Corporate diversification in family-controlled firms : evidence from Hong Kong

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Corporate diversification in family-controlled firms : evidence from Hong Kong

 

Author: Hung, Wing-ying Priscilla
Title: Corporate diversification in family-controlled firms : evidence from Hong Kong
Degree: D.B.A.
Year: 2007
Subject: Hong Kong Polytechnic University -- Dissertations.
Business planning -- China -- Hong Kong -- Case studies.
Family-owned business enterprises -- China -- Hong Kong -- Case studies.
Department: Graduate School of Business
Pages: ix, 127 leaves : ill. ; 30 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2145967
URI: http://theses.lib.polyu.edu.hk/handle/200/3133
Abstract: Literature on the valuation effects of corporation diversification has come to the general consensus that diversification destroys firm value (Berger & Ofek 1995; Lins & Servaes 2002). Yet despite such a consequence, firms have continued to operate in multiple lines of business, suggesting a potential conflict of interest between the insiders and the outsiders. In particular, conventional wisdom suggests that such conflict of interest may be exacerbated in firms controlled by families, as families are believed to expropriate from minority shareholders (Fama & Jensen 1983; Claessens et al. 1999). Corporate diversification provides a channel for families to expropriate in the form of personal risk reduction. With the aim to seek knowledge on the relationship between family ownership and corporate diversification, we assemble a sample of 551 firms listed on the Hong Kong stock exchange from 2003 to 2005. Hong Kong is an ideal location for this study as it has one the highest levels of family ownership among developed economies (La Porta et al. 1999). Using this data, we investigate the agency effects of family ownership on the level of diversification and the excess firm value they derive from diversification. However, contrary to the risk-reduction hypothesis, our results show a significantly negative relationship between family ownership and the level of corporate diversification. Consistent with Anderson & Reeb (2003b), our findings shed light on the convergence-of-interest effect of family ownership by showing that families actually seek to protect shareholder value by minimizing the level of corporate diversification. Results remain robust after controlling for the family's excess control right and other determinants of diversification. Our findings suggest that excess control right is not associated with the families' decision to diversify. However, when family-controlled firms choose to diversify, they are discounted more heavily than non-family firms. Our results show that diversified family-controlled firms suffer a discount of 31.7% relative to non-diversified non-family firms, and a discount of approximately 13.6% relative to diversified non-family firms. But for family-controlled firms that are not diversified, they are not discounted by the market. Our finding is consistent with Lins & Servaes (2002) who document a diversification discount in Hong Kong, but without consideration for the effects of family ownership. Our results also complement prior studies by Denis, Denis et al. (1997) and Anderson and Reeb (2003b) who investigated similar issues based on managerial ownership and founding-family ownership using US data. Yet unlike studies conducted in the US, where family ownership is relatively low and pyramidal ownership structures are scarce, our study provides evidence based on families whose ownership concentration would allow them to be resistant from losing control in board elections and hostile takeovers (Jensen & Meckling 1976; Holderness & Sheehan 1988; Pedersen & Thomsen 2003), and families whose control rights often exceed their ownership rights. Overall, our results suggest that family ownership would be an effective organization structure if the firm is willing to adopt a focused investment strategy. While investors should be cautious about valuation discounts associated with diversified family-controlled firms, family-controlled firms that are already diversified should also reconsider the adoption of a focused strategy to maximize shareholder's value. To the extent that family ownership remains the dominant ownership structure across world economies, our findings will have important implications for investors and stakeholders worldwide.

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