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Family Ownership and Firm Performance in
Taiwanese Firms
10621342
By Kan, Po-Han
Faculty of Economics and Business Bachelor Thesis Finance and Organisation
Supervisor: Simin He
Abstract
In recent years, family firms have encountered growing interest in financial academic literature. The majority of past literature has concentrated on family firms in the West; studies that examine the effect of family shareholdings in, familial firm dominated East Asia, remain uncommon. This
paper examines the connection between family ownership and firm performance by analysing 670 publicly-listed companies on the TSE from 2010-2014. Firm performance is measured by two performance indicators, return on assets (ROA) and Tobin’s Q. The results indicate that family ownership is extensively integrated into Taiwan’s economy and family firms represent a prevalent business structure. The outcome of the analysis determined that family ownership and firm accounting performance is significant and positively associated; despite an inconclusive
2 I. Introduction
Familial firms are recognised for their role and prevalence in the global economy, exercising substantial influence over both advanced and developing nations. According to Anderson and Reeb, over a third of S&P 500 companies and 67% of Australian businesses are family firms (2003). Claessens, Djankov, and Lang (2000) observe the significant presence of familial firms in East Asian economies, representing more than 50% of businesses. In Taiwan, family firms constitute 76% of public firms with 66.45% of corporate boards controlled by families (Yeh, Lee & Woidtke, 2001). The popularity of familial firms has gained growing interest in business strategy and financial academic literature.
The majority of existing research on family ownership and financial performance has been concentrated on the United States and advanced Western economies. However, the importance and dominance of familial firms in contributing to economic development in growing economies merits further research. Hence, this thesis seeks to empirically examine whether family
ownership has a positive relationship on the financial performance of public firms in Taiwan. The main challenge encountered by researchers is to produce a consensus regarding the association between family ownership and a firm’s financial performance. Previous literature on familial ownership and firm performance remains divided. Anderson and Reeb (2003) concluded that family firms exhibited better financial performance than non-family firms, by measuring firm profitability and their performance on the stock market. An examination of European
companies by Barontini and Caprio (2006) determined that family ownership does not negatively impact firm performance. Furthermore, Denis and Denis (1994) discovered that firms with family ownership did not exhibit any additional inefficiencies compared to non-family firms. Contrary to the aforementioned findings, Villalonga and Amit (2006) determined that disputes between family and nonfamily shareholders in descendant-CEO companies often produce a decrease in performance. Miller et al. (2007) indicated that family companies within the Fortune 1000 did not specifically demonstrate superior performance. Consequently, the matter of whether family ownership positively contributes to better financial results remains an issue of ambiguity.
To elaborate, this thesis studies the effect of family ownership by evaluating both
profitability and market measures of firm performance. Ordinary-least-squares (OLS) multiple regression analysis were performed on a sample of 670 publicly listed companies on the Taiwan Stock Exchange (TSE); by regressing the firm’s return on assets (ROA) and Tobin’s Q
respectively. The essential hypothesis claims that family ownership reflects positively with both profitability and market measures of firm performance. This study argues that potential benefits of family ownership are positively related to firm performance and have been integrated
positively into the Taiwanese economy.
Retaining original expectations, initial findings suggested that the relationship between family ownership and firm performance was positive. Anderson and Reeb’s (2003) study indicated with EBITDA as a performance measure, family ownership maximises firm
performance at 30.8% and at 31% using Tobin’s Q. Moreover, Maury (2005) stated that family ownership decreases agency problems stemming from manager and shareholder conflicts.
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Finally, these initial results correspond with Maury’s (2005) previous findings that family ownership is associated with better firm performance initially;however the positive benefits become outweighed by the negative aspects as family ownership increases beyond a certain level.
The structure of this thesis is organised as follows: First, the theoretical framework introduces the necessary theoretical background and reviews empirical evidence of the
relationship between familial firms and performance. The methodology utilised is discussed in the third section. In this section, the sample selection, regression variables, research data, and method of examination are presented. Subsequently, the results are displayed and analysed in section four, the last subsection presents the limitations of this study. The final section provides a conclusion and remarks for future research.
II. Theoretical Framework
As previously discussed, a consensus remains to be formed among researchers on the relationship between family ownership and a firm’s performance. This study will begin by discussing the role of family ownership in relation to the economic structure of Taiwan. Subsequently, the following paragraphs review both negative and positive family ownership effects found in previous literature.
