International Journal of Managerial Finance

Family ownership and firm performance: evidence from Taiwanese firms

Jonchi Shyu
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Jonchi Shyu, (2011),"Family ownership and firm performance: evidence from Taiwanese firms",
International Journal of Managerial Finance, Vol. 7 Iss 4 pp. 397 - 411
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Family
Family ownership and firm ownership and
performance: evidence from firm performance
Taiwanese firms
397
Jonchi Shyu
Department of Business Administration,
National Taiwan University of Science and Technology, Taipei, Taiwan

Abstract
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Purpose – Using the panel data of 465 Taiwanese listed companies and taking into consideration
endogeneity issues this paper aims to examine the influence of family ownership on firm
performances.
Design/methodology/approach – The use of a panel data set encompassing a five-year period
enables one to examine both cross-sectional and within-firm variations in the relationships between
family ownership and firm performances. The paper also uses a simultaneous equation system to
account for the endogeneity between family ownership and firm performances, and apply the
quadratic equations to identify the percentage of family ownership that maximizes firm performance.
Findings – When either a profitability indicator (ROA) or a valuation indicator (Tobin’s Q) is applied,
the empirical results show that family ownership positively affects firm performance. The results also
show that the profitability of a firm (ROA) first increases and then decreases with family ownership. In
other words, when families have more than 30 per cent control of the firm, the potential for
entrenchment and poor performance becomes greater.
Originality/value – This paper is the first to examine the relationships between family ownership
and firm performances, while simultaneously addressing the issue of endogeneity and identifying the
optimal level of family ownership in Taiwanese firms. The finding that family ownership positively
affects firm performance elucidates why a family firm is one of the most important business
development models in Taiwan. Meanwhile, the finding that the percentage of family ownership
should not exceed 30 per cent to avoid the occurrence of poor performance also suggests that excessive
family shareholdings may not be necessarily healthy for a family firm in Taiwan.
Keywords Family ownership, Performance management, Endogeneity, Panel data, Taiwan, Companies
Paper type Research paper

