Family-controlled Business Groups Research Articles

Family-Controlled Business Groups: An In-Depth Review and a Microfoundations-Based Research Agenda

It is now well-established that business groups (BGs)—an inimitable multifirm structure that enables legally distinct firms to take coordinated action—constitute a dominant organizational form in many economies around the world. The BG phenomenon has attracted sustained scholarly attention over the last three decades. Despite the shift in BG research toward BG heterogeneity and strategic performance outcomes, prior reviews and the last meta-analysis a decade ago focus narrowly on the question of whether BGs confer a financial performance advantage on affiliated firms. We provide a more extensive account of the BG effect and an in-depth review of the theoretical approaches used in prior work by focusing only on family-controlled business groups (FBGs)—the dominant type of BG. We make three contributions. First, we develop a parsimonious organizing framework to summarize extant FBG research in a nuanced way—specifying the relationships examined, theoretical explanations advanced, and empirical evidence adduced. This summary reveals that extant FBG theorizing is predominantly structurally focused. Second, we propose a reorientation of FBG research toward a microfoundations-based approach. We develop a scheme for theoretical “taking” and “giving” of relevant microfoundational frameworks from contiguous management subfields to systematically identify potential paths ahead for future FBG theorizing. Finally, we granularly discuss illustrative microfoundation-based frameworks, outlining how their application could both enrich and better integrate FBG research with contiguous management subfields such as entrepreneurship, family business, and strategy research. We thus consolidate our understanding of FBG research, identify gaps, and suggest promising pathways for future work.

The impact of control structures on firm value

The purpose of this study is to investigate the impact of control structures on the value of family-controlled firms in Turkiye, an emerging market. Turkish firms are usually affiliated with family-controlled business groups. Families control business group firms through pyramid structures and dual-class shares, which results in a control–ownership rights wedge. In this study, I use precise quantitative measures for the control–voting rights wedge (pyramid wedge) and the voting–ownership rights wedge (dual-share wedge) to analyze the impact of control-enhancing mechanisms on firm valuation. The empirical results of the panel data estimation indicate a negative relationship between firm value and the control–voting rights wedge. However, the voting–ownership rights wedge does not affect firm valuation. This study also shows that foreign-family coalition and CEO duality have a positive impact on firm value.

Family-Controlled Business Groups: An In-Depth Review and a Micro-Foundations Based Research Agenda

Family-Controlled Business Groups: An In-Depth Review and a Micro-Foundations Based Research Agenda

Acquiring firms' earnings management in stock-for-stock mergers within Korean business groups

PurposeThis study examines acquirers' earnings management in intragroup mergers to investigate whether stock-for-stock mergers between affiliated firms within the same family-controlled business group facilitate the controlling shareholder's rent seeking. Specifically, it investigates the acquiring firm's incentive to inflate premerger-announcement earnings in intragroup mergers given the controlling shareholder's relative equity holdings in the target and acquiring firms. The authors also examine how creditor monitoring affects premerger-announcement earnings in intragroup mergers compared to mergers between independent firms.Design/methodology/approachUsing univariate analysis, panel regression based on accruals and cross-sectional regression based on discretionary accruals, the authors compare earnings management in mergers between affiliated firms with that in mergers between independent firms in the context of Korean business groups. The authors also compare the effects of creditors on earnings management in both cases.FindingsAcquirers' premerger-announcement positive abnormal accruals are less evident in mergers between affiliated firms than in mergers between independent firms. These accruals decrease with high financial leverage only in the latter case, suggesting that creditor monitoring mitigates earnings management only in independent firm mergers.Originality/valueThe authors examine intragroup mergers, unlike previous studies, which focus on unaffiliated firm mergers. They also contribute to the literature on stock-for-stock mergers, showing that lender monitoring can mitigate the acquiring firm's premerger earnings management in unaffiliated firm mergers but not in intragroup mergers. These findings suggest that stock-for-stock mergers between affiliated firms may facilitate the controlling shareholders' rent seeking, which has policy implications for emerging markets with large family-controlled business groups.

