Board surname sharing and investment efficiency: Evidence from Chinese state‐owned enterprises

• Published date: 01 July 2023
• Author: Baibing Huang,Endong Yang,Yang Zhang
• Date: 01 July 2023
• DOI: http://doi.org/10.1111/corg.12483

ORIGINAL ARTICLE

Board surname sharing and investment efficiency: Evidence

from Chinese state-owned enterprises

Baibing Huang

1

| Endong Yang

1

| Yang Zhang

1,2

1

Faculty of Business Administration, University

of Macau, Macao, China

2

Asia-Pacific Academy of Economics and

Management, University of Macau, Macao,

China

Correspondence

Yang Zhang, Faculty of Business

Administration/Asia-Pacific Academy of

Economics and Management, University of

Macau, E22-4036, Avenida da Universidade,

Taipa, Macao, China.

Email: yzhang@um.edu.mo

Funding information

Asia-Pacific Academy of Economics and

Management, University of Macau, Grant/

Award Number: APAEM/MEMO/0001/2022;

University of Macau, Grant/Award Number:

MYRG2020-00220-FBA

[Correction added on 16 August 2022, after

first online publication: the authors affiliations

have been corrected in this version.]

Abstract

Research Question/Issue: Using data on Chinese listed state-owned enterprises

(SOEs), this study examines the impact of board surname sharing on firms' invest-

ment efficiency.

Research Findings/Insights: We find that surname sharing among a firm's board of

directors is positively associated with its investment efficiency. The main result

continues to hold when using alternative measures and accounting for endogeneity.

Specifically, we show higher surname homogeneity mitigates agency costs and

information asymmetry. Taken together, this evidence supports the view that board

surname sharing is conducive to effective communications in the boardroom, thus

enhancing board effectiveness and collective decision-making among board

members.

Theoretical/Academic Implications: With the theory of social identity, the litera-

ture presents two opposing views on the impact of group identity on corporate

behaviors. One view focuses on the cost of favoritism bias and coalition while the

other view illustrates the benefits of group coordination and communication. We

shed light on this debate by documenting that the group identity of surname

sharing might increase corporate investment efficiency. To our knowledge, this is

the first study providing evidence that social identity benefits board decision-

making.

Practitioner/Policy Implications: Our findings have implications for formulating the

“best practice”on executive selection and boosting board composition. In addition to

structural factors and procedural rules, shareholders and policymakers may need to

carefully consider creating the climate of a robust social system of the board to

ensure a virtuous cycle of trust and outspokenness, especially when dealing with the

problems of passive monitoring.

KEYWORDS

corporate governance, board of directors, investment efficiency, surname sharing

1|INTRODUCTION

A firm's investment decisions and their outcomes determine the firm's

future cash flows and profitability, thus having a profound influence

on the firm's growth in the long term. Making optimal investment

decisions, as a result, is very often one of the most important respon-

sibilities of the senior management team. A growing stream of litera-

ture has examined the determinants of investment efficiency and

ascribes investment distortion to agency problems and information

asymmetry (Biddle et al., 2009; Guariglia & Yang, 2016; Jiang

Received: 26 May 2021 Revised: 21 May 2022 Accepted: 5 July 2022

DOI: 10.1111/corg.12483

Corp Govern Int Rev. 2023;31:597–624. wileyonlinelibrary.com/journal/corg © 2022 John Wiley & Sons Ltd. 597

et al., 2018; Richardson, 2006; Stein, 2003). Under these two fric-

tions, managers are likely to invest in self-serving projects, distort

investment behaviors, and lead to excessive or less efficient invest-

ment (Liu et al., 2015; Rajkovic, 2020). To invest at the optimal level,

an environment with information transparency and an effective moni-

toring mechanism are conducive to achieving investment efficiency

(Chen et al., 2017). The board of directors has been one of the most

extensively examined governance mechanisms in the corporate gover-

nance literature. We contribute to this line of research by providing

new evidence for how board members' sharing of surnames influences

a firm's investment efficiency.

Extant literature shows that board diversity is a double-edged

sword affecting the board's functions and effectiveness, and ulti-

mately, the decision-making to drive corporate performance (Adams &

Ferreira, 2009; Farrell & Hersch, 2005; Harjoto et al., 2018). Board

diversity enriches the professional backgrounds in the boardroom,

providing a diverse pool for knowledge outputs and capabilities. In a

diverse team, the information obtained is more comprehensive,

improving the board's ability to engage in problem-solving (Gruenfeld

et al., 1996; Harjoto et al., 2018; Wittenbaum & Stasser, 1996). How-

ever, board diversity may reduce trust, impede interpersonal coordina-

tion, and raise conflicts in the boardroom (Giannetti & Zhao, 2019). In

this paper, we focus on surname sharing of board members as an

aspect of surface-level attributes in board diversity. Surname sharing

is a pervasive, easy-to-trace, and visible source of board diversity

(Gompers et al., 2016), yet relevant empirical studies have been

limited in the literature.