Introduction
Family firms are common in advanced economies, such as Europe and the USA, and
are even more popular in Taiwan and other Asian countries. La Porta et al. (1999) used
listed companies in 27 countries around the world as samples and find that 68 per cent
of the sampled companies have controlling shareholders; in addition, they find that
family firms are the most common type of economic organization in these countries.
Anderson and Reeb (2003) studied 403 companies in the S&P 500 industries and claim
that more than one-third of these are family firms. Barontini and Caprio (2006)
examined 675 listed companies in 11 European countries and find that with 10 per cent
voting right as the control threshold, the firms controlled by families account for 53 per International Journal of Managerial
cent of the sampled companies. Claesens et al. (2000) studied 2,980 listed companies in Finance
Vol. 7 No. 4, 2011
nine countries in East Asia, and discover that at a 10 per cent control threshold, the pp. 397-411
companies controlled by families account for more than 50 per cent of the companies q Emerald Group Publishing Limited
1743-9132
studied. Yeh et al. (2001) examined 208 listed companies in Taiwan, and find that at a DOI 10.1108/17439131111166393
 IJMF 10 per cent control threshold, 81 per cent of the listed companies are controlled by
7,4 families. If a 20 per cent voting right is used as the control threshold, 51 per cent of
these firms would be considered family firms.
Whether the family firm is an effective business model remains an issue of ambiguity,
presenting challenges to researchers in their efforts to generate a consensus. Anderson
and Reeb (2003) claim that family firms perform better than do non-family firms in both
398 profitability-based and market-based measurement. James (1999) proposes that family
firms have a long-term vision in investments and yield better returns. Barontini and
Caprio (2006) sampled European companies and argue that family control does not
hamper family performance. In contrast to the previously-mentioned findings, Faccio
et al. (2001) studied family firms in Europe and Asia, and find that family-owned
companies managed by non-family members perform worse than those managed by
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family members. Holderness and Sheehan (1988) show that the Tobin’s Q values of
family firms are lower than those of non-family firms. Miller et al. (2007) find that
Fortune 1000 firms that are owned by families, or employ relatives, as managers never
exhibit superior performance. Hence, the issue of whether family firms actually perform
better than do non-family firms warrants further investigation.
In Taiwan, corporate control is concentrated to a large extent in the hands of family
members; such ownership provides family members with considerable incentive to
maximize firm value. However, the benefits that family members acquire may come at
the expense of firm performance. Therefore, this paper aims to understand how family
ownership influences firm performance. Another important issue that we focus on is
determining under what percentage of family control can the performance of a firm be
strengthened? This subject matter is important given that family firms are common in
Asian countries.
In the discussion of whether family ownership affects firm performance, family
ownership itself may be an endogenous variable because family member-owners have
more internal information than do minority shareholders. Hence, the presence of family
control may signal positive prospects for the firm and enable easier decision-making
regarding company holdings. Therefore, firm performance may also influence the
willingness of a family to exercise control over a firm. Demsetz and Lehn (1985),
Himmelberg et al. (1999), and Morck et al. (1988) all indicate that without considering
endogeneity, the discussion of the correlation between equity ownership and
performance may lead to measurement bias. More recently, Adams et al. (2009) showed
that founder CEO status is endogenous in performance regression. Disregarding the
endogeneity of founder CEO status leads one to underestimate its effect on
performance [compared with standard ordinary least squares (OLS) regressions].
Hence, statistical bias may plague most of the previous studies, which fail to address
the endogeneity issue when examining the relationship between family ownership and
performance.
This paper is the first to examine the relationship between family ownership and
firm performance while simultaneously addressing the issue of endogeneity and
identifying the optimal levels of family ownership in Taiwanese firms. Empirical
results suggest that firm performance and family ownership influence each other. An
increase in family ownership can improve firm performance, and better firm
performance can lead to higher ownership holdings by a family. We also find that a
non-linear relationship (inverse U shape) exists between family ownership and firm
 profitability when endogeneity is considered. This finding indicates that the Family
percentage of family ownership should not exceed 30%, otherwise, the profitability of ownership and
the firm would be diminished.
firm performance
Family ownership and firm performance
Advantages and disadvantages of family firms
In Taiwan, many family firms are publicly listed. However, unlike other listed 399
companies in economically advanced countries where ownership is diversified owing
to numerous shareholders, the majority of family firms in Taiwan have relatively
concentrated equity ownership. Demsetz and Lehn (1985) suggest that investors with
high ownership concentrations are provided substantial economic incentives to reduce
conflicts associated with agency problems and maximize firm value. Caselli and
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Gennaioli (2002) and Burkart et al. (2003) state that ownership concentration empowers
family members to achieve their goals better than other shareholders can. Family
control may negate or significantly eliminate agency problems stemming from conflict
between shareholders and managers. Family wealth is closely linked to firm
performance; thus, family members have strong incentive to supervise managers and
improve firm performance.
The long-term nature of family ownership engenders family members tend to have
a longer investment horizon compared to other investors. In other words, family
members are more willing to carry out long-term investment plans compared with
other shareholders who focus chiefly on short-term or immediate profits ( James, 1999;
Stein, 1989). Stein (1988, 1989) argues that shareholders who work toward a long-term
vision are less likely to be harmed by the shortsightedness of managers and less likely
to give up profitable projects. Casson (1999) and Chami (1999) state that family firms
treat the firm not as part of their wealth, but as an asset for their descendants. The
survival of the firm is the main concern, suggesting that family members are
supporters of long-run corporate value maximization. This high level of trust and value
sharing can also more effectively reduce agent costs in family firms than in non-family
firms. Maury (2006) shows that active family control is associated with high
profitability; in non-family firms, passive family control does not affect profitability.
Martinez et al. (2007) also show that active family involvement in management
responsibilities can enhance firm performance.
Meanwhile, many studies have suggested that family members have both the power
and the incentive to seek personal benefits at the expense of firm performance. Demsetz
and Lehn (1985) mention that the Disney family influences the policies of the firm to
satisfy the needs of the family, rather than maximize the profits of the firm. According
to Demsetz (1983), family firms may choose non-monetary benefits and remove
resources from profitable projects and consequently damage firm performance.
DeAngelo and DeAngelo (2000) argue that when family members become major
shareholders, they are likely to ensure that managers execute policies pursuant to the
interests of the family, but not necessarily of the firm. In addition, family shareholders
tend to distrust non-family shareholders; therefore, they are less likely to establish
good relationships with the latter. The complicated relationships among family
members may also cause conflicts and damage the reputation of the firm in both the
eyes of the consumers and the shareholders. Using Fortune 1000 firms as samples,
Miller et al. (2007) show that firms owned by families or managed by relatives never
 IJMF outperform their counterparts in market valuation, even when the companies are run
7,4 by first-generation family members. Only lone-founder ownerships (in which no
relative of the founder plays a role) perform competitively in the market. Cucculelli and
Micucci (2008) find that inherited management within the family negatively affects the
performance of a firm. This effect is strongly associated with good performers,
especially in the more competitive sectors.
400 Family firms have certain competitive advantages; however, they also suffer from
certain disadvantages because of family attributes. In Taiwan, families own half of the
top 20 business groups, with total revenues accounting for more than 50 per cent of the
gross national product. This figure indicates the importance of family ownership in
Taiwan and raises the question of whether the benefits generated by family firms
compensate for their weaknesses.
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Endogeneity relative to family ownership and firm performance