Strategic Response to Corporate Governance Reform of Family Business Groups

Based on the scheme of principal–principal conflicts, we investigate family business groups’ strategic response to a board regulation requiring appointment of independent directors and the effects of proactive compliance with this regulation on performance. Empirical results from Taiwan show that family-controlled business groups are less likely to adopt proactive compliance. Controlling shareholders’ excess control has a negative effect on a firm’s adoption of proactive compliance; foreign ownership has a positive effect. The family business group affiliation weakens the positive effect of foreign ownership on the adoption of proactive compliance. We also found that improved firm performance is directly and positively affected by the proactive response. Thus, this study concludes that the responsiveness of firms to institutional pressures depends on which control mechanisms they are situated in and the power relations within the key stakeholders.

Group-Affiliated Analysts’ Strategic Forecasts During a Year: Evidence from Korea

ABSTRACTIn examining the family-controlled business groups in Korea, prior literature shows that group-affiliated analysts’ forecasts are optimistically biased. This article investigates whether the group-affiliated analysts strategically time the level of accuracy and bias in their forecasts for the same group-affiliated firms due to the change in information asymmetry in the market. The results show that the group-affiliated analysts issue more accurate and less optimistic earnings forecasts for the affiliated firms when the level of information asymmetry is low; particularly, in April, which is right after annual earnings announcements.

Is Blood Thicker Than Water? Sibling Rivalry and Strategic Change in Family Business Groups

This paper emphasizes relational aspect of competitive dynamics to investigate the rivalry that is inherent between sibling executives within family owned business groups. We focus on the family CEOs unique role both as a member of the kin and a professional manager responsible for their own companies. In particular, we examine how the strategic change pursued by family CEOs prompts his sibling CEO to respond and also enact strategic change at another group-affiliated firm. We further theorize how the similarity of sibling CEOs in terms of potential managerial capabilities and the relative sibling birth order strengthens this relationship due to the increase in reference group salience and enhanced social comparison. At the organizational level, we also investigate how the abundance in resource niche opportunities for family CEOs and the presence of a group leadership succession plan weakens the effect of sibling rivalry on strategic change. Our empirical context utilizing listed family-controlled firms in Korean business groups (chaebols) provides strong support for our theoretical perspectives. We discuss our studys contribution to the studies of market rivalry, socio-cognitive bias in competitive interaction, and family controlled business groups.

Controlling shareholders' value, long-run firm value and short-term performance

We propose a new determinant of firm value within a business group: controlling shareholders' value (CSV), the value of controlling shareholders' stake in an affiliate divided by their stake in all affiliates. We posit that controlling shareholders focus attention on the high-CSV affiliates. Using data on Korean family-controlled business groups, we find that CSV has greater explanatory power for firm performance than traditional cash flow rights (CFR). We also find that, among affiliates with non-family CEOs, higher CSV is associated with higher Tobin's Q and lower EBITDA, indicating that controlling shareholders and non-family CEO have successfully addressed their principal-agent problem.

Different means of earnings management of owner-managed firms versus agent-led firms: evidence from chaebols in Korea

This paper examines the earnings management behavior of large, family-controlled business groups (so-called ‘chaebol’) in Korea from 2006 to 2010. Specifically, the author studies whether the methods of earnings management are different between chaebol firms versus non-chaebol firms. The author finds no significant difference in accrual-based earnings management by these two types of firms. However, the author shows that chaebol firms’ real-based earnings management is greater than non-chaebol firms, based on their higher abnormal production costs and lower abnormal discretionary expenses, in order to manipulate accounting income upward. The results suggest that owner-managed firms tend to choose real manipulation which negatively affects future corporate performance and consequently mislead investors about the firm value

Governance Structure and Related Party Loan Guarantees: The Case of Chinese Family Business Groups

ABSTRACTLoan guarantees to related parties by affiliated subsidiaries within family controlled pyramids form a means by which the controlling family expropriates value from minority shareholders. The controlling family, however, will attempt to escape blame for the behavior. Using a sample of 1785 listed Chinese firms affiliated with family-controlled business groups, we explore how family governance structure affects the use of related party loan guarantees. As hypothesized, we find that affiliates with non-family chairmen, but with family directors or senior executives, issue larger volumes of loan guarantees to related parties, whereas affiliates with family chairmen and those with non-family interlocking chairmen do not. The behavior is moderated by regional institutional development.

