Board chair and credit rating of family firms: Evidence from China

Abstract

This study examines how credit rating agencies evaluate the involvement of a family member as a board chair. Based on a sample of Chinese family firms from 2008 to 2021, this study finds that firms with family members serving as board chairs (i.e., family chairs) exhibit credit ratings that are, on average, 0.46 notch higher than family firms with nonfamily chairs. This finding holds when robustness checks and endogeneity tests are performed. The positive effect of the family chair is more pronounced when the potential shareholder-bondholder conflict of interests is larger, when the family reputation concerns are stronger, and when the chair has more power. Further evidence shows that family chairs are associated with conservative firm policies that are desirable for bondholders, and thus support a positive evaluation. Finally, we rule out the alternative explanation concerning the possibility of rating shopping by family chairs. Overall, the study's results indicate that family involvement as a board chair heightens family reputation concerns and promotes long-term orientation, thereby mitigating shareholder-bondholder conflict of interests.