Do Founding Families Downgrade Corporate Governance? The Roles of Intra-Family Enforcement
58 Pages Posted: 2 Dec 2019 Last revised: 13 May 2021
Date Written: May 1, 2021
We examine the roles of conflicts of interest within firm controlling families and associated corporate governance outcomes, an agency problem unique to family firms. Based on a sample of 1242 founder-controlled publicly traded Chinese private-sector firms, we report that when firm ownership and management rights are more diffusely held by founding family members, the volumes of transactions suspicious of expropriating shareholders are lower. The relation is stronger when more arm’s length family relatives participate in firms as owners or managers, when families are influenced by collectivist cultures, when firms are subject to weaker capital market disciplines, and when firms have higher levels of free cash flow. The findings are consistent with a self-enforcement role of founding families in protecting ownership rights, which spills over to benefit market investors.
Keywords: Founding families, Family firms, Corporate governance, Related-party transactions, China
JEL Classification: G32, G34
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