According to Davies (2011), people bearing the same surname

have better mutual understanding and trust and would find it easier

to act collectively to conform to shared values and norms. Boards with

more directors sharing the same surname can strengthen directors'

group identity and facilitate cooperation, improve resources and

information-sharing, and reduce the cost of coordination in board

decision-making (e.g., Gompers et al., 2016; McPherson et al., 2001).

Also, sharing a surname improves affinity and fosters personal ties

between otherwise unrelated directors, allowing them to feel less dis-

tant and communicate better with more generosity and goodwill

(Chan, 1997; Charness & Gneezy, 2008). Consequently, it may be

more effective for board members sharing the same surnames to

discuss firms' objectives and strategies, while having fewer conflicts in

the boardroom. Higher communication efficiency among the board

members potentially induces more efficient decision-making and reac-

tions in a fast-changing economic environment (Bernile et al., 2018;

Gompers et al., 2016; Malenko, 2014), causing timelier and optimal

financial decisions, especially for firms operating in a volatile industry

(Tan et al., 2021). This points to a potential positive effect of board

surname sharing on investment efficiency.

Alternatively, directors' sharing of surnames may lead to high

levels of coalition and group favoritism bias, which can be detrimental

to the board's monitoring process. Highly coalitional boards may be

affected by the proliferation of personal exchanges (Feldman

Barrett & Russell, 1998; Forbes & Milliken, 1999). Directors sharing

the same surname may integrate themselves into a group

(e.g., Du, 2019), leading to group favoritism bias. Bias occurs when in-

group membership is emphasized, while out-group members are trea-

ted differently (Tajfel & Turner, 1986). Surname-sharing board mem-

bers may lose self-thinking when facing group decision-making; they

are less likely to challenge other in-group directors who share the

same surname and may downplay suggestions or alternative views

from out-group directors. As a result, surname sharing among

directors could impede productive discussion of different views and

independent checks and balances in board decision-making (Tan

et al., 2021), resulting in a less effective board. This argument predicts

a negative relation between board surname sharing and investment

efficiency. As such, the relation between surname sharing and firm

investment efficiency is not obvious and therefore remains an

empirical question.

In this paper, we investigate the impact of surname sharing

among board members on investment efficiency for Chinese state-

owned enterprises (SOEs). We focus on SOEs for several reasons.

First, SOEs are playing an increasingly important role in both China

and the global economy. Attributing to about 25% of the Chinese

economy, the SOE sector has grown significantly in China's equity

and bond markets, contributing to 40% of the market capitalization

and accounting for the majority of total bond issuance.

1

Across the

globe, 102 out of Fortune Global 500 corporations were SOEs in

2017 (Lin et al., 2020). Second, capital investment is one of the two

primary tasks for SOEs in China (Jiang & Kim, 2020), yet SOEs often

suffer from investment distortions (Cong et al., 2019; Liu & Siu, 2011).

Third, unlike non-SOEs whose boards often contain family members

with the same surnames, SOEs provide a cleaner sample without the

confounding effects of relatives' ties in the boardroom,

2

as it is very

unlikely for relatives to serve on the boards of SOEs.

Empirically, we collect surname information about directors from

the corporate governance tables for all A-share listed SOEs in the

CSMAR database. Then, we construct two variables to measure the

degree of board surname sharing following prior literature (Tan

et al., 2021): the Herfindahl index (Surhhi) and the inverse entropy

index (Surent). Following Chen et al. (2021), Chen, Hope, et al. (2011),

and McNichols and Stubben (2008), we develop a proxy of invest-

ment efficiency allowing for different implications for revenue

increases versus revenue decreases and form a sample of 8400 firm-

year observations over the period from 2003 to 2017.

We find that firms with greater surname homogeneity on the

board are associated with higher investment efficiency. The positive

impact is statistically and economically significant. Specifically, a one

standard deviation increase of Surhhi (0.035) enhances investment

efficiency by 0.0012, which is about 5% relative to the sample

median. Similarly, a one standard deviation increase of Surent (0.246)

improves investment efficiency by 0.0015, which is approximately

6.4% of the sample median. A set of sensitivity tests confirm the

robustness of our main results by excluding the five most common

surnames; by adopting an alternative measure of investment effi-

ciency; by focusing on a subsample of nine-director boards; by explic-

itly controlling for the surname sharing of other senior executives; and

by excluding utility companies.

598 HUANG ET AL.