Market Competition, Degree Of Family Members’ Involvement And Enterprise Value

One major characteristic of family business governance is family members’participation in management. On one hand, it emphasizes the existence of family business, bringing special knowledge and social relation network to the company. With a low agency cost between the owners and managers, it promotes the enterprise value; On the other hand, it prevents more talented external professional managers coming into the enterprise which may increase decision-making risk. At the same time, agency problems like the difficulty to balance the board (which is also grasp in the family) and family executives, managers’privilege consumption, tardiness issue may be more severe, causing the fall of the enterprise value. Family business often start with a low cost, a high-degree of trust among family members, a strong internal coherence and show a great vitality in a non-perfect market economy system in China. Therefore, several questions are raised:Could family management really improve the enterprise value? At present, is there a need for the introduction of more talented external professional managers to make management mode transformation? Finally, as an important external governance mechanism, can market competition reduce agency cost and play a role in the relationship between family participation and enterprise value?Samples of549family-controlled public firms listing in the small and medium-sized plate and growth enterprise market from year2009to year2011are chosen as research object. With a combination method of normative research and empirical research and from perspectives of agency theory and the decision making mechanism theory, the paper studies from following two aspects:(1) according to the Herfindahl-Hirschman Index, the paper classify the samples into two categories:high competitive industry one and low competitive industry one. Based on the verification that family members’involvement in the administration lessen the enterprise value, the paper controls the industry competition degree variable to demonstrate even in different market condition, family involvement still have damage effect in enterprise value with a different degree.(2) This paper introduces cross-multiplication impact factor of industry competition degree and family involvement to analysis the internal logic relationship among market competition, degree of family members involvement and enterprise value.This paper obtains two conclusions as follows:(1) there is a significant negative correlation between degree of family members’ involvement and enterprise value. The higher the ratio of family members’participation in management, the lower the enterprise value, regardless of industry competition grade. Meanwhile, this paper finds that negative correlation in more competitive industry is weaker than less competitive industry.(2) Market competition degree has a moderating effect on the relation between family participation and enterprise value. Less competitive market enhances the damage effect that family participation has to enterprise value and vise versa. This shows that the supervision function of market competition, not the enterprise decision-making mechanism, plays the dominant role in the essential and internal logic relationship among market competition, degree of family members involvement and enterprise value. In addition, the market competition, proved to be an important external governance mechanism, helps to reduce agency cost. When introduction of external managers in the family enterprise has multifarious hinder and progress slow, reducing trade barriers and strengthening market competition can yet be regarded as an effective way to solve the disadvantages of family members’ participation in management.The contribution of this paper is the introduction of the external environment variable:market competition and this paper put the study of family participation and enterprise value in a more realistic environment, not only confined to the family business within the scope of internal management. This paper, from the two analysis dimensions of decision-making mechanism theory and market competition supervision mechanism, studies the relationship among market competition, degree of family members involvement and enterprise value, finding that the market competition supervision mechanism dominated. In the fierce market competition environment, for one thing, the management face risk of business failure and losing position, thus forced to reduce loss moral hazard, privilege consumption to improve the efficiency of management; for the other thing, in the bad competition situation, family members will work hard in order to maintain family prestige and efforts, then the internal cohesion will increase, which is beneficial to the ascension of the enterprise value. Market competition make up the insufficient of internal supervision mechanism in family enterprise. When internal governance reforms as the introduction of external managers progress slowly, it may be a effective way to reduce agency cost by appropriately reducing industry barriers to increase market competition degree.