Family Firms, Corporate Governance and

Performance:

Presented By:Ambu GyawaliAnita K. LuitelAyush Nepal

Barsha ShresthaBidur Koirala

Evidence from Zhejiang

Introduction• The case deals about the Family Firms, Corporate Governance and

Performance.• The case deals with:

▫ Family firm’s performance ▫ Ownership Structure and Performance ▫ CEO duality ▫ Nepotism

• The case examines :▫ The stake of the largest family shareholder▫ The leadership structure and ▫ The characters of management impact on family firm performance.

The Concept of Family Business• A firm whose ownership passes from one generations of a family to another.• It is closely held firm whose ownership and policy making are dominated by

members of an ‘emotional kinship group’.

Literature Review• (Weber 1951, Hajnal 1982)Family loyalty and obligations took precedence over

other loyalties and obligations, thus, the Chinese extended family tended to dilute individual incentives to work, save, and invest.

• Whyte (1995) observes that despite tremendous changes, such as the shift from the extended to the nuclear family and the dismantled organizational structure of the lineage system, some features of Chinese families persisted, such as loyalty to the larger kin groups and sacrifice of personal interests for the sake of the family.

• Gorriz and Fumas (1996) have studied family-owned firms in Spain. They used both productivity and profitability as measures of firm performance. They found that on an average, family firms have higher productivity than non-family-owned firms, but they did not find any difference in profitability.

• (Fukuyama 1995) Chinese business continues to be based on family ties. The Chinese family provides the social capital with which to start up new businesses, but it also prevents them from evolving into durable, large-scale institutions.

Significance of the Study• Study reveals the association between family firms, corporate governance and

performance, which has been identified for public firms, persists in private firms.

• The study focuses on the difference between if family-owned firms are more productive than non family business in Zhejiang province due to resource scarcity and environmental dynamism.

• The study also helps learn about the proportion of shares owned by the largest family shareholder doesn’t harm the performance of family-owned firms.

• The study is also done to see whether there exists statistically significant relationship between CEO duality and performance of family-owned firms.

• And also the study is done to check if nepotism is negatively associated with family-owned firm performance.

Data, Methodology & Empirical Test• Data collected is restricted to a particular geographical region• Includes intensive interviews of firm owners of 311 random sample of

enterprises in Zhejiang Province• Questionnaire includes:

▫The Firm’s Size▫Firm’s History▫Basic Financial Information▫Governance Structure ▫Owners Family Background▫Education▫Occupation▫Experience

Research Methodology• Dependent Variables

▫Sales▫Value Added▫Value Added/Worker

• Independent Variables (Includes 4 Governance Indicators)▫Share▫CEO Duality▫Nepotism▫Leverage

• Control Variables▫Human Capital of the Owner▫Firm Age▫ Industry Dummies

Regression EquationMultivariate Regression with Cross-Section Data

ln Y = ln A +γfam +α ln L + β ln K + δX + ε

Where,Y = Sales or Value Added

fam = Dummie Variable (fam = 1 if family business & 0 otherwise)

L = Labour

K = Capital

α /β = Corresponding Elasticity

Value Added Per Worker

ln Y/L = ln A + γfam + β ln K/L + δX + ε

Relationship between CG and the Productivity of Family Firms

lnY = ln A + α ln L + β ln K + Ф1sha1 + Ф2lev + Ф3dua +Ф4nep + δX

+ ε

Value Added Per Worker ( Employed as Performance Measure)

ln Y/L = ln A + β ln K/L + Ф1sha1 + Ф2lev + Ф3dua +Ф4nep + δX + ε

HypothesisH1: Family-owned firms are more productive than non-

family business in Zhejiang Province due to resource scarcity and environment dynamism.

H2: The proportion of shares owned by the largest family shareholder doesn’t harm the performance of family- owned firms.

H3: There is no statistically significant relationship between CEO duality and performance of family owned firms.

H4: Nepotism is negatively associated with family-owned firm performance.

Conclusion• The paper investigates the relationship between CG and Firm

Performance based on Productivity employed rather than various accounting performance measure and Tobin’s Q.

• Family business performance is highly impacted by:▫Proportion of shares owned by the largest family shareholders▫The Leadership Structure▫Character of Management

• According to Empirical Findings ▫Family business performs better than Non-Family Business▫Nepotism is negatively correlated with productivity of the firm▫Owner’s education has significant impact on productivity

improvement▫There exists no significant relationship between CEO duality and

Family-Owned firm performance

Limitations

ThankYou!!!