Chu (2009) noted that Taiwan’s economy maintains two distinct divisions, including a substantial sector of small and medium enterprises (SMEs) and a significant but smaller group of large corporations; both contributing to Taiwan’s economy. In Taiwan, a significant amount of publicly listed firms are family firms that developed from original SMEs and maintained their controlling family status. In contrast to publicly listed companies in other developed countries with ownership diversified amongst many shareholders; the majority of familial firms in Taiwan maintain comparatively high levels of concentrated equity ownership (Shyu, 2011). The
advanced economy of Taiwan holds substantial levels of entrepreneurial capitalism, where family ownership and control are still retained (Filatotchev, Lien & Piesse, 2005). Filatotchev et al. states even publicly listed firms where founding families hold limited shares, the influence of family ownership remains.Thus, in the majority of Taiwanese companies, the board of directors and supervisors maintain a close relationship.
i. Negative Effects of Family Ownership
Traditional research on family ownership has concentrated on its potential costs and assumed that family ownership and firm performance have a negative relationship. While recent studies have suggested advantages of family ownership exist and are significant, there remain substantial suggestions that family ownership is negatively associated with firm performance. Most notably, family ownership raises two main concerns: (1) inappropriate wealth expropriation and (2) institutional misalignment, which encompass of the main directions of research (Chu, 2009).
Family members with access to significant controlling rights may take actions at the expense of the firm in order to benefit themselves. Empirical studies conducted on East Asian firms revealed that controlling families often utilised hierarchical company structures to preserve their
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controlling rights and obtain disproportionate cash flow rights (Claessens et al., 2000). Demsetz and Lehn (1985) provided an example from the Disney family, which sought to manipulate company policies to increase their family wealth, affecting the financial performance of the firm and discouraging outside shareholders.Founding-families often have different objectives from institutional investors and minority shareholders. Family shareholders are generally concerned with long term objectives, such as wealth preservation and firm growth. On the other hand, smaller investors are more profit driven, thus are more concerned with increasing shareholder value in the short term. Carney and Gedajlovic (2003) indicated that in family firms, the interests of non-family shareholders may be sacrificed in favour of the family’s interests, such as firm growth over dividend payments to outside shareholders.
Controlling family shareholders are motivated to safeguard family interests and preserve wealth by appointing compliant managers, willing to execute policies that benefit the family, but not necessarily in the best interests of the firm (DeAngelo & DeAngelo, 2000). Controlling families are more inclined to contest the employment of non-family executive managers (Chu, 2009). Family ownership can contribute to managerial entrenchment if misappropriated; most notably, inserting unqualified family members to high level positions with the company’s
management.Miller et al. (2007) examined Fortune 1000 firms and determined that family firms do not exhibit better performance than nonfamily firms. Anderson and Reeb (2003) stated that a narrower and less efficient labour pool reduces family firm competitiveness; subsequently negatively affecting firm productivity and employee efficiency (Burkart et al., 1997). Lastly, family firms are susceptible to inheritance disputes, which have far reaching adverse effects on the firm and its operations. Cucculelli and Micucci (2008) who studied a sample of Italian firms concluded that inherited management is associated with adverse firm performance. Such
behaviour associated with family ownership can create corporate governance crises in family firms, leading to a decline in firm performance.
Past empirical studies have indicated that wealth expropriation and institutional misalignment arising from family ownership present negative influences on firm performance. To summarise, the simultaneous pursuit of family, minority shareholder, and firm objectives associated with family ownership complicates the management of family firms, leading to a potential negative relationship with firm performance. The negative association of family ownership has been thoroughly examined; however recent studies have suggested potential benefits of family ownership.
ii. Positive Effects of Family Ownership
Past conventional academic literature has presented the drawbacks of family ownership and maintained the existence of a negative relationship between family ownership and firm
performance (Villalonga & Amit, 2006).However in recent years, an increasing amount of empirical studies have concluded that family ownership and firm performance are positively associated(Anderson & Reeb, 2003; Burkart, Panunzi & Shleifer, 2003; Maury, 2006; Shyu, 2011).Whether family ownership hampers firm performance remains a debate; nevertheless,
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recent crises have seen increased attention towards the positive values provided by family firms (Filatotchev et al., 2005). Chu (2009) stated that the potential advantages of family ownership argued by contemporary financial academic literature can be categorised into the following: (1) alignment of ownership and control, (2) superior information, presence, and financing, and (3) investment and long term vision.
