Business founders and performance of family firms: evidence from developing countries in Asia
| DOI | https://doi.org/10.1108/JABS-03-2019-0095 |
| Date | 23 July 2020 |
| Pages | 217-239 |
| Published date | 23 July 2020 |
| Subject Matter | Strategy,International business |
| Author | Yee Peng Chow |
Business founders and performance of
family firms: evidence from developing
countries in Asia
Yee Peng Chow
Abstract
Purpose –The purpose of this study is to examine how businessfounders influence the performance of
familyfirms in developing countries in Asia.
Design/methodology/approach –The pooled ordinaryleast squares regression is used on a sample of
134 public listed family firms from four developing countries inAsia during the period 2004–2014. This
study also conducts sub-period analyses where the study periodis divided into three sub-periods, i.e.
before,during and after the global financial crisis (GFC).
Findings –This study finds that founder-ledfamily firms outperform family firms led by nonfounders for
the full study period. The results for the sub-period analyses also show that founder-led family firms
outperformnonfounder-led family firms for the pre-crisisand during crisis periods. Finally, thisstudy finds
no evidencesupporting the superior performanceof founder-led family firms post-GFC.
Originality/value –Because familyfirm is one of the most fundamental forms of business organizationin
the world, policymakershave great concerns about how business foundersinfluence the performance of
these firms. Nonetheless, the existing research on family firms is chiefly concentrated on developed
countries but there is a paucity of studies being conducted in the context of developing countries.
Moreover, previous research has only considered the performance of these firms during normal or
turbulent times but no prior studieshave compared the firm performance during normal, turbulentand
recovery periods. It is the aim ofthis paper to address these research gaps by using a new and more
recentset of data.
Keywords Corporate governance, Global financial crisis, Firm performance, Developing countries,
Family firms, Business founders
Paper type Research paper
1. Introduction
Among the many types of ownership structure in the world, family firm stands out as one of
the most fundamental forms of business organization. This evidence has been widely
reported in numerous studies in the USA (Zhou et al., 2017;Miller et al.,2011), Europe
(Arrondo-Garcı
´aet al., 2016;Burgstaller and Wagner, 2015), Asia (Sitthipongpanich, 2017;
Gill and Kaur, 2015) and around the world (Linset al., 2013;La Porta et al.,1999).
This research largely builds on the work by Jensen and Meckling (1976) which postulates a
long-standing issue encountered by publicly traded firms because of the dispersed nature
of their ownership. When the ownership and management of these firms are not properly
aligned, conflicts may arise between both parties, which may lead to poor corporate
decisions and performance. This phenomenon, termed as the agency problem, is the
central focus of the agency theory espousedby the authors.
Extant family business literature has widely adopted the agency theory to explain how
business founders influence the performance of family firms, especially publicly traded
Yee Peng Chow is based at
the Faculty of Accountancy,
Finance and Business,
Tunku Abdul Rahman
University College, Kuala
Lumpur, Malaysia.
Received 27 March 2019
Revised 23 June 2020
Accepted 28 June 2020
DOI 10.1108/JABS-03-2019-0095 VOL. 15 NO. 2 2021, pp. 217-239, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 217
firms. Nevertheless, this theoryhas conflicting views concerning the moral hazard problems
faced by founder-led family firms. On the one hand,founder-led publicly traded family firms
are expected to experience less agency problems because of the unified roles of the
founder Chief Executive Officer (CEO) as the manager and shareholder of the firm.
Therefore, founder CEOs are expected to put in more effort in monitoring the firms than
other major shareholders such as pension funds, banks and other institutional shareholders
(Villalonga and Amit, 2009;Andres, 2008). Besides, founder CEOs are more effective
monitors because of their substantial shareholdings in the firm, their superior knowledge of
the firm and the close bond which they have developed with their firm (Fahlenbrach, 2009;
Villalonga and Amit, 2009). On the other hand, founder-led family firms are perceived to be
more prone to managerial entrenchment, nepotism (Villalonga and Amit, 2006;Anderson
and Reeb, 2003) and altruism (Schulze et al.,2001,2003). Because of these conflicting
arguments, it remains an open question whether business founders actually contribute to
better firm performance or not.
The primary motivation of this paper is to contribute to the ongoing conversation on family
firm dynamics as well as the existing literature on family firms. For instance, Lahiri et al.
(2020) have conducted a comprehensive review on the growing literature of family firms,
particularly family firms’ internationalization strategy, and identified various resource-based,
industry-based and institution-based factors which may influence the strategies of these
firms. In terms of resources, some researchers contend that family ownership promotes
better alignment of interests between the managers and their firms (e.g. the involvement of
family members in the top management team or board of directors), the exchange of
valuable experience and information, swift decision-making, more flexibility and the
inclination to preserve thebusiness across generations (Chen et al.,2014). Moreover, family
firms also share common identity and values which provide a mutual understanding toward
any strategic endeavors (Sestu and Majocchi, 2018). Furthermore, family members who
possess higher expertise may facilitate the firms in generating pertinent capabilities
(Graves and Thomas, 2008). These resources enable firms to execute important corporate
strategies.
Conversely, there are studies which have highlighted the reasons for family firms’
reluctance to engage in such strategic actions, which among others include risk aversion,
the unwillingness to dilute the ownership and control of the family firm by allowing external
ownership (Fern
andez and Nieto, 2005), the tendency to preserve harmony among family
members (Scholes et al.,2016) and the organization of the top management team (De
Massis et al.,2020
). Additionally, recent research on family firms also considersdifferences
in industry settings (Segaro et al.,2014;Calabro
`et al.,2013) and country-level institutional
contingencies (e.g. investor protection regime and political risks) (De Massis et al.,2018).
To sum, extant literature has produced inconclusive evidence of whether family firms
actually contribute to better firm performance or not because of conflicting arguments of
their willingness to engage in strategiccorporate activities (Kim et al., 2020).
Based on the aforementioned discussions, this study contends that there remain gaps in
the family firm literature that needto be addressed. First, this research considers more fine-
grained classifications of family firms by distinguishing them by founder- and nonfounder-
led family firms. Extant family business literature has reported mixed and inconclusive
evidence and has pointed out that this could be because of different definitions of family
firms (Wang and Shailer, 2017;Vieira, 2014). Moreover, this paper is also in line with
G
omez-Mejı
´aet al.’s (2010) and Short et al.’s (2009) call for more research to be done on
the influence of the CEO position on the behavior of family firms. For example, Singh et al.
(2019) find that the top management’s (e.g. CEO’s) knowledge value may influence firm
performance by encouraging knowledge-sharing practices and open innovation. Preceding
literature has also demonstrated why it is particularly crucial to investigate the role of
founder CEOs and distinguish them from nonfounder CEOs such as successor CEOs,
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