Joseph P.H. Fan 1

Mixing Family with Business:Marriage and Succession

Joseph P.H. Fan (范博宏）Director, Centre of Economics & Finance

Professor, School of Accountancy and Department of Finance

Phone: 852-26097839; Email: pjfan@cuhk.edu.hkWeb: http://ihome.cuhk.edu.hk/~b109671/index.html

Joseph P.H. Fan 2

Succession: The Roles of Specialized Assets

and Transfer Costs

Joseph P.H. Fan (CUHK)Ming Jian (NTU, Singapore)

Yin-Hua Yeh (Fu-Jen Catholic University, Taiwan)

Joseph P.H. Fan 3

Some Observations about Family Business

Persistent concentration of ownership Family (heir or close relative) succession Mixed performance in succession,

especially in family succession Perez-Gonzales (2006), Bennedsen et al.

(2007), Villalonga and Amit (2006)

Joseph P.H. Fan 4

Research Questions

We use succession as an event to address the following questions: Why family succession, hence the emergence

of family firms? Why persistent concentration of ownership? What are the fundamental determinants of

succession performance? How do firm governance structures evolve

around succession?

Joseph P.H. Fan 5

The property right approach

Coase (1937) Firms exist to mitigate costs in market exchanges

Klein, Crawford, Alchian (1979), Williamson (1979), Grossman and Hart (1985) Holdup problems in transactions involving specialized investments,

and vertical integration as a viable governance structure of the transactions

Demsetz (1967), Demsetz and Lehn (1985) The structure of corporate ownership and how it evolves over time

Jensen and Meckling (1976) and most subsequent papers in accounting and finance Conflict of interest between managers and shareholders as firm

ownership become diffused

Joseph P.H. Fan 6

Key hypothesis

We go back to the old property right literature (Alchian, 1965, 1969), testing the possibility that

Family ownership and family succession are arrangements to protect specialized assets that are difficult to partition, value, and transfer across individuals or organizational boundaries

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Specialized assets in entrepreneurial activities

1. Entrepreneurial activities are special Entrepreneurs’ superior management skills,

creativity, leadership charisma, secret formula, reputation, business/political connections, etc.

These assets are specific to the entrepreneurs because they cannot be quickly learned or easily bought and sold in marketplace

Joseph P.H. Fan 8

Specialized assets in entrepreneurial activities

2. There exist strong ideologies (personal interests) in entrepreneurial activities Entrepreneurial activities often consume a large amount

of entrepreneurs’ time, effort, and financial capital, dictating an ideology (strong personal interest) to take on these activities and associate risks

Because of their extraordinary interests and efforts, entrepreneurs attach a high value of their firms that are not comparably priced by the market

Joseph P.H. Fan 9

Specialized assets in entrepreneurial activities

3. Entrepreneurial activities often have strong team spirit When the required labor, financial and human capital

inputs are large and beyond what an individual entrepreneur can supply, friends and/or family members often join to become both highly motivated and disciplined labor force and contributors of financial capital.

Bonded and enforced by friendship or blood tie, contracts with co-founders or family members are often short of details

These implicit contracts can be hard to enforce upon succession

Joseph P.H. Fan 10

High transfer costs of specialized assets

Specialized assets contribute to the initial success of entrepreneurial activities

But difficulties arise when these assets are to be transferred across individuals or organizational boundaries

Even in standardized business, family members or business partners may dispute about their individual contributions to and hence rewards of their team activities, resulting in costly infighting

Joseph P.H. Fan 11

Predictions

Ownership concentration Cross-sectionally, ownership concentration increase with asset

specificity, so that the costs and benefits of the specialized assets concentrate on the entrepreneur

Family or outside succession The choice of successor depends on how well the value of the

specialized assets can be preserved, or conversely how large is the value dissipation during and after the transfer

An heir or a close relative would be chosen as the successor if the extent of asset specificity is large

Firm value An overall decline in firm capitalized value within the process of

succession Across firms, the extent of value dissipation depends on the degree

of asset specificity in their business activities

Joseph P.H. Fan 12

Predictions of governance structure changes

Assuming that the successor only partially inherits specialized assets, such as reputation, political connection, etc, he would need to shore up his credibility to stakeholders by enhancing internal governance More concentrated ownership More outsider participation on board and management Separating chairman and CEO positions More cash dividends

Joseph P.H. Fan 13

Defining succession

An entrepreneur stepping down from the top executive position (typically the chairman in Asia), replaced by a family member or an unrelated professional