Denis and Denis (1994) observed that the combination of firm ownership and control through family ownership is beneficial because block shareholders more effectively scrutinise firm management and reduce managerial entrenchment. Similarly, Maury and Pajuste (2004) stated that large controlling shareholders have significant incentives to reduce firm conflicts arising from agency problems and benefit minority shareholders by monitoring firm management. In numerous Taiwanese firms, the family simultaneously holds shares and serves as firm
management, which entitles the family to be the owners and residual claimants of the firm (Filatotchev et al., 2005). Thus, family firms create an organisational structure where the interests of the owners and management are aligned(Schulze et al. 2003). Maury (2006) states that family ownership decreases agency problems, significantly reducing those created through shareholder and management conflicts. Furthermore, Anderson and Reeb (2003) stated that families invest substantial amounts of their financial assets into their firms; the wealth and financial wellbeing of the family is often strongly connected to the firm’s financial performance. As a consequence, family members have increased incentives to supervise the firm’s
management and to maximise profitability.
Secondly, Anderson and Reeb (2003) stated that through extensive exposure; family members have access to more information and a greater understanding of their companies than regular shareholders. Burkart et al. (2003) further suggested that concentrated equity ownership incentivises family members to achieve their objectives more efficiently than normal
shareholders. Families can control and monitor their firms easier and more effectively than non-family companies. An empirical study conducted by Burkart et al. (2003) indicated that families which maintain a long term presence within a firm offer a competitive benefit for the company. Consequently, family shareholders that hold information advantages can take disciplinary actions toward managerial opportunistic behaviour and reduce free-rider problems brought by smaller individual shareholders (Denis & Denis. 1994).
The ability to attract firm financing and capital in East Asian economies is often relationship-based. La Porta and Lopez-De-Silanes (1997) found that narrower and illiquid capital markets in emerging economies are correlated with their lack of investor protection. Thus, the demand for private financing is created, which represents a valuable source for firm growth. McConaughy et al. coincided by stating that in economies with immature capital markets and underdeveloped market structures; greater family firm occurrence can be attributed to their establishment through the procurement of capital through the families’ personal networks. The presence of family ownership can generate a counter-balance to the instability found in developing economies. Therefore, the existence of family ownership within a firm can be associated with high growth opportunities and increased firm value (Filatotchev et al., 2005).
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Lastly, founding-families of family firms have an inclination to preserve wealth for successive generations; therefore, family companies typically have longer investment
perspectives than non-family firms managed by professional managers (Chu, 2009). Chu (2009) cited Stein’s (1989) empirical research that focusing on short term gains, generally sacrifices long term profits, which eventually produces losses for all shareholders. Family firms not plagued by internal succession crises, frequently follow long term perspectives over a focus on performance on the stock market (Filatotchev et al., 2005). Consequently, family ownership creates a category of shareholders that possess significant influence in the firm, distinctive incentives, and motivation to preserve long term growth (Demsetz & Lehn, 1985).
The arguments presented indicate family ownership potentially reduces firm agency costs and reduces managerial entrenchment, which are associated with nonfamily firms. Moreover, family firms serve as a counter-balance in emerging economies, raising capital, and promoting a long term focus. Increasing empirical studies have presented evidence that family ownership has a positive relationship with firm performance in Europe (Maury, 2006; Barontini & Caprio, 2006) and the United States (Anderson & Reeb, 2003).
III. Methodology and Data i. Sample Data
The sample data used in this study consists of Taiwanese firms listed on the TSE from 2010 to 2014, a five year period. Financial data of the companies were acquired from the database of the Taiwan Economic Journal (TEJ), a credible organisation that mainly conducts credit analysis and research. TEJ provides detailed financial information and company profiles on firms listed on the TSE. The database has been utilised by previous literature analysing Taiwanese firms and is considered a reliable source for data (Shyu, 2011; Chu, 2009; Yeh et al., 2001).
Following previous literature, firms associated with financial, insurance, and utilities
industries were excluded from the sample data. Financial and insurance institutions have distinct financial and corporate governance structures that diverge significantly from nonfinancial companies, which increase the difficulty of data analysis and comparison (Filatotchev et al., 2005; Villalonga & Amit, 2006). According to Anderson and Reeb (2003), industries that are heavily regulated by the government such as public utilities, may have outside factors affecting firm performance. As a result, models of family ownership within utility firms may yield unclear results; hence, utility firms have been subsequently removed from the sample data. Finally, an additional 11 firms from the sample data, not consistently covered over the five year periods were removed. The quarterly data of 670 listed firms were compiled, creating 13,400 quarterly observations between the years 2010 and 2014. The five year period was specifically chosen to be after the 2008 financial crisis, thus avoiding the influence of volatile macroeconomic
conditions. However, it is worth noting that Taiwan was experiencing protracted economic recession and low exports, due to the financial crisis.