Previous literature has addressed the influence of family ownership or manager
shareholding on firm performance, whereas only a few studies have investigated
whether reciprocal relationships exist between firm performance and family
ownership. In Taiwan, family members hold important managerial positions in their
firms. Compared with other shareholders, family members possess more internal
information and are better able to forecast the prospects of the firm. Therefore, they
increase or decrease their shareholdings accordingly. Does the degree of family
ownership expand or diminish according to the performance of the firm, or do
changes in family ownership lead to changes in firm performance? Anderson and
Reeb (2003) examined endogeneity issues using instrument variables (firm size and
stock return volatility) and the two-stage least square (2SLS) method to investigate
whether firm performance is subject to the influence of family ownership. Empirical
findings show that family ownership and firm performance influence each other.
Barontini and Caprio (2006) used linear instrumental variables regression to obtain
limited information maximum likelihood estimates, which help resolve endogeneity
problems in the study of family ownership and firm performance. The finding that
family ownership is endogenously determined implies that researchers should
consider this endogeneity when ascertaining the relationships between family
ownership and firm performance. Failure to do so is bound to yield biased
regression estimates.
When family ownership increases, family wealth is closely related to firm
performance; therefore, family members are provided considerable incentive to oversee
the functions of managers in enhancing firm performance. An expansion of family
ownership helps negate the agency problem that results from conflict between
shareholders and managers, thereby improving firm performance. However, with a
continual increase in family ownership and control over the firm, family members may
also endeavor to satisfy their personal interests at the expense of firm performance.
The question then arises as to how much family ownership is conducive to optimize
firm performance. Anderson and Reeb (2003) used ROA and Tobin’s Q as proxy
variables for performance, and show that the initial performance of US-based family
firms improves along with an expansion in family ownership. Firm performance
reaches its peak when family ownership is 30.8 per cent (measured using EBITDA),
27.6 per cent (measured using NI), and 31 per cent (measured using Tobin’s Q).
 However, firm performance begins to worsen when family ownership continues to Family
increase. The relationship between firm performance and family ownership appears to ownership and
take on an inverse “U” shape.
Unlike most previous studies that mainly address insider ownership, our study firm performance
focuses on family ownership. This topic merits considerably more investigation than it
has thus far received in the study of ownership structure on Asian business
performance. The use of a panel data set encompassing a five-year period enables us to 401
examine both cross-sectional and within-firm variations in the relationships between
family ownership and firm performance. We also examine the effects of potential bias
resulting from the joint endogeneity of ownership and performance. We use a
simultaneous equation system to account for any endogeneity between family
ownership and firm performance, and apply quadratic equations to identify the
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percentage of family ownership that maximizes firm performance.

Methodology
Sample selection and data sources
This study uses sampled panel data on companies listed in the Taiwan Stock
Exchange from 2002 to 2006. Financial institutions and insurance companies have
unique financial structures and are subject to the control and supervision of
government authorities. Thus, we exclude these two sectors from the sample data.
Companies with missing data during the sampling period are also excluded. A total of
465 listed companies during the five-year period are used as samples, resulting in 2325
firm-year observations. The data were collected from:
.
the database of the Taiwan Economic Journal, which provides financial data,
backgrounds of board members, and relationships among family members; and
.
annual reports and prospectuses of listed companies, which help calculate direct
or indirect family shareholdings.

Previous studies have shown that different definitions of a “family firm” may lead to
dissimilar empirical findings. Mok et al. (1992) define a family firm as an institution where
the total ownership holdings of either family members or the companies established by
the same family exceed 10 per cent, and where family members hold board seats. Burch
(1972) states that a family firm is where any family member owns more than 4 per cent of
equity and occupies a seat on the board of directors. Anderson and Reeb (2003) suggest
that family firms should be defined according to the following conditions:
.
continual ownership by family members; and (or)
.
family members acting as board members.