An optimization approach to resolving circular shareholding in large business groups

Circular shareholding refers to a situation where a series of capital contributions made by companies in a family business group establish a chain of shareholdings. For example, a circular shareholding is formed when company A owns stock in company B, company B owns stock in company C, and company C owns stock in company A. In Korea, the practice of circular shareholding in large family-controlled business groups may give the principal families higher control over member firms and more opportunities to pursue their own interest at the expense of other shareholders. For this reason, the government of Korea has encouraged large conglomerates to gradually eliminate their circular shareholdings. However, there has been no research as to which shareholdings out of the complicated ownership structure should be cleared in order to resolve the issue of circular shareholding. In this paper, we propose optimization models to address the problem. Of the proposed integer programming models that can eliminate circular shareholding, one maximizes the sum of cash-flow rights while another maximizes the sum of voting rights. The proposed models have been applied to Korean family-controlled business groups, and the results are included herein. To the best knowledge of the authors, this research is the first study to apply optimization theory to the problem of resolving circular shareholding.

Family Governance, Vertical Interlocks and the Use of Related Party Loan Guarantees in Chinese Business Groups

Loan guarantees to related parties by affiliated subsidiaries within family controlled pyramids form a means by which the controlling family expropriates value from minority shareholders. The controlling family, however, will attempt to escape blame for the behavior. Using a sample of 1785 listed Chinese firms affiliated with family-controlled business groups, we explore how family governance structure affect the use of related party loan guarantees. As hypothesized, we find that affiliates with non-family chairmen, but with family directors or senior executives, issue larger volumes of loan guarantees to related parties, whereas affiliates with family chairmen and those with non-family interlocking chairmen do not. The behavior is moderated by regional institutional development.

Controlling Shareholderss Value, Long-Run Firm Value and Short-Term Performance

We propose a new determinant of firm value among affiliate firms of a business group: controlling shareholders’ value (CSV), the value of the controlling shareholders’ stake in each affiliate divided by their total stake in all affiliates. We posit that controlling shareholders pay more attention to those affiliates in which they have higher CSV. Using data on Korean family-controlled business groups, we find that CSV has greater explanatory power for firm performance than cash flow rights (CFR). We find that, among affiliates with no-family CEOs, higher CSV is associated with higher Tobin’s Q and lower EBITDA. This combination indicates that controlling shareholders and non-family CEO have successfully addressed their principal-agent problems; it appears to be related to R&D and capital expenditures.

As old as history: Family-controlled business groups in transport services: the case of SEUR

This article presents empirical evidence about the contribution of family-controlled business groups as highly efficient alternatives to the large vertically integrated and professionally managed corporation in specific institutional and market environments. This hypothesis is tested with a single case study, SEUR, in the Spanish transport services sector. SEUR is one of the most prominent Spanish courier companies. It was founded during Franco's dictatorship, expanded in democratic times, and imaginatively adapted to the financial challenges of the late globalisation at the end of the twentieth century, while maintaining the traditional values based on personal trust and family ties.

The Political Economy of Capital Markets in Latin America

Empirical studies of Latin American finance suggest that domestic capital markets are less developed than expected in light of the region’s economic fundamentals. One of several potential causes for this underdevelopment may be tied to the dominance of the 'grupos', family-controlled business groups that extract significant rents from existing institutional arrangements. Although the 'grupos' have driven economic development in Latin America, they also have powerful incentives to block the reforms that would enhance access to capital markets. Without these reforms, the 'grupos' will continue to have privileged access to the region’s stock markets, crowding out standalone firms in the process.This paper describes some of the political economy challenges to capital market development in Latin America and explores how regional integration under the Pacific Alliance and the Latin American Integrated Market (MILA) may create the space for institutional reform.

