Founders Versus Descendants: Evidence Of The Taiwanese Publicly Traded Firms

Abstract

This study investigates the performance of founder-controlled firms vis-à-vis firms controlled by founders’ descendants and relatives among Taiwanese publicly traded firms.  After adjusting for size, age, growth potential, financial leverage, and industry effects, we find that the Taiwanese descendant-controlled firms underperform the matching founder-controlled firms.  In searching for the potential reasons, we find that the average board size for the descendant-controlled firms is significantly larger than that of the founder-controlled firms.  In addition, the ratios of family-related supervisors and board members of the descendant-controlled firms are significantly higher than those of the matching founder-controlled firms.  While the significantly larger board size suggests a potential power struggle between the controlling family and the non-family related board members, the stronger family domination in the board of directors and supervisors for the descendant-controlled firms provides room for entrenchment and tunneling.  In light of the absence of large outside blockholders and relatively weaker legal protections, the minority shareholders of Taiwanese firms are dependent upon internal monitoring mechanisms to protect them from the expropriation of the controlling families.  However, our results indicate that family control has undermined the internal monitoring mechanism of the Taiwanese descendant-controlled firms.