The effect of estate tax change on the controlling shareholding structure and corporate value of family firms

• Author: Chen‐Chieh Liao,Yin‐Hua Yeh
• DOI: http://doi.org/10.1111/corg.12237
• Date: 01 January 2019
• Published date: 01 January 2019

ORIGINAL MANUSCRIPT

The effect of estate tax change on the controlling shareholding

structure and corporate value of family firms

Yin‐Hua Yeh

1

|Chen‐Chieh Liao

2

1

Graduate Institute of Finance, National Chiao

Tung University, 1001 Ta‐Hsueh Rd., Hsinchu

City, Taiwan, 30010

2

Department of Finance, National Chengchi

University, No. 64, Sec.2, ZhiNan Rd.,

Wenshan District, Taipei City 11605, Taiwan

Correspondence

Yin‐Hua Yeh, Graduate Institute of Finance,

National Chiao Tung University, 1001 Ta‐

Hsueh Rd., Hsinchu City, 30010, Taiwan.

Email: yhyeh@nctu.edu.tw; yinhua.yeh@gmail.

com

Abstract

Manuscript type: Empirical

Research question/issue: Estate tax planning has always been a primary concern of

large shareholders when arranging the controlling shareholding structure of family

firms. This paper provides evidence on the effect of a drastic change in estate tax

on the shareholding structure of family‐controlled firms in Taiwan, as well as the

impact of these changes on the firms' corporate value. We examine a 2008 policy

change in Taiwan that substantially reduced the estate tax from a maximum rate of

50% to a single tax rate of 10%.

Research findings/insights: We analyze a 12‐year period from 2002 to 2014

looking at data of family‐controlled, listed companies with IPOs prior to 2001. The

empirical results reveal a reduced motivation among controlling families to circumvent

estate tax through altering the shareholding structure after the law change. The

results also reveal a positive impact on firm value as a result of the reduction in the

tax burden of controlling families. These findings contribute to the family firm and

tax literature and provide insight into the effects of tax policy change on the control-

ling structure of family firms and the consequent benefits on firm value.

Theoretical/academic implications: To the best of our knowledge, this paper is the

first empirical study that establishes a significant relationship between estate tax and

tax‐avoidance behaviors reflected in the change of the shareholding structure of a

family firm. Many research topics linking estate tax with other corporate governance

issues in family firms are here unexplored.

Practitioner/policy implications: For the policymaker, this study highlights the

increase of firm value due to a reduction in the estate tax rate. Moreover, a

tax‐friendly environment can help the controlling family commit themselves to the

proper management of the firm instead of expending effort on tax minimization to

safeguard their wealth.

KEYWORDS

Corporate Governance, Family ownership, Legal Effectiveness, Ownership Mechanisms, Taiwan

1|INTRODUCTION

Research into corporate governance in family firms has received much

attention over the years (Claessens, Djankov, & Lang, 2000; Faccio &

Lang, 2002; La Porta, Lopez‐de‐Silanes, & Shleifer, 1999), particularly

in the areas of the performance of family firms versus non‐family firms

(Anderson, Mansi, & Reeb, 2003; Anderson & Reeb, 2003; Bertrand,

Johnson, Samphantharak, & Schoar, 2008; Perez‐Gonzalez, 2006;

Received: 8 August 2017 Revised: 7 February 2018 Accepted: 6 March 2018

DOI: 10.1111/corg.12237

Corp Govern Int Rev. 2019;27:33–44. © 2018 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/corg 33