Academic journal article Seoul Journal of Economics

Family Control, Product Market Competition and Firm Performance

Academic journal article Seoul Journal of Economics

Family Control, Product Market Competition and Firm Performance

Article excerpt

(ProQuest: ... denotes formulae omitted.)

I. Introduction

Most previous studies have reported both positive and negative influences of family control on firm performance. While studies showing evidence of positive influences assert that family ownership actually reduces the agency problem, due to the alignment of ownership and management (Anderson, and Reeb 2003), studies showing evidence of negative influences argue that the interests of controlling family shareholders infringe on the interests of minority shareholders (Holderness, and Sheehan 1988). Little research has been conducted on the association between external corporate governance and internal corporate governance, however, especially on the relation between product market competition and family control. Therefore, in this study we examine the effect of internal corporate governance on the agency problem, which has been found to be more severe when external corporate governance is weaker.

The effect of internal control on operating and stock market performance depends on the level of product market competition. In a similar study by Januszewski et al. (2002), Nickell et al. (1997) and Koke, and Renneboog (2005), the impact of corporate control (namely blockholder ownership) and product market competition on productivity growth is examined. Specifically, Januszewski et al. (2002) show that in the case of German manufacturers, the productivity growth seems to be higher when operating in markets with intense competition. In addition, a positive effect of competition increases even more so when strong ultimate owners (i.e., private individuals, government authorities) are in place, suggesting that competition and tight control are complementary.

On the other hand, Nickell et al. (1997) and Koke, and Renneboog (2005) suggest that product market competition and insider control are substitute mechanisms. Specifically, Nickell et al. (1997) indicate that in the case of UK manufacturing companies, strong ownership (the largest shareholders were insurance companies, pension funds or banks in this case) and product market competition are substitutes, each increasing the productivity. Koke, and Renneboog (2005) suggest that weak product market competition has a negative impact on productivity growth in both UK and German markets. For UK firms, however, it reports that a negative effect on weak product market competition is mitigated in firms with a large portion of insider control (directors and their families).

With these past studies in mind, the differentiating points of this study are as follows: First, this study focuses on controlling family shareholders whose characteristics are quite different from general large shareholders. Second, we study the family control variable in depth by analyzing the different impacts generated by different types of CEOs within the family firms when compared with nonfamily firms, further developing the results of preceding studies.

One of the defining characteristics of public companies in the US is the separation of management and ownership. This separation, however, can cause agency problems between managers and outside shareholders (Demsetz, and Lehn 1985; Jensen, and Meckling 1976; Shleifer, and Vishny 1997), and such agency problems can be even more severe for firms with weak external monitoring systems on management. Unlike firms with dispersed shareholders, however, undiversified investment by family members is characteristic of family controlled firms. Family shareholders consider these long-term investments as a way of connecting multiple generations, and value the reputation of the family firm (Anderson, and Reeb 2003; Anderson et al. 2002; Demsetz, and Lehn 1985; Steier 2001). Thus, the characteristics of family firms are quite different from those of conventional firms with general large shareholders. Family members often occupy important management positions and have considerable influence and control. …

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