The previously mentioned studies define a family firm primarily on the bases of
percentage of ownership and (or) occupancy of board positions. Many family firms in
Taiwan are conglomerates wherein spouses and relatives are involved in management
or hold board seats. Therefore, this study defines a family firm as a company that
meets at least one of the following two conditions:
(1) total family ownership (including ownership by spouses and family members
up to third-degree relatives) exceeding 10 per cent, with family members as
board members; or
 IJMF (2) more than half of the board seats held by family members[1].
7,4 With this definition, 168 firms meet Condition 1 and 25 firms meet Condition 2, adding
up to 193 family firms.
Table I summarizes the number of family and non-family firms, as well as the
percentage of family firms in different industries in Taiwan. In electrical engineering,
402 cables and wires, chemicals, and other industries, the percentages of family firms all
exceed 50 per cent. Our sample includes 465 companies, of which 193 are family firms.
Over 40 per cent of the sampled companies are family firms, indicating that family
firms are relatively common business development models in Taiwan.

Model
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To address the potential endogeneity problem, we estimate a simultaneous equation

system of family ownership and performance using the 2SLS method. The
simultaneous equation system can be expressed as follows:

Performanceit ¼ b1i þ b2 Family ownershipit þ b3 ðFamily ownershipÞ2it

þ b4 Firm sizeit þ b5 Long-term debt ratioit

þ b6 Dividend yieldit þ b7 Institutional ownershipit

þ b8 R&D=salesit þ eit ð1Þ

Industry Non-family firms Family firms Per cent of family firms

Cement 5 3 37.5
Food 10 9 47.4
Plastics 11 9 45.0
Textiles 28 19 40.4
Electric machinery 12 14 53.8
Electrical and cable 5 8 61.5
Chemical 14 14 50.0
Glass, ceramics 3 2 40.0
Paper, pulp 5 2 28.6
Iron and steel 13 11 45.8
Rubber 5 4 44.4
Automobile 4 0 0.0
Electronic 99 63 38.9
Building material and construction 21 10 32.3
Shipping and transportation 11 4 26.7
Tourism 4 2 33.3
Trading and consumers goods industry 6 4 40.0
Oil, gas and electricity 4 2 33.3
Table I. Other 12 13 52.0
Number and percentage Total 272 193 41.5
of family and non-family
firms by industry Note: n ¼ 465 firms
 Family ownershipit ¼ b1i þ b2 Performanceit þ b3 Firm market valueit Family
ownership and
þ b4 Long-term debt ratioit þ b5 Dividend yield it
firm performance
þ b6 Return volatilityit þ eit ð3Þ

