Family, Management And Control Of Business Performance And Mechanism Of Action

Traditional principal-agent theory is a "two sides" principal-agent theory: besides the first side between the owner and managers, there is a second between dispersed outer stockholder and controlling shareholder.Because of private ownership, owner-management, and altruism based on cognation, family firm is always ignored by traditional agency theory, or is deemed to be low-agency-cost organization. However, with the development of the research on altruism, researchers find that family firm, especially the family-controlled company, is suffering entwined agency problems rooted in family ownership, owner-manager' self control problem, and Pyramid-controlling structure. There are family managers and professional mangers usually in family business. For the existence of family mangers and professional mangers, the first agency problem is divided into two layers: Principal-agent relationship between the owner (family principals, especially parents/founders) and family managers (family agents, especially successors), relationship between the owner and most remarkable characteristic of professional managers. These agency conflicts will be sharpening sometimes, which will exacerbate firm performance.This article starts with family ownership. Firstly we analyze the influence of family ownership on family controlled firm performance, and the relationship between family ownership and firm performance. Then we focus on the factors that may influence firm performance, or moderate the relationship between family ownership and performance, such as management regime, corporate behavior (especially long term investment), characteristic of controlling structure, and governance equipment.We name family controlled firm according to the ultimate controller, who must be family or individual. Our sample comprises a panel of 4,931 firm-year observations from all non-finance companies listed in Shanghai and Shenzhen during the period of 2002-2005. 1006 of which is family controlled businesses. Based on empirical research, we conclude that:1. Family ownership in listed companies will destroy firm performance. The relationship between family ownership and performance is U-nonlinear. We find that family ownership structure is not efficient in the listed companies in China.2. Firm performance is influenced by management regime and corporate behavior. Family-controlled firms managed by a person outside the family are significantly less productive. Family CEO, especially the founder, will enhance firm performance. Most of family-controlled companies are managed by outsider, which is one of the reasons why family controlled firms perform worse than non-family-controlled firms do. This result is consistent with classic agency theory.Long-term investment has positive effect on the relationship between family-management regime and performance and the relationship between family ownership and firm performance. More long-term investment for family controlled firms implies better firm performance.3. Characteristics of controlling structure affect family controlled firms significantly. The contestability of the largest family shareholder's voting power has a positive effect on firm value. Separation of cash-flow rights and voting rights will help family shareholders to keep control, but harm firm performance. It is very popular for family controlled firm to adopt Pyramid-controlling structure. This structure is convenient for controlling family-shareholder to expropriate other shareholders. On the other way, it also endows family shareholder special advantage on resource acquirement and control.4. Two factors may exacerbate family controlled firm performance: hired CEO and family expropriate relates to control rights enhancement. We combine the presence or absence of control-enhancing mechanisms with the presence or absence of a family CEO to yield a useful two-by-two classification of our sample firms. We use this classification to test the impact on firm value of the two agency problems. Results show that existence of second agency problems is more detrimental to firm value than is the presence of first agency problem.5. The structure of check-and-balance ownership can increase the governing efficiency of family-controlled listed companies. This result suggests that families are prone to private benefit extraction if they are not monitored by another strong blockholder. We also show that the relation between multiple blockholders and firm value is significantly affected by the identity of these blockholders. Higher sharestake by another family is negatively related to firm value in family-controlled firms, whereas a higher sharestake held by a financial institution is positively related to firm value in family-controlled firms. These results suggest that the incentives to collude with the largest shareholder or to monitor the largest shareholder are significantly affected by the type of the blockholder.6. The monitoring function of board of director is not powerful. Scale and independence of director are not significantly related to firm performance. But independent director's compensation has positive effect on performance. Family directors will affect firm value positively, which is not consistent with agency theory, but support steward theory and Resource based view of the family firm.The main innovations of this dissertation are as follows:Firstly, we look family ownership, control and management regime as three different profiles of one system, and try to find out how this system affects firm value.Secondly, we analyze the special agency problems of multi layers-multi sides, and find out the most serious agency conflict in family firm.Thirdly, we empirically inspect the efficiency of two internal governance equipments: blockholder and board of director. We find that finance institutions are a good monitor, but family blockholder will destroy value because of collusion. We argue that we should emphasize the decision-maker function of board of director. Directors are not only monitors, but also stewards and recommenders.With the development of family firm and capital market, listed company controlled by family will be the most important force in market and economic development. The results will help us to understand agency problem in large and middle family firms, to analyze the efficiency of allocation of control rights in family business group, and to understand the function and efficiency of governance equipment. Also, the results will helpful for family firm development, and provide theoretical support for policy decision, foster better environment for Chinese family businesses' healthy development in the long term.