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In examining family firms, the primary concern is the classification of familial companies. Existing literature has not reached a consensus on the definition of a family firm. Consistent with past literature, the definition of family ownership has generally been based on the percentage of equity ownership and (or) the number of board positions held (Anderson & Reeb, 2003). This study seeks to focus on the equity ownership of the controlling family, thus concentrating on the percentage of family holdings. The minimum percentage of equity owned by family members that constitutes a family firm varies among past literature. For example, Chu (2009) labelled a firm with more than 5% family holdings as a family firm. In contrast, 10% to 20% ownership is considered by the majority of literature to be sufficient to control a firm (Classens et al., 2000; Villalonga & Amit, 2006). This study designates a family firm as a company that satisfies the following condition: total family ownership including family members and relatives exceeds 20% of the total number of shares.
iii. Methodology and Variables
This study utilises multivariate regression analysis to investigate the relationship between family ownership and a firm’s accounting and stock market performance. The OLS regression models created for the multivariate analyses are displayed as follows:
ROAi= β0+ β1 Family ownership + β2 R&D/Sales + β3 Long-term debt ratio + β4 ln(Firm
Age) + β5 ln(Total Assets) + β6 ln(Market Capitalisation) + εi, Cluster (CompanyCode)
Tobin’s Qi = β0+ β1 Family ownership + β2 R&D/Sales + β3 Long-term debt ratio + β4
ln(Firm Age) + β5 ln(Total Assets) + β6 ln(Market Capitalisation) + εi, Cluster (CompanyCode)
The main interest of this study is firm performance, thus it is presented as the dependent variable. Following prior research on firm performance and family ownership, firm performance is measured using both accounting and stock market indicators. The key performance measures utilised in this study are the return on assets (ROA) for accounting performance and Tobin’s Q for stock market performance.
Prior literature generally employs two ROA measurements, which can be calculated using two methods (Anderson & Reeb, 2003). According to Chang and Choi (1988), earnings before interest after taxes (EBIAT) more accurately reflects firm efficiency due to the imperfect capital markets of emerging countries. Nonetheless, this approach was not widely adopted in literature and sporadically utilised (Maury, 2006; Chu, 2009). However, Shyu (2011) stated that the EBITDA method more accurately reflects the firm’s actual profitability. Furthermore, the EBITDA measure was utilised by several prominent studies, either uniquely representing ROA (Villalonga & Amit, 2006) or included as one of several approaches to ROA (Anderson & Reeb, 2003; Yeh et al., 2001). Therefore, the EBITDA approach to ROA is adopted in this study. Tobin’s Q is the measure for the firm’s stock market performance, employed as a performance indicator by the majority of research on family ownership (Shyu, 2011; Anderson & Reeb, 2003;
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Villalonga & Amit, 2006). Tobin’s Q is defined by Anderson & Reeb (2003) as “the market value of total assets divided by the replacement cost of assets”. Shyu (2011) acknowledges the complications in computing precise asset replacement costs; thus taking into account past research, a proxy representing Tobin’s Q is created (Villalonga & Amit, 2006; Chu, 2009). This study adopts a simplified version of the formula utilised by Chu (2009): total market value divided by total asset value.
Family ownership is the independent variable of this study. Previously, the method of
measurement for family ownership was discussed, which was determined to be when total family ownership, including family members and relatives, exceeds 20% of the total number of shares. The variable is represented by the numerical measure Family Ownership, which is the percentage of equity owned by the controlling family.
In the regression analysis, several control variables in reference to prior literature, are
employed to control for firm and industry characteristics. Firm size takes into account economies of scale, which could influence the relationship between firm performance and family ownership. To prevent extreme values, firm size is the natural log of the firm’s total assets. Firm age
addresses potential differences with non-family firms, caused by succession disputes found in family firms (Villalonga & Amit, 2006). Firm age is defined as the number of years since the founding of the company, similarly the natural logarithm is applied to control for extreme values. The long-term debt ratio controls for debt within a firm’s capital structure and is measured by dividing long-term-debt with total assets. Shyu (2011) hypothesised a negative correlation between the long-term debt ratio and family ownership, because high debt ratios increase financial risk and bankruptcy costs. Firm growth and product innovation is calculated as the R&D ratio, which is research and development costs divided by total sales. The firm’s market capitalisation is measured as the natural logarithm of the entire market value of the firm’s total outstanding shares. Market capitalisation is expected to be positively associated with family ownership; high valuation incentivises controlling families to maintain long-term ownership (Shyu, 2011).