Profit redistribution in family-controlled, group-affiliated publicly-listed corporations in Malaysia

This paper attempts to examine the potential occurrence of profit redistribution in family-controlled business groups in Malaysia. It is argued that there exists a tendency for business groups with extensive family ownership and control to redistribute resources from group affiliates that outperformed to affiliates that underperformed. This phenomenon is prevalent particularly in large business groups where the link between business groups and politics is most clearly displayed. Such „propping up‟ activities are believed to adversely affect the shareholders of the outperforming affiliates as the performance of these affiliates diminishes due to the profit redistribution. They also result in inefficient allocation of resources within the business group, though it is found that higher board independence may reduce such inefficiency

Family Business Groups around the World: Financing Advantages, Control Motivations, and Organizational Choices

Using a dataset of 28,635 firms in 45 countries, this study investigates the motivations for family-controlled business groups. We provide new evidence consistent with the argument that particular group structures emerge not only to perpetuate control, but also to alleviate financing constraints at the country and firm levels. At the country level, family groups, especially those structured as pyramids, are more prevalent in markets with limited availability of capital. At the firm level, investment intensity is greater for firms held in pyramidal rather than in horizontal structures, reflecting the financing advantages of the former. Within a pyramid, internal equity funding, investment intensity, and firm value all increase down the ownership chain. However, group firm performance declines when dual-class shares and cross shareholdings are employed as additional control-enhancing mechanisms. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

The Effects of Board Independence in Controlled Firms: Evidence from Turkey

A large number of empirical studies in the U.S. report that there is no cross-sectional relationship between board composition and firm performance. On the other hand, a relatively small but growing literature on boards in emerging market corporations shows that a higher level of board independence is associated with both firm actions which are consistent with the interests of shareholders and with superior firm performance. This important difference between developed and emerging markets suggests that boards matter more in weak governance systems. We analyze the relationship between board structure and firm performance for a sample of listed companies in Turkey - a country that features relatively weak protection for investors, firms associated with family controlled business groups and pyramidal structures. We do so by using a hand-collected data set on directors’ personal characteristics and their roles. We document that Turkish boards are populated besides members of the controlling shareholder and their affiliated parties, by employees of the apex firm in the business group, by ex-politicians, ex-bureaucrats and ex-military officers. Classifying the board members as independent and affiliated directors, we report three main results: (i) Board independence is unrelated to equity issues, (ii) Independent directors are unlikely to curb the extent of related party transactions, and (iii) Depending on the statistical methods we use, the presence of independent board members and firm performance are negatively related or uncorrelated. These results are robust under different specifications and estimation methods which try to deal with the endogeneity problems inherent in board research. Especially the findings (ii) and (iii) challenge the usefulness of independent directors as an internal governance device in Turkish companies.

Family Business Groups Around the World: Costs and Benefits of Pyramids

Using a comprehensive dataset of 28,039 firms in 45 countries, this study investigates the motivations for family-controlled business groups, focusing on the question of how such groups are able to attract minority shareholders and allay their concerns about being expropriated. We argue that minority shareholders co-invest with group controlling owners because group structures play critical roles in financing projects that might not be otherwise funded by external investments, especially in underdeveloped capital markets. Our analysis offers support for this argument and provides new insight into how the balance of costs and benefits of group affiliation varies both within the pyramidal structure of a group and across investment environments. At the country level, we find that restricted access to external capital is associated with a greater prevalence of family business groups. Within individual groups, we find evidence consistent with funding advantages that pyramid structures offer: among group members, firms at the bottom of a pyramid receive the greatest internal capital support. In particular, internal equity funding, investment intensity, and firm performance all increase down a pyramidal chain. Comparing group affiliates and independent firms, we find that the former is associated with a valuation discount, which is consistent with evidence from prior studies. However, controlling for endogeneity in group affiliation shows that certain firm types benefit from business group membership. Overall, our results highlight that in addition to the well-documented control motivations behind pyramidal groups, these structures also provide important funding and certification support to members firms.

Family Business Groups around the World: Financing Advantages, Control Motivations and Organizational Choices

Using a dataset of 28,635 firms in 45 countries, this study investigates the motivations for family-controlled business groups. We provide new evidence consistent with the argument that particular group structures emerge not only to perpetuate control, but also to alleviate financing constraints at the country and firm levels. At the country level, family groups, especially those structured as pyramids, are more prevalent in markets with limited availability of capital. At the firm level, investment intensity is greater for firms held in pyramidal rather than in horizontal structures, reflecting the financing advantages of the former. Within a pyramid, internal equity funding, investment intensity and firm value all increase down the ownership chain. However, group firm performance declines when dual-class shares and cross shareholdings are used as additional control-enhancing mechanisms.