45). Milan, Italy: SDA BOCCONI.

87.

Ritter

J. R.

(1984). The “hot issue” market of 1980. Journal of Business, 57, 215-240.

88.

Ritter

J. R.

Welch

(2002). A review of IPO activity, pricing, and allocations. Journal of Finance, 57, 1795-1828.

89.

Ryngaert

(1988). The effect of poison pill securities on shareholder wealth. Journal of Financial Economics, 20, 377-417.

90.

Schulze

W. S.

Lubatkin

M. H.

Dino

R. N.

(2003). Toward a theory of agency and altruism in family firms. Journal of Business Venturing, 18, 473-490.

91.

Schulze

W. S.

Lubatkin

M. H.

Dino

R. N.

Buchholtz

A. K.

(2001). Agency relationships in family firms: Theory and evidence. Organization Science, 12, 99-116.

92.

Sharma

(2004). An overview of the field of family business studies: Current status and directions for the future. Family Business Review, 17, 1-36.

93.

Sharma

Chrisman

J. J.

Chua

J. H.

(1997). Strategic management of the family business: Past research and future challenges. Family Business Review, 10, 1-35.

94.

Shleifer

Vishny

R. W.

(1997). A survey of corporate governance. Journal of Finance, 52, 737-783.

95.

Shu

P. G.

Yeh

Y. H.

Yamada

(2002). The behavior of Taiwan mutual fund investors: Performance and fund flows. Pacific-Basin Finance Journal, 10, 583-600.

96.

Smith

B. F.

Amoako-Adu

(1999). Management succession and financial performance of family controlled firms. Journal of Corporate Finance, 5, 341-368.

97.

Steier

L. P.

Chrisman

J. J.

Chua

J. H.

(2004). Entrepreneurial management and governance in family firms: An introduction. Entrepreneurship: Theory and Practice, 28, 295-303.

98.

Stewart

Hitt

M. A.

(2012). Why can’t a family business be more like a nonfamily business? Modes of professionalization in family firms. Family Business Review, 25, 58-86.

99.

Tihanyi

Johnson

R. A.

Hoskisson

R. E.

Hitt

M. A.

(2003). Institutional ownership differences and international diversification: The effects of boards of directors and technological opportunity. Academy of Management Journal, 46, 195-211.

100.

Tolbert

P. S.

(1985). Institutional environments and resource dependence: Sources of administrative structure in institutions of higher education. Administrative Science Quarterly, 30(1), 1-13.

101.

Trillas

(2001). The takeover of Enersis: The control of privatized utilities. Utilities Policy, 10(1), 25-45.

102.

Tsai

W. H.

Hung

J. H.

Kuo

Y. C.

Kuo

(2006). CEO tenure in Taiwanese family and nonfamily firms: An agency theory perspective. Family Business Review, 19, 11-28.

103.

Tsang

E. W. K.

(2002). Learning from overseas venturing experience: The case of Chinese family businesses. Journal of Business Venturing, 17, 21-40.

104.

Tsao

C. W.

Chen

S. J.

Lin

C. S.

Hyde

(2009). Founding-family ownership and firm performance: The role of high-performance work system. Family Business Review, 22, 319-332.

105.

Varian

H. R.

(1990). Monitoring agents with other agents. Journal of Institutional and Theoretical Economics, 146, 153-174.

106.

Verbeek

(2000). A guide to modern econometrics. Chichester, England: John Wiley.

107.

Xie

Davidson

W. N.

III DaDalt

P. J.

(2003). Earnings management and corporate governance: The role of the board and the audit committee. Journal of Corporate Finance, 9, 295-316.

108.

Yeyati

E. L.

Peria

Schmukler

(2004). Market discipline under systemic risk: Evidence from bank runs in emerging economies (World Bank Policy Research Working Paper, No. 3440). Retrieved from http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2004/11/11/000012009_20041111151715/Rendered/PDF/WPS3440.pdf

109.

Yiu

Bruton

G. D.

(2005). Understanding business group performance in an emerging economy: Acquiring resources and capabilities in order to prosper. Journal of Management Studies, 42, 183-206.

110.

Yiu

Bruton

G. D.

Hoskisson

R. E.

(2007). Business groups: An integrated model to focus future research. Journal of Management Studies, 44, 1551-1579.

111.

Young

M. N.

Peng

M. W.

Ahlstrom

Bruton

G. D.

(2002, August). Governing the corporation in emerging economies: A principal: Principal perspective. Paper presented at the Best Paper Proceedings, Academy of Management Annual Meeting, Denver, CO.

112.

Young

M. N.

Peng

M. W.

Ahlstrom

Bruton

G. D.

Jiang

(2008). Corporate governance in emerging economies: A review of the principal-principal perspective. Journal of Management Studies, 45, 196-220.

113.

Zahra

S. A.

Filatotchev

(2004). Governance of the entrepreneurial threshold firm: A knowledge-based perspective. Journal of Management Studies, 41,885-897.

114.

Zahra

S. A.

Filatotchev

Wright

(2009). How do threshold firms sustain corporate entrepreneurship? The role of boards and absorptive capacity. Journal of Business Venturing, 24, 248-260.

115.

Zahra

S. A.

Pearce

J. A.

II . (1989). Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15, 291-334.

116.

Zahra

Sharma

(2004). Family business research: A strategic reflection. Family Business Review, 17, 331-346.

117.

Zhang

(2009). Adoption of professional management in Chinese family business: A multilevel analysis of impetuses and impediments. Asia Pacific Journal of Management, 26, 119-139.

Supplementary Material

Please find the following supplemental material available below.

For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.

For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.

0.00 MB

0.19 MB