The 13,400 observations represent the total quarterly financial data of 670 firms. However the observations from each firm were dispersed over the five year period. Therefore, the model should take into account a time component, with a clear source of correlation across observations: across time within the same individual firm. Cluster groups each firm’s quarterly numerical observation over the five years together and the cluster identification does not alter over the time period. The lack of the cluster would indicate that each of 13,400 observations represented a new firm, rather than 20 observations over time generated by 670 firms. Thus, employing cluster in this model is critical in ensuring that the model is correct and representative of the actual sample size.
Different industrial characteristics could potentially generate significant variations in firm profitability. The TSE classifies firms into eighteen different industry categories, which include cement, foods, plastics, textiles, electric machinery, electrical and cable, chemical biotech, glass and ceramics, paper and pulp, iron and steel, rubber, automobiles, electronics, building and
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construction, shipping and transportation, tourism, trading and consumers, and other industries. Subsequently, seventeen dummy variables are created to organise all the sample firms into different industries. Table I provides a summary of the number of family and non-family companies, in addition to the 18 different industries identified by the TSE with corresponding percentages of family firms present.
Table 1 Number and Percentage of family and nonfamily firms listed on the TSE (n = 670) TSE
Code
Industry Total
Firms
Family Firms Non-Family Firms Family Firm Percentage 1100 Cement 7 4 3 57.1 1200 Foods 21 12 9 57.1 1300 Plastics 20 15 5 75.0 1400 Textiles 45 17 28 37.8 1500 Electric Machinery 36 20 16 55.6
1600 Electrical and Cable 13 7 6 53.8
1700 Chemical Biotech 36 20 16 55.6
1800 Glass and Ceramics 4 2 2 50.0
1900 Paper and Pulp 7 3 4 42.9
2000 Iron and Steel 28 17 11 60.7
2100 Rubber 9 4 5 44.4
2200 Automobile 5 4 1 80.0
2300 Electronics 326 137 189 42.0
2500 Building and Construction 41 23 18 56.1
2600 Shipping and Transportation 16 10 6 62.5
2700 Tourism 8 6 2 75.0
2900 Trading and Consumer 12 6 6 50.0
9900 Others 36 24 12 66.7
Note: Family firms are defined where total family ownership including family members and relatives exceeds 20% of shares
The data from table 1 indicates the prevalence of family firms in the Taiwanese economy, with only four industries, textiles (37.8%), paper and pulp (42.9%), rubber (44%), and
electronics (42%) exhibiting family firm percentages below 50%. These findings reaffirm Anderson and Reeb’s (2003) proposal that controlling for industry features is essential in conducting empirical analysis of firms.
iv. Hypotheses
This thesis aims to provide evidence to prove the following two hypotheses.
A study conducted by Demsetz and Lehn (1985) suggested that block shareholders have increased incentives to maximise firm value. In addition, Anderson and Reeb (2003) stated that family wealth is strongly correlated with firm value; growth in the firm’s stock value translates to increased family wealth. In family firms, board members are often family members or maintain close connection with family shareholders (Filatotchev et al., 2005). Furthermore, Taiwan has mandated that board members in publicly-listed firms are required to hold shares of the company. Therefore, the increased financial incentives created through family ownership,
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potentially aligns the interests of family and minority shareholders. Hence we form our firm hypothesis:
Hypothesis 1: In Taiwan, an increase in family ownership is positively correlated with better stock (Tobin’s Q) performance for publicly-listed firms.
Filatotchev et al., (2005) suggested that family ownership not only generates increased financial incentives for family management members, but increases their ability to make sound and profitable financial judgement. The focus of family firms on long-term survival and firm growth indicates that family firms seek to maintain firm profitability and are not willing to take on excessive financial risk. These advantageous aspects can potentially convert into increased firm profitability. Additionally, family shareholders encounter greater motivation to oversee firm management and reduce free-rider problems associated with independent individual shareholders (Anderson & Reed, 2003). Thus, it is entailed that:
Hypothesis 2: In Taiwan, an increase in family ownership is positively associated with better accounting (ROA) performance of publicly-listed firms.
IV. Results
i. Descriptive Statistics
This initial section presents the results of the descriptive statistics, including the mean, median, standard deviation, minimum, and maximum of the variables. Table 2 displays the descriptive statistics for the sampled firms, with Tobin’s Q and ROA as indicators for firm performance.
