Family ownership and firm performance : evidence from Hong Kong during the Asian financial crisis

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Family ownership and firm performance : evidence from Hong Kong during the Asian financial crisis


Author: Wong, Kelvin
Title: Family ownership and firm performance : evidence from Hong Kong during the Asian financial crisis
Degree: D.B.A.
Year: 2007
Subject: Hong Kong Polytechnic University -- Dissertations.
Financial crises -- China -- Hong Kong -- Case studies.
Department: Graduate School of Business
Pages: 176 leaves ; 30 cm.
Language: English
InnoPac Record:
Abstract: Research findings on the link between ownership concentration and firm performance have been mixed. On the one hand, concentrated ownership reduces agency problems that arise from the separation of ownership and control and hence positively associates with firm performance (as described by Berle & Means 1932; Jensen & Meckling 1976; Demsetz & Lehn 1985). On the other hand, both high ownership concentration and the use of control pyramids by controlling shareholders may generate larger agency problems and hence lower firm performance (as outlined by Holderness & Sheelan 1988 and LLSV 1999); and the governance problem becomes more critical during a financial crisis (as explained by Rajan & Zingales 1998; Lemmon & Lins 2003). The extant literature is also inconclusive with respect to the relationship between board independence, board size, and CEO duality and firm performance. First, board independence is particularly important in Asia given its high level of ownership concentration (OCED Principle, principle VI.E. 1). This belief has been evidenced by research which finds a positive relationship between board independence and firm performance (e.g., MacAvoy et al. 1983; Baysinger & Butler, 1985; Hermalin & Weisbach, 1991). However, others argue with opposing evidence suggesting a negative relationship (e.g., Yermack 1996; Prevost, Rao & Hossain 2002). Second, larger board size may inhibit rather than promote group cohesion and monitoring (OECD White Paper on Corporate Governance in Asia dated 10 June 2003) and negatively relate to firm performance (e.g., Yermack 1996; Prevost, Rao & Hossain 2002). However, there is other research which finds no relation between board size and firm performance (e.g., Rowe & Davidson III, 2002; Belkhir 2004; Adams & Mehran 2005). Third, CEO duality and its link with firm performance has been highly controversial among the extant literature with some arguing from an agency theory point of view that the separation of Chairman and CEO should mitigate managerial entrenchment and hence lead to better firm performance (Fama & Jensen 1983). The opposing view argues from an organizational perspective that CEO duality may lead to stronger and unambiguous leadership and therefore enhance firm performance (e.g., Donaldson 1985; Anderson & Anthony 1986; Barney 1990). According to the OECD, the financial crisis in 1997 triggered a lively discussion about corporate governance in Asia. It was generally agreed that weak corporate governance practices made companies more vulnerable and deepened the economic problems associated with the financial crisis. In this thesis, I will investigate the association between both family ownership and board composition with firm performance during the Asian Financial Crisis. Using a sample of 93 of the largest listed firms in Hong Kong between 1996 and 1998, I study the effect of family ownership and board composition on firm performance during the Asian Financial Crisis. My research methodology involves two sets of regression models, namely, cross-sectional regression and panel data regression to test my hypotheses. I use Tobin's Q and stock return as my primary performance measures and return on assets, return on equity, and Altaian's Z as my alternative measures. I also test the robustness of my results using different cutoff points for family firms. Overall, my results are consistent when using different performance measures and the definitions of family firms. First, similar to prior research findings (e.g., Holdemess & Sheelan 1988; LLSV 1999; Lemmon & Lins 2003), I find a significant and negative relationship between firm performance (measured by Tobin's Q) and shareholding of the largest shareholder (Expropriation Hypothesis) and this relationship is more pronounced during the financial crisis, consistent with Johnson et al. (2000). Family firms under-performed non-family firms and the difference widened during the financial crisis. However, when using stock returns as an alternative performance measure, family firms under-performed non-family firms only after the crisis. This finding is in line with Rajan & Zingales (1998) who posit that investors tend to ignore weak governance when the economy is doing well, but then quickly pull out once a crisis begins as they believe that poor governance may not be able to protect their investment. Second, I find that firm performance is positively related to management ownership (Convergence of Interest Hypothesis). Third, I find that board independence is positively associated with firm performance. Fourth, I find evidence to support previous research (e.g., Jensen & Meckling 1976; Fama and Jensen 1983) that CEO duality is negatively associated with firm performance. Fifth, contrary to the agency theory assumptions that managerial alignment may reduce agency problems (Jensen & Meckling 1976), I find no significant association between board composition variables and firm performance. It is only the ownership structure variables that are important to firm performance. Sixth, firm size strongly and negatively correlates with firm performance (as measured by Tobin's Q). Lastly, I find leverage to be negatively associated with firm performance especially after the crisis. My findings are robust to various alternative measures of firm performance such as stock return, return on assets, return on equity, and Altman's Z. My findings are also robust to different model specifications including the ordinary least squares and fixed effect modeling.

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