Collectivist Cultures and the Emergence of Family Firms

Abstract

Using a sample of 1,103 Chinese private-sector firms that went public during 2004-2016, we find that founders from the country’s regions with stronger collectivist cultures engage more family members as managers, retain more firm ownership within the family, and share the controlling ownership with more family members. These findings are robust to a battery of diagnostic tests to account for alternative institutional factors that may induce the relations. The results are consistent with the hypothesis that because the collectivist culture reduces information asymmetry, shirking problems, and associated monitoring costs among family members, more family ownership and management is expected in firms when entrepreneurs are from collectivist regions. The overall evidence supports the theory of the firm pioneered by Harold Demsetz and his co-authors.

Keywords: Ownership structure, Family firms, Collectivist culture, Individualist culture, Rice culture, China