Does a Family‐controlled Firm Perform Better in Corporate Venturing?

• Author: Shao‐Chi Chang,Li‐Yu Chen,Ying‐Jiuan Wong
• Published date: 01 May 2010
• DOI: http://doi.org/10.1111/j.1467-8683.2010.00792.x
• Date: 01 May 2010

Does a Family-controlled Firm Perform Better in

Corporate Venturing?corg_792175..192

Ying-Jiuan Wong*, Shao-Chi Chang, and Li-Yu Chen

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Family control involves issues of agency costs and nepotism. This study investigated the impacts

of family control on stock market reactions to corporate venturing announcements by public f‌irms. Moreover, in this paper

we examined whether the monitoring effect of institutional investors inf‌luenced the relationship between family control and

stock market reactions.

Research Findings/Insights: In terms of research f‌indings/results, with different measures of family control, the evidence

indicated that family control is signif‌icantly and negatively associated with the abnormal returns of corporate venturing

announcements. Furthermore, we found that the divergence of cash f‌low and voting rights had a strong negative impact on

abnormal returns. Finally, the empirical results suggested that institutionalownership had a signif‌icant positive moderating

effect on the relationship of family control and stock market reactions.

Theoretical/Academic Implications: Prior research focused on the inf‌luence of private family f‌irms on venturing activities.

This study contributes to the literature by highlighting the unique characteristics of family control in public f‌irms. This

research suggests that nepotism embedded in public family f‌irms is likely to create agency costs resulting from deviations

in cash f‌low and voting rights. This study further shows that institutional ownership plays an important role in reducing

agency costs associated with public family f‌irms.

Practitioner/Policy Implications: Our f‌indings suggest that family control is an important consideration for investors in

evaluating the wealth impacts of corporate venturing. Therefore, a well-established governance system could be a crucial

signal of the quality of corporate venturing for family businesses, particularly the outside governance mechanism.

Keywords: Corporate Governance, Family Ownership, Institutional Shareholder

INTRODUCTION

One of the most important drivers of a f‌irm’s perfor-

mance is corporate entrepreneurship (CE). The litera-

ture suggests that CE involves a f‌irm extending its

competence and corresponding opportunities by creating or

acquiring new organizations, or combining new resources to

expand its future growth opportunities by entering new

businesses or markets (Ben-Amar & Andre, 2006; Chung &

Gibbons, 1997; Covin& Slevin, 1991). Additionally, a growing

body of literature has been focused on CE and family busi-

nesses. Kellermanns and Eddleston (2006) showed that both

the willingness to change and the ability to recognize tech-

nological opportunities were positively associated with CE

attributes for US private family f‌irms. Naldi, Nordqvist,

Sjoberg, and Wiklund (2007) suggested that risk-taking

behavior was signif‌icantly affected by CE in Swedish family

businesses. Zahra (2005) found that while family ownership

and involvement promoted CE, the long tenures of CEO

founders had a negative effect on it for US family f‌irms.

Although those studies have provided important insights,

they have mainly focused on private family f‌irms. However,

publicly listed, family-controlled f‌irms represent a signif‌i-

cant proportion of the businesses in Asia and Europe (Faccio

& Lang, 2002; La Porta, Lopez-de-Silanes & Shleifer, 1999).

Moreover, about one-third of publicly held f‌irms in the

United States were classif‌ied as family-controlled (Anderson

& Reeb, 2003). Yet, publicly listed family businesses have

been infrequently researched in the literature. The effect of

family control on CE may differ between public family f‌irms

and private f‌irms because public f‌irms tend to be confronted

with agency costs between managers and shareholders,

which are often not as important for private businesses. In

addition, public f‌irms may face another agency cost between

*Address for correspondence: National Kaohsiung University of Applied Sciences,

Departmentof Business Administration, 415 Chien- Kung Rd., Kaohsiung, Taiwan. Tel:

+886-7-381-4526; Fax: +886-7-396-1245; E-mail: yjwong@cc.kuas.edu.tw

175

Corporate Governance: An International Review, 2010, 18(3): 175–192

© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00792.x

majority and minority shareholders resulted from the pyra-

midal ownership structure and cross-holding shares.

The literature also suggested that family ownership might

have a positive effect on corporate venturing. Based on the

specif‌ic characteristic that family f‌irms are often associated

with innate household relations, family shareholders may

have the tendency to transfer control of businesses to their

children (Lubatkin, Schulze, Ling, & Dino, 2005).As a result,

family shareholders could be encouraged to invest in ven-

turing decisions more eff‌iciently (Bruton, Ahlstrom, & Wan,

2003; James, 1999; Westhead & Cowling, 1998). Moreover, a

family f‌irm is often associated with high family involvement

and long tenure in management. Thus, family-controlled

f‌irms could have more experience in recognizing opportu-

nities and uncertainties and be more likelyto have long-term

planning horizons. This could not only lead to increased

continuity, but also encourage family shareholders to have

patience while investing in new business opportunities to

create family wealth (Casson, 1999; Zahra, 2005).

