Finance Cluster Seminar: Joseph Fan
The prevalence of family firms in capital markets around the world has raised public concern about the role of controlling families in investor rights protection. This study examines how founding family participation in firm ownership and management shapes related-party transactions that concern public investors with more than 1,200 Chinese publicly traded private-sector firms. Surprisingly, we find that firms with more family member participation engage in fewer potentially expropriating related-party transactions, suggesting a potential monitoring role by firm founding family members. Such effects are stronger in stocks that are thinly traded, followed by few analysts, and have more potential agency costs, suggesting the family governance compensates for the weak market governance. This key result is robust to treatments of endogeneity concerns. Moreover, the strength of the monitoring effect depends on family members’ positions in the family and ownership and/or managerial roles in the firm. Specifically, siblings and parents of the founder are associated with the fewer potential tunneling related party transactions, while children of the founder weakens the monitoring effect. Shareholding family managers are associated with fewer potential tunneling related party transactions than are family managers without shares and family owners who do not act as managers. The overall evidence suggests that the check and balance among founding family members benefits public investors, particularly so when market governance is weak to enforce investor rights.