Different from ordinary a managerial turnover, succession is typically associated with transfer of controlling ownership

Joseph P.H. Fan 14

Sampling procedure

Starting with all publicly traded firms in Hong Kong, Singapore, and Taiwan

Excluding SOEs, foreigner controlled firms, and financially distressed firms

Tracking top executive turnovers starting from the IPO year Excluding the first turnover if the subsequent turnover

occur within 5 years Excluding any cases that an entrepreneur steps down

from chairmanship but remains a director on the board

Joseph P.H. Fan 15

The Succession SampleYear Hong Kong Singapore Taiwan Total

1987 0 0 2 2

1988 0 0 4 4

1989 0 0 6 6

1990 0 0 6 6

1991 0 0 5 5

1992 0 4 6 10

1993 0 5 4 9

1994 0 6 7 13

1995 0 4 6 10

1996 4 5 11 20

1997 7 2 6 15

1998 3 3 8 14

1999 9 4 12 25

2000 12 4 13 29

2001 9 1 12 22

2002 8 3 0 11

2003 6 4 0 10

2004 2 1 0 3

2005 2 1 0 3

Total 62 47 108 217

Joseph P.H. Fan 17

Successor Choices

　 Hong Kong Singapore Taiwan Total

Family member 43 69% 17 36% 80 74% 140 65%

Heir 18 29% 4 9% 57 53% 79 36%

Relative 25 40% 13 28% 23 21% 61 28%

Outsiders 6 10% 17 36% 24 22% 47 22%

Sold-out 13 21% 8 17% 4 4% 25 12%

Unknown 0 0% 5 11% 0 0% 5 2%

Total 62 100% 47 100% 108 100% 217 100%

Joseph P.H. Fan 18

Measurement of Asset Specificity

Ideologies Whether the old chairman is the founder Whether the entrepreneur has any business in museum,

gallery, recreation facilities, club, garden, movie, newspaper or book publication, advertisement, restaurant and hotel (Demsetz and Lehn, 1985)

Indivisibility of common property Whether co-founded Number of family members co-managing the business

Relationship and reputation capital Whether the business is labor intensive Access to long term loans

Joseph P.H. Fan 19

Summary statistics

Variable Obs. Mean Median Std. Dev.

Founder 217 0.5530 1.00 0.4983

Amenity 217 0.0553 - 0.2291

Co-founded 217 0.0461 - 0.2101

Family managed 210 2.4476 2.00 1.5027

Labor intensity 213 0.0089 0.0048 0.0239

Bank relation 216 0.0939 0.0491 0.1434

Experience 217 0.4378 - 0.4973

Education 217 0.5668 1.00 0.4967

Size 217 11.822 11.8315 1.494

Ultimate ownership 202 0.3355 0.3106 0.218

Joseph P.H. Fan 20

Successor Choice and Ownership Structure

Successor Ultimate ownership (1) (2)

Founder 0.661 -0.023

(1.53) (0.39)

Amenity -0.156 0.035

(0.91) (0.69)

Co-founded -0.579*** -0.066

(3.09) (1.19)

Family managed 0.210*** 0.013***

(3.08) (4.07)

Labor intensity 5.313** 1.296***

(1.99) (3.54)

Bank relation 2.108*** 0.058

(4.38) (1.19)

Experience 0.655*

(1.82)

Education 0.494***

(3.37)

Size -0.057 -0.059***

(0.94) (39.68)

Constant 1.016***

(10.63)

Number of observations 201 198

Pseudo R-square 0.165 0.20

Joseph P.H. Fan 21

Succession and firm valueMonthly cumulative abnormal stock return (CAR)

around succession

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

-60 -48 -36 -24 -12 0 12 24 36

Joseph P.H. Fan 22

Succession and firm valueMonthly cumulative abnormal stock return (CAR)

around succession, by economy

-1.4

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

-60 -48 -36 -24 -12 0 12 24 36

Hongkong

Singarpore

Taiwan

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Statistics of CAR around succession

Variable Obs. Mean Median Std. Dev.