In addition, agency theory suggests that the separation of

ownership and control in public f‌irms could result in man-

agers pursuing their own interests at the expense of share-

holders’ interests (Jensen & Meckling, 1976). Since family

shareholders’ wealth is closely tied to the f‌irm, they would

have the incentive to minimize the agency problem and to

monitor managerial decisions with regard to effective ven-

turing projects (Anderson & Reeb, 2003; Jensen & Meckling,

1976; Shleifer & Vishny, 1986). Both the motivation to

monitor a f‌irm’s actions and the attitude to secure long-term

f‌irm value encouragea family-controlled business to allocate

the company’s resources on value-maximizing new ventures

(Bruton et al., 2003; Ezzamel & Watson, 1993; James, 1999).

Family ownership, however, may also hamper a f‌irm from

investing in value-creating ventures. Due to the effect of

nepotism, a family-controlled f‌irm may favor hiring family

members and fail to retain competent but unrelatedemploy-

ees.1This may harm venturing value since family employees

are often unqualif‌ied for the positions they hold (Lubatkinet

al., 2005). Nepotism can also reduce the effectiveness in

monitoring family agents because the embedded parent-

child relationship may potentially bias parent-owners’ judg-

ment concerning the performance of their child-agents

(Lubatkin et al., 2005; Schulze, Lubatkin, & Dino, 2003;

Schulze, Lubatkin, Dino, & Buchholtz, 2001). In addition,

nepotism may causefamily owners to invest in new ventures

primarily benef‌icial to their relatives, and thus misuse a

f‌irm’s resources in venturing activities. Furthermore, the

practices of pyramidal ownership structures and cross-

holdings enable family owners to control a larger proportion

of voting rights than those granted strictly by their owner-

ship. Accordingly, family controlling shareholders might be

more inclined to expropriate f‌irms’ resources for their self-

interest at the expense of minority shareholders (Claessens,

Djankov, Fan, & Lang, 2002; La Porta, Lopez-de-Silanes, &

Shleifer, 1999).2As a result, investments in venturing

projects by family-controlled f‌irms would less likely be

aimed at enhancing f‌irm value.

The purpose of our study is to investigate whether a

public-listed, family-controlled f‌irm performs better in cor-

porate venturing. In this work, event-study methodology is

used to measure the market valuation of venturing

announcements. Announcements of corporate venturing

made by Taiwanese f‌irms were collected to test the hypoth-

eses. This sample provided an ideal setting for our study for

several reasons. First, in Taiwan, family-controlled busi-

nesses whose managers and boards of directors are also

family members are prevalent (Filatotchev, Lien, & Piesse,

2005; Yeh, 2005). Second, most Taiwanese listed f‌irms often

use pyramidal structures or cross-holdings to create a devia-

tion between cash f‌low and voting rights (Yeh, 2005). Third,

Taiwan’s stock market is relatively eff‌icient (Aitken & Siow,

2003), as seen in Chang, Chen, and Liu’s (2004) documenta-

tion that Taiwan’s stock market responded prof‌iciently to

corporate news announcements. Finally, both the maturity

and globalization of Taiwan’s capital markets have been

accompanied by the increased importance of institutional

investors (Filatotchev et al., 2005). Consequently, the unique

characteristics of Taiwanese publicly listed f‌irms provide an

appropriate sample for testing the effect of family control on

the market reactions to corporate venturing announcements.

The results of our study showed that family control, and

the divergence of cash f‌low and voting rights, was strongly

and negatively associated with stock market reactions to

venturing announcements. The conclusions from long-run

stock and operating performance also showed that family-

controlled businesses experienced lower long-run stock and

operating performance. This implies that family ownership

is not benef‌icial in the value assessment of investors on new

ventures. In addition, we found that the participation of

institutional investors mitigated the negative inf‌luence of

family control. The conclusions were robust under various

measures of familycontrol, and remained valid after control-

ling for other inf‌luential factors that could affect stock

market reactions to venturing announcements.

In the following section, we develop the theoretical back-

ground and our hypotheses. We then describe the sample

construction and research methodology, which is followed

by the presentation of our empirical results. Finally, we offer

a discussion section including the limitations and conclu-

sions of this study.

BACKGROUND AND HYPOTHESES

This paper attempted to evaluate the impact of corporate

venturing activities from the perspective of the f‌inancial

market. Specif‌ically, we estimated the abnormal stock

market reactions upon the announcements of corporate ven-

turing. This approach is based on the eff‌icient market

hypothesis (Fama, 1970), which argues that in an informa-

tionally eff‌icient market, any unanticipated new information

will be incorporated into security prices. When a f‌irm

announces new venture investments, investors will evaluate

the impact of new ventures on the future earnings and prof-

itability of the announcing f‌irm, and the subsequent changes

in stock prices represent investors’ revisions of their expec-

tations with regard to the net present value of the f‌irm’s

risk-adjusted expected cash f‌low (Chang et al., 2004).

Numerous studies have suggested that f‌inancial markets

are capable of distinguishing value-enhancing ventures

from value-destroying ones (Chung, Koford, & Lee, 1993;

McConnell & Nantell, 1985).

176 CORPORATE GOVERNANCE

Volume 18 Number 3 May 2010 © 2010 Blackwell Publishing Ltd