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Does family control help or hinder a company's value in China?
(knowledgeatwharton.com.cn)
Updated: 2010-02-04 17:52
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Does family ownership, control or management help or hinder the value of a company? The answer depends on a lot of factors, some of which aren't always in a company's control and could have just as much to do with where a company is based as with who is running it.
According to research conducted in 2006 by Raffi Amit of The Wharton School and Bella Villalonga of Harvard Business School, family ownership in the US does indeed have a positive impact on the value of a company, as it also does when a company's founder is its CEO. However, it's a different - less positive - situation when a family wields more management control over a company than its share ownership permits and when a founder hands over a company to subsequent generations to manage. With other research finding similar results for companies in Europe, Amit and Villalonga decided to look further afield. Their next port of call? China.
The two professors recently wrote a paper along with Ding Yuan and Zhang Hua of the China Europe International Business School (CEIBS) in Shanghai, titled, "The Role of Institutional Development in the Prevalence and Value of Family Firms," which aims to shed light on China's family firms. They studied 1,453 listed companies in the country in 2007 - 491 of which were family firms and 962 were non-family firms, with the latter group comprising 896 State-owned enterprises (SOEs) and 66 that were neither family- nor State-controlled. For each firm, the researchers looked at the market value of its tradable equity plus the book values of non-tradable equity and net debt (liabilities minus liquid assets), divided by total assets.
The result? "Our research suggests that family firms do not inhibit growth and development as is sometimes argued," says Amit. "These findings are particularly relevant for China as it continues its transition from a centrally planned system to a market economy."
And the research comes at a time when China's family firms are raising their profile, inside and outside the country. Meanwhile, more family-run industry leaders are on the way. Family businesses are expected to emerge much faster and more actively thanks to ChiNext, the new stock exchange opened last year in Shenzhen. ChiNext is seen as China's answer to NASDAQ by providing a new alternative for the country's smaller companies to get public financing. Among the 50 companies listed on the new exchange currently, more than 90% are family businesses, with the largest shareholder stake belonging to one family.
Testing ground, China
The effect of family ownership on Chinese firms is very similar to elsewhere. "First, family ownership is positively and significantly related to value, and second, family control in excess of ownership, which in China is primarily achieved through pyramid control structures, is negatively and significantly related to value," says Amit. "Third, family management, which in China is primarily exercised by founders, bears no significant relation to value in the full research sample," but does in the parts of the country with less-developed institutions.
Indeed, a critical part of the research looked at the role of institutional development - that is, the quality and enforcement of local laws as well as the competence and fairness of government institutions – in the proliferation of family firms and value of having family members involved in one way or another. "The presence of family control is a response to institutional development, not to cultural differences," asserts Amit. "Moreover, the relatively higher prevalence of these firms in regions with high institutional efficiency suggests that family firms do not inhibit growth and development as is sometimes argued."
Previous research attempted to explore institutional differences in the value of family businesses by comparing countries. "However, when comparing countries, a lot of noise, including cultural differences, is hard to control," explains Ding of CEIBS.
Some key assumptions are hard to test when comparing different countries. These include the investor protection theory, which argues that in a country with less investor protection, family ownership is the best way to resolve the "agency conflicts" that arise between shareholders and managers. Another includes the internal market theory, which contends that in an undeveloped economy with scarce resources such as capital and labor, a family business is more efficient. "Although these are important explanations, they are not complete, as there are a lot of complicated cultural elements that are hard to control," says Ding.
But some forms of analysis are easier in China, as the researchers learned. While its laws and culture are more or less uniform, there's an enormous disparity between institutional development from one region to the next. "That makes China an ideal setting to analyze our research question about the role of institutional development in the prevalence and value of family firms," says Ding. "For all the listed companies in China, the legal [environment], including regulations and financial disclosure, are the same."