This study uses both profitability indicators (ROA) and valuation indicator (Tobin’s Q) 403
to measure firm performance. The accounting indicator used in this study is ROA,
calculated in two ways:
(1) NI divided by the book value of total assets, denoted as ROA (NI).
(2) EBITDA divided by the book value of total assets, denoted as ROA (EBITDA).
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Although EBITDA can better reflect the actual profitability of a firm, both ROA (NI)
and ROA (EBITDA) may be distorted by accounting treatments. Therefore, we use a
market indicator, Tobin’s Q (firm market value divided by asset replacement costs), to
evaluate firm performance. Tobin’s Q considers the cost of capital, risks, and time
value of money, and avoids problems associated with accounting principles. Given the
difficulties in calculating asset replacement costs, we adopt the simplified formula
proposed by Chung and Pruitt (1994) in the computation of Tobin’s Q. Family
ownership is the fractional equity ownership of the firm’s founding family. We
estimate family ownership as the ratio of the number of shares of all classes hold by the
family to total shares outstanding.
In regression analysis, we employ several control variables commonly used in
literature. R&D/Sales is the research and development costs divided by the sales
revenue of a given company. This variable represents the importance of intangible
assets for sales and functions as a control for asset specificity. R&D/Sales may
positively influence performance, as one would expect intangible assets to enhance
performance (Morck et al., 1988; McConnell and Servaes, 1990). However, firms with
high research expenditures (asset specificity) also entail larger costs for external
investors to monitor these expenses; thus, this factor may cause firm performance to
deteriorate (Chen and Steiner, 1999). The formula for long-term debt ratio is long-term
debt divided by total assets, which is expected to have a negative correlation with the
given operating performance of a company (Chen et al., 2003; Singh and Davidson,
2003; Demsetz and Villalonga, 2001) because leverage increases the floating and
bankruptcy costs of the company. Morck et al. (1988) claim that financial leverage can
capture the value of corporate tax shields, a scenario that increases the value of Tobin’s
Q. We expect long-term debt ratio to be negatively associated with family ownership
because firms with high debt ratios need to undergo relatively intense monitoring by
the external market, a scenario implying that less internal monitoring is imposed on
these firms (Chen et al., 2003; Jensen et al., 1992).
Return volatility represents the operational risk of a firm, and is measured
according to the standard deviation of the annual historical daily returns. High
firm-specific risk can increase the value of insider ownership because when market
asymmetries exist, managers in firms with high operational risks require elevated
insider ownership to gain market recognition (Chen et al., 2003). Firm size is measured
as the natural log of the book value of total assets (Ln (total assets)). We expect firm
size to have a positive relationship with performance (Andres, 2008) because larger
 IJMF firms are likely to be more efficient in asset utilization and benefit from economies of
7,4 scale. Some studies have also shown that firm size can be associated with the decrease
in firm value, insofar as a given firm becomes larger and more diversified (Lang and
Stulz, 1994; Demsetz and Villalonga, 2001). Firm market value is caculated as the
natural log of the market value (Ln (market value)). We expect firm market value to be
positively related to family ownership, insofar as family firms seek long-term
404 ownership (Casson, 1999; Chami, 1999). Firms with high valuation and future growth
potential may inspire family members to increase their equity holdings. Dividend yield
is defined as cash dividends per share divided by market price per share. Dividend
yield can decrease agency cost; therefore, it can be positively related to firm
performance ( Jensen et al., 1992; Chen and Steiner, 1999). By contrast, when the firm
lacks good investment opportunities, dividend yield can be negatively related to firm
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performance (Ross, 1977). Therefore, the direction of the impact of dividend yield on
family performance remains ambiguous (Chen et al., 2003). The influence of dividend
yield on family ownership is also unclear. We expect a negative correlation between
dividend yield and family ownership because dividend payments signify fewer free
cash flows, lead to decreased agency costs, and reduce potential needs of internal
monitoring by family ownership. However, high dividend yield stocks may signal
value and inspire ownership, particularly in the periods of weak economy (Chen et al.,
2003). Institutional ownership (%) is defined as the total holdings of government
agencies, financial institutions, and foreign institutional investors divided by the
number of outstanding shares. Institutional ownership acts as an external monitor and
is expected to be positively associated with performance (Chen et al., 2003; Pound, 1991;
Black, 1992).

Empirical results
Table II lists the descriptive statistics of the key variables for the sampled companies,
with Tobin’s Q, ROA (NI), and ROA (EBITDA) as the firm performance variables. For
market value performance indicators, the maximum value of Tobin’s Q is 6.57, the
minimum value is 0.28, and the mean (median) is 1.20 (1.04). For accounting
performance indicators, the maximum value of ROA (EBITDA) is 42.84 per cent, the
minimum value is 2 238.16 per cent, and the mean (median) is 7.14 per cent (7.31 per

