Abstract
Using a sample of Chinese family firms listed from 1999 to 2014, we investigate the relationship between non-family leadership and firm performance. We find that firms with a non-family member as board chair perform significantly worse than firms whose chair belongs to the family. Moreover, we show that the underperformance of non-family-chair firms is more pronounced when firms are under weaker outside monitoring and when the controlling families care less about family business longevity. The negative effect of a non-family chair is robust to a variety of endogeneity tests. We also dismiss alternative explanations other than concern for reputation. Overall, our empirical results suggest that the social norms regarding family reputation are important in shaping the controlling shareholders’ expropriation incentives and firm performance.
Highlights
With the prevalence of family firms around the world (La Porta et al 1999; Claessens et al 2000; Morck et al 2000; Faccio and Lang 2002), an increasing number of studies have shed light on how family firms perform
To verify the argument that controlling families expropriate minority shareholders aggressively when the board chair is appointed outside the family, we further examine the conditions under which the negative effect of a non-family board chair on firm performance is mitigated or worsened
Instead of joining the debate on whether family CEOs purely improve or damage firm performance (e.g., Anderson and Reeb 2003; Maury 2006; Bennedsen et al 2007; Bertrand et al 2008; Cai et al 2012; Isakov and Weisskopf 2014), or how family involvement with strategic control and operational control affects principal-agent conflicts (Luo and Chung 2013), we focus on the unexplored role of the board chair in family firms from the perspective of principal-principal conflict and examine the more important question: Under what conditions will the negative impact of a non-family appointment be reduced or reinforced? The various methods we use to address endogeneity concerns further ensure the robustness of our results
Summary
With the prevalence of family firms around the world (La Porta et al 1999; Claessens et al 2000; Morck et al 2000; Faccio and Lang 2002), an increasing number of studies have shed light on how family firms perform. Instead of joining the debate on whether family CEOs purely improve or damage firm performance (e.g., Anderson and Reeb 2003; Maury 2006; Bennedsen et al 2007; Bertrand et al 2008; Cai et al 2012; Isakov and Weisskopf 2014), or how family involvement with strategic control and operational control affects principal-agent conflicts (Luo and Chung 2013), we focus on the unexplored role of the board chair in family firms from the perspective of principal-principal conflict and examine the more important question: Under what conditions will the negative impact of a non-family appointment be reduced or reinforced?
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