Bequest Motive, Information Transparency, and Family Firm Value: A Natural Experiment

Posted: 27 Jun 2017 Last revised: 13 Oct 2020

See all articles by Haijie Huang

Haijie Huang

East China Normal University (ECNU) - Department of Accounting

Edward Lee

University of Manchester - Alliance Manchester Business School

Lyu Changjiang

Fudan University - School of Management

Yiyi Zhao

University of International Business and Economics (UIBE)

Date Written: October 8, 2020

Abstract

Motivated by Cao, Cumming, and Wang (2015), we utilize China’s one-child policy reform as a unique and exogenous setting to examine the economic impact of a potential rise in bequest motives among family firms, which is driven by the prospect of family and clanship expansion after the reform. A bequest motive is the economic incentive to accumulate wealth presently for inheritance by heirs in the future. It causes short-term present economic decisions to be influenced by long-term future utility expectations. On the one hand, the reform may strengthen stewardship as a means to maximize firm value for present family wealth enhancement and future inter-generational succession. On the other hand, the reform may weaken innovation and competitiveness by inducing reluctance against takeovers or outsider succession. Consistent with a positive economic impact, we observe that family firms experience (i) favorable ex-ante market reactions to the news of the reform and (ii) ex-post decline in managerial expropriation through tunneling after the reform. These findings of ex-ante investor anticipation and ex-post real effect are both stronger among less transparent family firms where Type-II agency problems are likely to be more pronounced. Further analyses also provide supportive evidence of a post-reform rise in the long-term value, measured by Tobin’s Q, and a decline in stock-selling by controlling shareholders among family firms. Our combined findings imply that this reform could induce positive externality on family firm governance.

Keywords: China’s one-child policy reform; corporate governance; family firms

JEL Classification: G14; G38; J13

Suggested Citation

Huang, Haijie and Lee, Edward and Changjiang, Lyu and Zhao, Yiyi, Bequest Motive, Information Transparency, and Family Firm Value: A Natural Experiment (October 8, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2992510

Haijie Huang

East China Normal University (ECNU) - Department of Accounting ( email )

Shanghai 200041
China

Edward Lee (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Lyu Changjiang

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Yiyi Zhao

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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