Mean Median Std_Dev Max Min

Tobin’s Q 1.20 1.04 0.55 6.57 0.28

ROA (EBITDA) (%) 7.14 7.31 10.59 42.84 2 238.16
ROA (NI) (%) 3.07 3.08 8.53 40.05 2 165.54
Family ownership (%) 21.03 17.99 0.37 70.68 1.79
R&D/sales (%) 1.73 0.51 4.26 157.22 0
Long-term debt ratio (%) 8.59 5.35 9.63 55.41 0
Return volatility (%) 2.58 2.55 0.82 5.21 0.24
Firm size (NT$ million) 22.81 22.53 13.38 27.93 19.56
Firm market value (NT$ million) 22.27 22.14 1.48 28.18 18.11
Dividend yield (%) 0.76 0.35 1.25 27 0
Table II. Institutional ownership (%) 1.8 0 4.16 46.59 0
Descriptive statistics of
variables Note: n ¼ 465 firms
 cent). The maximum value of ROA (NI) is 40.05 per cent, the minimum value is Family
2 165.54 per cent, and the mean (median) is 3.07 per cent (3.08 per cent). These figures ownership and
indicate that significant variations are observed among the performance indicators of
the sampled companies. Variables of family ownership, R&D/Sales, long-term debt firm performance
ratio, return volatility, firm size, firm market value, dividend yield, and institutional
ownership, have mean values of 21.03, 1.73, 8.59, 2.58 per cent, NT$ 22.81 million, NT$
22.27 million, 0.76, and 1.8 per cent, respectively. 405
Table III shows the differences in mean values in each key variable for family and
non-family firms. The differences in mean values are also tested to observe whether
these differences are significant. Return volatility, firm size, market value, and
institutional ownership in family firms are significantly smaller than in non-family
firms. However, family and non-family firms do not have significant differences in
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R&D/Sales, long-term debt ratio, and dividend yield. With regard to performance,
family firms significantly function better than do non-family firms in three firm
performance variables at a 1 per cent significance level.
This study uses a simultaneous equation to solve the measurement bias resulting
from the existence of endogeneity in family ownership and firm performance. Based on
the method proposed by Kelejian (1971), this study uses all predetermined variables as
instrument variables, and employs the 2SLS technique to examine the regression
results. We also use panel data models with fixed effects to control for unobserved
heterogeneity[2].
Tables IV and V show the results of the simultaneous equations for family firms.
Table IV shows that regardless of whether the dependent variable is ROA (EBITDA),
ROA (NI), or Tobin’s Q, the coefficients of family ownership are all positive and
statistically significant. As shown in Table V, when family ownership is a dependent
variable, the coefficients of ROA (EBITDA), ROA (NI), and Tobin’s Q are also positive
and statistically significant. This confirms the jointly endogenous relationship
between family ownership and performance of firms. These two factors influence each
other. The increase in family ownership improves performance, and better
performance leads to higher family ownership.

Family firms Non-family firms t-statistic

Number of firms 193 272

Tobin’s Q 1.24 1.12 2.76 *
ROA (EBITDA) (%) 8.36 6.40 4.97 *
ROA (NI) (%) 4.14 2.43 5.20 *
Family ownership (%) 22.58 3.72 47.54 *
R&D/sales (%) 1.87 1.65 1.43
Long-term debt ratio (%) 8.27 8.78 2 1.3
Return volatility (%) 2.49 2.63 2 4.37 *
Firm size (NT$ million) 22.53 22.78 2 4.81 *
Firm market value (NT$ million) 22.06 22.43 2 6.37 *
Dividend yield (%) 0.73 0.77 2 0.93 Table III.
Institutional ownership (%) 0.90 2.39 2 11.55 * Difference of mean tests
between family and
Note: *Denotes statistical significance at the 1 per cent level non-family firms
 IJMF
Performanceit ¼ b1i þ b2 Family ownershipit þ b3 ðFamily ownershipÞ2it þ b4 Firm sizeit
7,4
þ b5 Long-termdebt ratioit þ b6 Dividend yieldit þ b7 Institutional ownershipit

þ b8 R&D=salesit þ eit
Variable ROA(EBITDA) ROA(NI) Tobin’s Q
406
Intercept 4.4998 3.3449 12.8963
Family ownership (3.43) * * * (3.16) * * * (14.17) * * *
12.8007 10.3659 32.3264
(Family ownership) (2.47) * * (2.48) * * (5.23) * * *
221.0268 2 17.0452 221.4461
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Firm size (22.44) * * * (2 2.45) * * (20.81)

0.1668 0.1207 0.4690
Long-term debt ratio (3.76) * * * (3.37) * * * (14.22) * * *
20.189 2 0.1636 20.1541
Dividend yield (22.57) * * * (2 2.76) * * * (21.86) *
0.0392 0.0383 0.2605
Institutional ownership (3.33) * * * (4.03) * * * (22.32) * * *
20.2587 2 0.2401 20.069
R&D/sales (21.34) (2 1.54) (20.36)
20.1721 2 0.2013 0.0871
Adj R square (21.25) (2 1.82) * (0.55)
0.1029 0.0835 0.0998
Table IV. Inflection point (%) 30.44 30.41 N/A
2SLS estimates of family
ownership on firm Notes: , * * * and * * * denote statistical significance at the 10, 5 or 1 per cent level, respectively.
performance n ¼ 193 family firms