Table 2 Descriptive Statistics of Variables (n = 670 firms)
Variables Mean Median Standard
Deviation Min. Max. ROA 5.44 4.27 8.51 -377.82 96.45 Tobin’s Q 0.86 0.66 0.69 0.02 11.06 Family Ownership (%) 22.96 19.83 13.99 0.12 94.94 Ln(Firm Size) 16.06 15.82 1.42 11.12 21.62
Long-term debt ratio (%) 119.82 77.73 584.34 1 59380.21
R&D/Sales (%) 2.94 0.99 9.39 0 557.43
Ln(Firm Age) 3.51 3.57 0.39 2.3 4.25
Ln(Market Capitalisation) 15.66 15.55 1.43 10.61 22.02
The accounting performance measure (ROA) exhibited a maximum of 96.45%, a minimum value of -377.82%, and the mean (median) were 5.44 (4.27) per cent. The stock market
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measurement, Tobin’s Q showed a maximum value of 11.06 and a minimum value of 0.02, with the mean and median being 0.86 and respectively. The minimum family ownership percentage was found to be 0.12% and the maximum was 94.94%. The mean family ownership is 19.83 per cent, consistent with previous remarks on the concentration of equity ownership in family firms. Furthermore, these statistics suggest that substantial variations are found in the performance indicators of the sampled firms.
ii. Multivariate Analysis
OLS multiple regression analyses were employed to examine if a positive relationship existed between family ownership and firm performance. The results were computed after controlling for variables such as firm age, research and development ratio, long-term debt ratio, firm age, market capitalisation, and industry association. Table 3 below provides a summary of the analysis results. Two independent variables, ROA and Tobin’s Q, were utilised in the two models created. Models 1 and 3 are regression analyses that have only included the control variables, whereasModels 2 and 4 incorporate the full regression, the independent variable (Family Ownership) and the control variables.
Table 3 OLS Results of Family Ownership and Firm Performance (n = 670 firms)
Variables ROA (EBITDA) Tobin’s Q
Model 1 Model 2 Model 3 Model 4
Intercept -14.72*** (5.69) -16.27*** (5.91) 1.22*** (0.22) 1.20*** (0.22) Family Ownership 0.02** (0.01) 0.0003 (0.00073) Ln(Firm Size) -2.19*** (0.50) -2.12*** (0.51) -0.82*** (0.05) -0.81*** (0.05) R&D/Sales -0.09*** (0.02) -0.09*** (0.02) 0.002** (0.0009) 0.002** (0.0009) Long-term debt ratio -0.0001
(0.0002) -0.0001 (-0.0003) 0.00008 (0.00007) 0.00008 (0.00007) Ln(Firm Age) -0.43 (0.44) -0.34 (0.44) -0.13*** (0.03) -0.13*** (0.03) Ln(Market Capitalisation) 3.60*** (0.33) 3.56*** (0.33) 0.85*** (0.05) 0.84*** (0.04) R2 0.1234 0.1247 0.7557 0.7559 F-Statistic 24.35 23.66 49.32 46.89
Note: ***, **, * Denotes significance at the 1%, 5%, and 10% levels, respectively. For simplified presentation purposes, the 17 industry dummy variables are not displayed in this table (Further details are provided in the appendix)
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Consistent with the hypothesis, when the family ownership variable was introduced to the regression analysis, both models for stock and accounting performance indicators displayed a slight increase in the explanatory power (R2). However, this increase in explanatory power was significantly less than anticipated, rising only 0.0013 and 0.0002 for ROA and Tobin’s Q models respectively. Most significantly, the family ownership regression coefficient for ROA was significant and positive, suggesting a positive association for family ownership.
The positive outcome for the accounting measure (ROA) is in line with the original
hypothesis of the study, that family ownership and firm performance are positively associated. The control variables that reflected significantly in the regression are firm size, research and development ratio, and market capitalisation. In addition, firm age appeared significant for Tobin’s Q but was insignificant for ROA. Table 3 indicates that firm size is negatively associated with firm performance, indicating the presence of diseconomies of scale. Diseconomies of scale imply that as firms expand, they experience increased unit costs of production. This coincides with the large number of SMEs in Taiwan; which according to the Ministry of Economic Affairs employed 78.30 per cent of all employed persons in Taiwan. These SMEs generally remain small scale manufacturers and lack the ability to develop economies of scale. The research and
development ratio (R&D/Sales) was negatively associated with ROA but positively associated with Tobin’s Q.With respect to the R&D ratio, the negative coefficient could be an anomaly, the result of low economic activity and decreased exports in Taiwan after the 2008 Financial Crisis. The negative coefficient of ROA corresponded with the findings of Shyu (2011). Shyu (2011) stated the marginal productivity of R&D is highly responsive to the greater macroeconomic environment, generating negative marginal productivity in economic downturns. On the other hand, the positive correlation with Tobin’s Q follows traditional economic theory that research and development investments promote product differentiation and firm growth, increasing firm value. The natural logarithm of market capitalisation is significant and positively correlated with firm performance, both Tobin’s Q and ROA.Faccio, Lang, and Young (2001) found a positive association between control rights and dividends as a ratio of market capitalisation. Faccio et al. (2011) stated that in such circumstances, firm insiders have more flexibility in providing lower dividend payments. Higher market capitalisation associated with family firms is consistent with academic theory that family ownership provides long-term growth for firms (Anderson & Reeb, 2003; Filatotchev et al., 2005; Burkart et al, 2003).