Full sample

CAR (-60, 0) 144 -0.5558 -0.5412 1.1225

CAR (-36, 0) 161 -0.1560 -0.2728 0.8471

CAR (0, +48) 179 -0.0288 -0.0754 0.8302

Hong Kong

CAR (-60, 0) 54 -1.2567 -1.0224 0.8656

CAR (-36, 0) 58 -0.5400 -0.7600 0.7163

CAR (0, +48) 54 0.0233 -0.0930 1.0643

Singapore

CAR (-60, 0) 30 0.2217 0.0484 0.7734

CAR (-36, 0) 32 0.1884 -0.0950 0.7176

CAR (0, +48) 32 -0.1849 -0.3734 0.8080

Taiwan

CAR (-60, 0) 60 -0.3139 -0.4101 1.1270

CAR (-36, 0) 71 0.0025 -0.2244 0.8902

CAR (0, +48) 93 -0.0054 -0.0409 0.6712

Joseph P.H. Fan 24

Regression results of firm value changes around succession

CAR (-60, 0) CAR (-36, 0) CAR (0,+48) (1) (2) (3) (4) (5)

Family members -0.378*** -0.236 -0.018 -0.019

(4.79) (0.90) (0.13) (0.21)

Sold-out -0.549 -0.591* 0.118 0.075

(1.34) (1.85) (0.40) (0.51)

Ultimate ownership -1.259** -0.696 -0.568 0.238

(2.51) (1.58) (1.33) (0.59)

Founder -0.402* -0.058 0.126***

(1.74) (0.36) (3.15)

Amenity -0.223 0.031 -0.059

(0.34) (0.06) (0.37)

Co-founded -1.113*** -0.792*** -0.015

(8.98) (4.88) (0.06)

Family managed -0.081*** -0.075*** 0.001

(4.43) (3.70) (0.02)

Labor intensity -1.513 -3.486*** -2.613

(0.46) (3.73) (1.28)

Bank relation 0.804 0.528 0.046

(1.03) (1.48) (0.07)

Experience -0.168 0.212*** 0.040

(1.22) (5.83) (0.80)

Education 0.035 0.016 -0.070

(0.32) (0.13) (0.38)

Size 0.003 -0.035 -0.080 -0.129*** 0.044**

(0.04) (0.43) (0.83) (3.12) (2.30)

Intercept -0.062 0.633 1.408 1.752*** -0.690

(0.05) (0.82) (1.12) (2.88) (1.10)

Industry dummies Yes Yes No No No

Number of observations 131 131 131 146 161

Adjusted R-square 0.10 0.12 0.17 0.13 0.02

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Regression results of governance structure changes around succession

Outside

Directors Duality Ownership Dividend

(1) (2) (3) (4)

Founder -0.654*** -0.424 -0.117 0.053

(14.18) (0.90) (1.58) (0.46)

Amenity 0.690*** -0.056 0.618*** 0.295*

(4.84) (0.46) (4.05) (1.88)

Co-founded 0.716 1.011 1.242** 1.257**

(1.61) (1.39) (2.56) (2.40)

Family managed 0.085*** -0.105 -0.032 0.098

(6.76) (0.76) (0.69) (1.03)

Labor intensity 4.790 7.563*** 7.942* 10.330***

(1.15) (3.30) (1.96) (3.56)

Bank relation -0.476 -7.853** -0.234 -0.196

(1.52) (2.45) (0.22) (0.13)

Size -0.102 -0.386*** 0.165*** 0.218*

(0.51) (4.89) (3.33) (1.85)

Market-to-book -0.156 -0.448*** 0.065 -0.079

(1.46) (6.01) (0.95) (0.56)

Return on assets -0.001 0.073* 0.219* -0.092**

(0.16) (1.86) (1.91) (2.32)

Intercept 0.693 4.177*** -2.415*** -3.852*

(0.31) (5.47) (4.89) (1.91)

Number of observations 178 178 178 178

Pseudo R2 0.1353 0.3268 0.0794 0.1011

Joseph P.H. Fan 26

Summary and Conclusion

Specialized assets play a crucial role in the emergence of family ownership A tendency that entrepreneurial firms, through family successions,

evolve into family owned and managed firms A tendency that family ownership stays concentrated across

generations of management The slow (or lack of) diffusion of ownership and control can be

explained by the desire to protect value associated with specialized assets

A pronounced dissipation of firm value during succession, which is positively related to asset specificity

Firm ownership and governance structures evolve to adapt to the new leadership

Joseph P.H. Fan 27

The Value of Family Network:Marriage and Network Formation in

Family Business Groups

Pramuan Bunkanwanicha (ESCP-EAP European School of Management)

Joseph P.H. Fan (Chinese University of Hong Kong)

Yupana Wiwattanakantang (Hitotsubashi University)

Joseph P.H. Fan 28

Research motivation

Family networks and family structure play an important role in shaping the business organization and its efficiency.[Bertrand et al. (2005), Perez-Gonzales (2006), Bennedsen et al. (2007)]

However, little is known about

“the formation of the family networks”

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Objective

This paper try to understand how the family networks are established and how they can bring value to networked firms.