Empirical findings show that when ROA (EBITDA) and ROA (NI) are the performance
indicators, the coefficient of family ownership is positive and the coefficient of the square
of family ownership is negative. This result indicates that performance initially
improves along with the increase in family ownership. When family ownership is
approximately 30.41 and 30.44 per cent, ROA (EBITDA) and ROA (NI) reach their peak.
However, afterwards, profitability (ROA) begins to drop accordingly with increasing
family ownership. A non-linear relationship (inverse U-shaped curve) exists between
family ownership and firm performance (profitability). When Tobin’s Q is used as the
performance indicator, firm performance (valuation) exhibits a significantly positive
correlation with family ownership; however, it shows an insignificantly negative
correlation with the square of family ownership. Therefore, determining the optimal
family ownership to maximize a firm’s market value is not possible.
This result may be caused by the high volatility of the Taiwan stock market in our
sample period. During this period, Taiwan was experiencing the severe acute
respirotory syndrome (SARS) outbreak and the 2004 Taiwan presidential elections
debacle. These two extraordinary events significantly influenced investor psychology,
 Family
Family ownershipit ¼ b1i þ b2 Performanceit þ b3 Firm market valueit þ b4 Long-term debt ratioit
ownership and
þ b5 Dividend yield it þ b6 Return volatilityit þ eit firm performance
Variable Family ownership Family ownership Family ownership

Intercept 0.0243 0.0577 0.2555 407

(1.92) * * (2.12) * * (6.93) * * *
ROA(EBITDA) 0.3995
(3.36) * * *
ROA(NI) 0.2278
(2.99) * * *
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Tobin’s Q 0.0482
(4.19) * * *
Firm market value 0.0144 0.0072 0.0177
(1.71) * (1.15) (1.89) *
Long-term debt ratio 20.0777 2 0.0445 2 0.0251
(23.09) * * * (2 1.97) * * (2 2.31) * *
Dividend yield 0.0052 0.0016 0.0061
(1.44) (0.39) (1.58)
Return volatility 0.9636 0.7423 0.3947
(5.17) * * * (5.56) * * * (2.59) * * *
Adj R-square 0.1441 0.1309 0.0907 Table V.
2SLS estimates of firm
Notes: *, * * and * * * denote statistical significance at the 10, 5 or 1 per cent level, respectively. performance on family
n ¼ 193 family firms ownership

thereby generating remarkable fluctuations in the Taiwan Weighted Stock Index

(TWSI). The percentages of difference between high and low points for TWSI are 45
per cent in 2002, 48 per cent in 2003, 35 per cent in 2004, and 42 per cent in 2005-2006.
As argued by Demsetz and Villalonga (2001), Tobin’s Q is buffeted more strongly by
investor psychology in relation to forecasts of numerous world events. The absence of
a non-linear relationship when firm performance is measured by Tobin’s Q may be
attributed to this phenomenon. Hence, we prefer to look at what management “has
accomplished” rather than “will accomplish” in analyzing the effect of family
ownership on firm performance[3]. Based on these results, family ownership of up to 30
per cent in a Taiwanese family firm is associated with better performance
(profitability). This figure exceeds the average ownership level of 22.58 per cent
observed in our sample. The finding also suggests the need to increase family
shareholdings for listed family firms in Taiwan.
Table IV shows that firm size is positively correlated and long-term debt ratio is
negatively correlated with firm performance. Both signs are consistent with our
expectations. Dividend yield carries a significantly positive sign, indicating that
high-dividend stocks are preferred during periods of weak economy[4]. The relationship
between institutional ownership and performance is statistically nonsignificant,
suggesting that institutional investors undertake no active external monitoring.
 IJMF Efficient monitoring hypothesis does not exist in Taiwanese family firms. R&D carries a
7,4 negative sign and is statistically significant with ROA. This result differs from those
reported in US data (Morck et al., 1988; McConnell and Servaes, 1990); however, it is
consistent with the study of Chen et al. (2003) on Japanese firms. Chen et al. (2003) offer
possible explanations for the previously-mentioned results, proposing that a short
timeframe makes reflection of R&D results in net incomes impossible. Therefore, the
408 recognition of R&D costs as expenses lowers profitability. The marginal productivity of
R&D is highly susceptible to the effects of economic conditions. When the economy
struggles through a slowdown, the marginal productivity of R&D may be negative.
Table V shows a negative correlation between long-term debt ratio and family
ownership, suggesting that less internal monitoring occurs in family firms. The
positive relationship between return volatility and family ownership indicates that
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volatility may increase the value of family ownership because uncertainty makes
monitoring managerial contributions to firm performance much more difficult. Our
study uncovers only weak evidence of a positive effect of market value on family
ownership. Dividend yield has no effect on family ownership.