Conversely, the stock market indicator (Tobin’s Q) did not share similar results, although the coefficient indicated positive, it was determined to be insignificant. The insignificance of
Tobin’s Q corresponded to the regression findings of Shyu (2011). Shyu (2011) found that family ownership increased the performance of ROA (EBITDA) and ROA (NI). The increase in performance maximised at 30.41 and 30.44 per cent family ownership respectively, before further family ownership induced a negative relationship with performance. However, the Tobin’s Q model conducted by Shyu (2011) showed similar results to this study. Tobin’s Q exhibited a positive and significant correlation with family ownership, but indicated an
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potential source of insignificance to the high instability during the sample period (2002-2006), citing the SARS outbreak in 2003 and political instability during the 2004 presidential elections. Fluctuations in the macro environment were reflected in the Taiwan Weighted Stock Index (TWSI); where percentage differences of high-low points on the TWSI were measured to be between 30-40% during the sample period (Shyu, 2011). An identical analysis was conducted by this study on TWSI fluctuations between the sample years, 2010 to 2014. A 24 per cent high-low point difference was found in 2010 and 35 per cent in 2011. Between 2012- 2014, lower
volatility affected the TWSI, thus percentage differences remained approximately between 10-20 per cent. However, high percentage differences in 2010 and 2011 reflected similar market
volatility incurred in the examination by Shyu (2011). According to Demsetz and Villalonga (2001), Tobin’s Q is susceptible to changes in investor psychology, with regard to
macroeconomic forecasts. Consequently, the insignificance of the Tobin’s Q model in this study may be attributed to these economic trends.
Finally, firm age showed a negative coefficient for both performance measures, but was only significant for Tobin’s Q. The negative coefficient indicates that firm performance and firm age are negatively correlated; reflecting the liability of obsolescence, as the firm grows older, its competitiveness and profitability decreases (Jara‐Bertin et al., 2008). The negative coefficients for firm age and firm size in the Tobin’s Q model reproduce results found in Anderson and Reeb’s study. In general, the results for control variables yielded in this regression are consistent with those found in prior research. The regression analysis suggests that family ownership brings both advantages and disadvantages to firms. The results from the stock market performance were determined to be insignificant, and therefore inconclusive. However, in terms of ROA and accounting performance, the advantages outweigh the costs, thus creating a positive relationship.
iii. Limitations
There are certain limitations in the analysis conducted by this study. Similar to prior research, sample firms were drawn from publicly listed firms, due to the lack of information regarding ownership and financial accounts in private firms. Firms included within the sample size were all publicly-listed firms on the TSE; private non-public businesses were excluded in the sample selection process. Nonetheless, Classens et al. (2000) stated that a significant amount of East Asian firms are small and family operated; similarly, these family business structures are widespread in Taiwan. The lack of organised and consistent documentation for numerous
Taiwanese firms has constrained the study from conducting a more comprehensive examination. Therefore, the practical application of family ownership and effect on firm performance is conditional to institutional contexts.
The second limitation occurred in this study regards the TEJ database and the sample
collection method. Complete comprehensive data on family holdings is not available on the TEJ database or the TSE, thus the computed percentage of total family ownership may potentially be underestimated and subject to greater variation. In addition, unforeseen circumstances in
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family networks, may have substantial influence over firm performance. Chu (2009) observed the prevalence of complex shareholdings among associated firms and family business networks in Taiwan contribute to a dynamic economic environment, which is beyond the scope of this study’s analysis. As a consequence, the results of this study are limited to Taiwan and may not be extended to interpret the effects of family ownership in other regions.The aspects discussed, may provide points for future research to incorporate, when conducting regression analysis. V. Conclusion
This study conducted regression analysis to find empirical evidence of a relationship between family ownership and firm performance. Our prior hypothesis assumed a positive relationship between family ownership and firm performance. This study, through examining past literature and reviewing prior research, argued that family ownership advantages are more adapted and integrated into the Taiwanese economy, therefore the relationship between firm performance and family ownership was expected to be positive.
