Controlling Family and Corporate Governance
62 Pages Posted: 2 Dec 2019
Date Written: November 1, 2019
Building on the theory of Burkart et al. (2003) that founding family ownership and control of firms mitigate the twin conflicts between owners and managers and between majority and minority owners, we suggest that the partition of firm ownership rights and associated governance within the controlling family helps mitigate conflicts among family members, a third type of agency problem. We examine the degrees of controlling family members participating as owners and/or managers of more than 1,200 emerging Chinese publicly traded private sector firms, and their effects on suspicious related party transactions that concern both family and outside shareholders. Consistent with the twin agency theory, firms with more family participation engage in fewer problematic related-party transactions, and the effects are stronger in firms subject to weaker market discipline. Furthermore, the effects are stronger in firms whose controlling families are more influenced by collectivistic culture and when more senior family members or more distant relatives participate in the firms. These findings are in contrast with the conventional view of controlling family expropriation but consistent with positive spillover effects of controlling family governance.
Keywords: Controlling families, Family governance, Corporate governance, Related-party transactions, China
JEL Classification: G32, G34
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