Conclusions
This study considered endogenous issues and used simultaneous equations to study
the influence of family ownership on firm performance. Whether a profitability
indicator (ROA) or a valuation indicator (Tobin’s Q) is used, family ownership
positively affects firm performance. Our findings elucidate why a family firm is one of
the most important business development models in Taiwan and other Asian
countries. Empirical results also show a jointly endogenous relationship between firm
performance and family ownership. An increase in family ownership enhances firm
performance, thereby driving family ownership even higher. The concentration of
family ownership in Taiwan indicates that the wealth of a family is closely related to
firm performance, in which the family has stronger incentive to maximize firm
performance. Therefore, family ownership affects firm performance. Compared with
other shareholders, family members have more internal information and can foresee
the prospects of a given firm more easily. This advantage allows family members to
make sound decisions on whether to reduce or increase their holdings. In other words,
firm performance also influences the changes in family ownership.
With regard to family-ownership levels that are most beneficial to firms, the results of
our study show that the profitability of a firm (ROA) initially increases with an increase
in family holdings, and reaches its peak when family ownership is approximately 30 per
cent. However, profitability begins to decline when family ownership increases further.
The relationship between firm profitability and family ownership appears to take on an
inverse U-shaped curve. Therefore, if family ownership is maintained at approximately
30 per cent, the alignment between family interests and firm profitability reaches its
highest level. At this point, family members have greater incentive to maximize the
profitability of the firm through supervision and management, but fewer motives to
entrench the profitability of the firm for the benefits of the family.

Notes
1. Yeh et al. (2001) studied family control and corporate governance in Taiwan in 1994-1995. They
find that the critical control levels for Taiwanese listed firms are 14.97 per cent (mean) and 13.14
 per cent (median). The largest family shareholder holds 53 per cent (mean) and 50 per cent Family
(median) of the board seats. Hsu (1997) finds that family control via a family member’s position
in the board of directors and senior management is gradually decreasing in Taiwan. According ownership and
to the database of the Taiwan Economic Journal, the average shares directly owned by family firm performance
members in Taiwanese listed companies show a decrease from 13.24 per cent in 1996 to 9.74 per
cent in 2006. Because our study period covers 2002-2006, we expect the critical control level for
Taiwanese firms to be lower compared with that in 1994-1995. Therefore, we consider family
ownership of more than 10 per cent as a criterion for classifying a company as a family firm. 409
However, using the critical control level to effectively define family firm may not be sufficient.
This must also hold true when a family controls more than 50 per cent of the board seats. To
sufficiently consider this factor, some family members may control the firm through the holding
of board seats Therefore, we define family firm as a firm that meets at least one of the following
criteria: total family ownership exceeding 10 per cent and family members as board members;
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or more than 50 per cent of the board seats held by family members.
2. Unobserved firm heterogeneity may cause family ownership to spuriously appear as a
determinant of firm performance (Himmelberg et al., 1999). The panel data in this paper have
both fixed and random effects. The results of the Hausman test show that p-value is close to
0. Therefore, fixed effect is applied as the empirical method in this study.
3. Demsetz and Villalonga (2001) point out that there are two major differences between
accounting (ROA) and valuation measures (Tobin’s Q). First, ROA is backward-looking,
whereas Tobin’s Q is forward-looking. Hence, we need to consider the measure that is more
appropriate in estimating what management “has accomplished” or “will accomplish” in
attempting to assess the effect of ownership structure on firm performance. The second
difference has to do with who is actually measuring performance? For accounting profit rates,
the accountant prepares financial data according to the standards set by his profession. Tobin’s
Q is measured primarily by a community of investors constrained by their expectations of the
market. Most researchers have a better understanding of market constraints than accounting
constraints. This causes disregard of accounting profit rates in favor of Tobin’s Q in many
previous studies. However, caution should be taken because “accounting profit rate is not
affected by the psychology of investors. It only partially involves estimates of future events,
mainly in the valuation it places on goodwill and depreciation. Tobin’s Q, however, is buffeted
by investor psychology pertaining to forecasts of a multitude of world events that include the
outcomes of present business strategies” (Demsetz and Villalonga, 2001, p. 213).
4. During the sampling period of 2002-2006, the economic indicators released by the Council for
Economic Planning and Development show that January to June 2003, March to July 2005,
and June to December 2006, are periods of slowdown for the Taiwan economy.

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Corresponding author
Jonchi Shyu can be contacted at: jonchi.shyu@msa.hinet.net

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