The regression analysis in this study analysed 670 publicly-listed firms on the TSE. Examining the data revealed the prevalence of family firms in Taiwan, representing
approximately 50% (49.4%) of the sample firms analysed. Controlling for firm and industry specific variables, the results of the multivariate regression analysis indicated compelling evidence that family ownership is positively associated with accounting performance. The outcome of our analysis indicates that the ROA is positively associated with to an increase in family ownership. More specifically, the results indicated that a 1% increase in family
shareholdings is associated with a simultaneous 0.02% increase in firm accounting performance. However, Tobin’s Q generated insignificant results; therefore the relationship between stock market performance and family ownership is deemed inconclusive. With respect to significant control variables, our findings indicate that firm value (Tobin’s Q) is negatively associated with firm size and firm age. A positive relation is observed between Tobin’s Q with the R&D ratio and market capitalisation. Similarly, ROA is negatively linked with firm size, firm age, and R&D sales, but positively connected to market capitalisation.
This study contributes to the theoretical and empirical understanding of the relationship between family ownership and firm performance. The findings of the study highlight a positive relationship between family ownership and ROA, despite the insignificance of the Tobin’s Q model. Family firms are prevalent in the economies of Taiwan and East Asia, and through the findings in this study, potentially form an advantageous business structure. Family ownership and firm performance affect each other simultaneously. Family firms receive the advantages from family ownership such as the presence of family shareholders, reduced agency costs, and increased capital capabilities. The high concentration of family shareholdings in Taiwan shows the connection between family wealth and firm performance. On the other hand, firm
performance influences family ownership. Firms that experience lower performance facilitate the decrease of family shareholdings. Overall, the analysis suggests that the potential advantages of family ownership supress the disadvantages, thus a net positive relationship is produced.
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17 Appendix
Table A1 OLS Results of Family Ownership and Firm Performance with Dummies
Variable ROA (EBITDA) Tobin’s Q
Intercept -16.27*** (5.91) 1.20*** (0.22) Family Ownership 0.02** (0.01) 0.0003 (0.00073) Ln(Firm Size) -2.12*** (0.51) -0.81*** (0.05) R&D/Sales -0.09*** (0.02) 0.002** (0.0009)
Long-term debt ratio -0.0001
(-0.0003) 0.00008 (0.00007) Ln(Firm Age) -0.34 (0.44) -0.13*** (0.03) Ln(Market Capitalisation) 3.56*** (0.33) 0.84*** (0.04) Dum 1 -1.87 (1.48) -0.12* (0.07) Dum 2 0.52 (1.74) -0.06 (0.08) Dum 3 0.11 (1.62) -0.16** (0.06) Dum 4 1.16 (1.70) -0.01 (0.08) Dum 5 1.67 (1.73) -0.08 (0.07) Dum 6 -0.08 (1.58) 0.04 (0.12) Dum 7 1.73 (1.83) 0.03 (0.10) Dum 8 -0.03 (1.92) -0.11 (0.09) Dum 9 -1.17 (1.80) 0.09 (0.09) Dum 10 0.19 (1.50) -0.06 (0.07) Dum 11 2.05 (1.62) -0.15** (0.06) Dum 12 -0.91 (1.57) -0.10 0.10 Dum 13 1.22 (1.66) -0.11* (0.07)
18 Dum 14 0.32 (1.57) -0.10 (0.07) Dum 15 -0.47 (1.41) -0.13* (0.07) Dum 16 1.31 (2.27) 0.22 (0.36) Dum 17 -1.22 (1.66) 0.11 (0.14) R2 0.12 0.75 F-Statistic 23.66 46.89
19 Table A2 Correlation Coefficients of Variables
ROA Tobi n’s Q Family Ownership Ln(Fir m Size) Ln(Fir m Age) Ln(Market Capitalisatio n) Long -term debt ratio R&D/Sal es ROA 1.00 Tobin’s Q 0.22 1.00 Family Ownership 0.03 0.07 1.00 Ln(Firm Size) 0.16 -0.15 -0.13 1.00 Ln(Firm Age) -0.05 -0.20 0.01 0.10 1.00 Ln(Market Capitalisati on) 0.28 0.28 -0.09 0.88 0.01 1.00 Long-term debt ratio -0.05 -0.08 -0.01 0.06 0.02 -0.03 1.00 R&D/Sales -0.06 0.16 -0.08 -0.08 -0.21 -0.004 -0.02 1.00