More precisely, we focus on the formation of family networks via marriage of the offspring of big-business families.

Joseph P.H. Fan 30

Research questions

Does marriage of offspring create family networks that benefit the networked firms?

The stock market reactions to the wedding announcements of the offspring of big-business families.

Do family business and family structure influence the offspring’s marital choice?

The determinants of the offspring’s marital decision.

Joseph P.H. Fan 31

Wedding events Data source:

"Celebrity Headline News" on Page 4 of the most popular local newspaper: "Thairath“

*Note that the policy of the newspaper in searching the news independently through hotel reservations and invitation cards helps us to mitigate the sample selection bias (not self-reported from the family).

Where did we get the data? Hand collected from the newspaper microfilm collections at the National Library of Thailand.

Period: 1991-2006.

There were 2,225 wedding announcements.

Our sample includes 200 events in which the bride and/or the groom is a member of the top 150 families.

Joseph P.H. Fan 32

The events

Year Number Percentage

1991 12 6.0%1992 13 6.5%1993 8 4.0%1994 15 7.5%1995 12 6.0%1996 15 7.5%1997 7 3.5%1998 13 6.5%1999 11 5.5%2000 11 5.5%2001 18 9.0%2002 13 6.5%2003 10 5.0%2004 9 4.5%2005 23 11.5%2006 10 5.0%

Total 200 100.0%

Note: These 200 events are from 91 families

Joseph P.H. Fan 35

The partner’s background

Number Percentage

A. Family backgroundRoyal, noble [1] 17 8.5%Politician, military, civil servants [2] 49 24.5%Big business [3] 42 21.0%Business [4] 51 25.5%Foreigner [5] 11 5.5%Others [6] 30 15.0%

B. By type of networksPolitical networks [1]+[2] 66 33.0%Business networks [3]+[4] 93 46.5%Others [5]+[6] 41

20.5%

C. Well-connected family?Political/Business networks 159 79.5%Others 41 20.5%

Joseph P.H. Fan 36

Market reaction to the wedding announcements

• Network marriages (N=110) Mean (clustering) 1.08%*** 1.54%***

Median (sign-test) 0.71%*** 0.91%***Positive CAR(%) 72%

71%

- Political networks (N=44) Mean (clustering) 1.29%*** 1.88%*** Median (sign-test) 0.74%** 1.22%** Positive CAR(%) 68%

68% - Business networks (N=66)

Mean (clustering) 0.94%*** 1.31%*** Median (sign-test) 0.65%*** 0.85%***

Positive CAR(%) 74% 73%

• Other marriages (N=30) Mean (clustering) -0.02% 0.03%Median (sign-test) 0.00% 0.21%Positive CAR(%) 50%

63%

CAR(-1,+1)

Event: Announcement Date

CAR(-2,+2)

* Standard errors are clustered at the family and firm levels since the observations include multiple firms from the same group that may not be completely independent.

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Determinants of the offspring’s marital decision

Prob(marry to a member of well-connected families) = f(family business, family structure, individual attributes,

other factors)

Estimation models:1. Probit model Network marriages vs. Others

2. Multinomial logistic model Political networks vs. Others Business networks vs. Others

Joseph P.H. Fan 42

Probit results of the Determinants of the offspring’s marital decision

(1) (2) (3)

A. Family businessConcession 0.929*** 1.004*** 0.712*** Property and construction 1.224*** 1.192*** 0.917***Diversified business group 0.426** 0.732***

0.868***Leverage 0.801* 0.952** 0.873*

B. Family structureMain line 0.786*** 0.753*** 0.669***Board member 0.584* 0.505 0.510Business dynasty 0.785*** 0.828*** 1.432***

C. Individual attributes and other control variablesMale -0.010 -0.009 -0.053Age difference -0.025

Log (total assets) -0.192 -0.060EBIT/total assets 0.909 1.305

Number of obs. 200 200 165

Pseudo R2 0.227 0.237 0.268 Log pseudo-likelihood -78.441 -77.386 -54.985Standard errors are clustered at the family level

Joseph P.H. Fan 44

Conclusion

It is not just about love!

Marriage can be used to create family networks, especially in emerging economies with weak institutions.

Family networks are firm-value enhancing to networked family firms.

Family business and family structure do matter to the offspring’s marital choice.

Joseph P.H. Fan Passing on the Crown, The Economist, Nov. 4, 2004

45

Thank you