Joseph P.H. Fan 1

Mixing Family with Business:Succession and Marriage

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

Family firms are a dominant organizational form in almost all countries around the world.

Joseph P.H. Fan 3

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 4

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 5

Research Questions

We use firm ownership and leadership 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 fundamental determinants of

succession performance? How do firm governance structures evolve

around succession?

Joseph P.H. Fan 6

Explanations of Mixed Performance of Family Ownership and Heir Succession

Outsider expropriation Though a professional manager is more productive, his

interest is not necessarily aligned with the family (Bhattacharya and Ravikumar, 2002).

Serious in weak institutional environments (Burkart, Panuzi, and Shleifer, 2003)

Insider expropriation Family firms are competitive, but insiders capture most

of the gain, leaving little to outside investors (Villalonga and Amit, 2007)

Transfer costs of specialized assets (our focus)

Joseph P.H. Fan 8

Key hypothesis

We go back to the old property right literature (Alchian, 1965, 1969; Klen, Crawford, Alchian, 1979; Williamson, 1978), 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

Joseph P.H. Fan 9

Specialized assets in entrepreneurial activities

1. Entrepreneurial activities are special Entrepreneurs’ specialized human capital,

including 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 10

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 11

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 12

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 13

13

Joseph P.H. Fan 14

Li Ka-shing （ 77） was sent to hospital on Sep. 6th , 2005.

14

Cumulated Daily Stock Return

Joseph P.H. Fan 15

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 16

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 17

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 an ordinary managerial turnover, succession is typically associated with transfer of controlling ownership completed at very old age or death of the old leader

A rare opportunity to observe the evolution of firm ownership, leadership, and governance

Joseph P.H. Fan 18

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

Joseph P.H. Fan 19

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 20

Sample by industryIndustry Hong Kong Singapore Taiwan Total

Agriculture, Forestry and Fishing 0 1 0 1

Construction and Real Estate 20 6 8 34

Food and Kindred Products 1 1 5 7

Textile and Apparel 3 1 13 17

Lumber, Furniture, Paper and Printing 1 2 4 7

Chemicals, Petroleum, Rubber, Plastic and Leather

5 0 15 20

Minerals and Metals 1 2 13 16

Machinery, Equipment and Instrument

11 7 26 44

Transportation and Communication 2 4 10 16

Utility 1 0 1 2

Commerce 8 5 6 19

Financial Company 4 7 3 14

Service 5 11 4 20

Joseph P.H. Fan 21

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 22

Measurement of Asset Specificity

Ideology (personal interest) 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

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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 25

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 26

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 27

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

Joseph P.H. Fan 29

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

Joseph P.H. Fan 30

Does poor performance lead to succession?

Likely only part of the story Although CAR is significantly related to accounting

performance measure, it is also related to proxies for asset specificity which is not caused by performance but rather causing performance outcome

Almost all turnovers occur at old age or even death of the controlling owner

Distressed firms are excluded Firm performance do not recover after succession

Joseph P.H. Fan 31

Daily cumulative net of market stock return of a HK-based conglomerate around death

of the founder at age 90

Li sted Company 1

0

0. 1

0. 2

0. 3

0. 4

0. 5

0. 6

-12

-10 -8 -6 -4 -2 0 2 4 6 8 10

Joseph P.H. Fan 32

Daily cumulative net of market stock return of a HK listed company around the news that its

98 year-old founder was sent to hospital

Department Retreat @ Shenzhen 2008

32

Cumulated Daily Stock Return

Joseph P.H. Fan 33

The Role of Entrenchment

It is sometimes difficult to remove an owner-manager refusing to change until he is very old or dead. Firm value deteriorate until the entrenchment problem is corrected by succession

Is the stock return pattern primarily driven by entrenchment? Overall, CAR did not increase after the old chairman left

position, suggesting entrenchment is not the full story We are investigating this possibility more thoroughly

Finding that both pre- and post-turnover CAR unrelated to whether the outgoing chairman remains on board after turnover

No effects of outgoing chairman’s age and tenure

Joseph P.H. Fan 34

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 35

Summary and Conclusion

Specialized assets play a crucial role in the emergence of family firms 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

Family institution and relationship based contracting substitues weak market institution

Joseph P.H. Fan 36

Extension

Relationship-based contracting and accounting properties Succession, corporate life cycle, and evolution

of accounting properties

Specific governance mechanisms of family firms Marriage and long-term network creation

Joseph P.H. Fan 37

Why Do Shareholders Value Marriage?

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 38

Family networks

In emerging economies, businesses are in the hands of small network connected by family networks.

Because institutions are weak, family networks play very important role.

Family relationships provide a degree of trust.

Family relationships in business are regarded as the next-best solution to imperfections in the financial markets and corporate governance

[Arrow (1974), Burkart et al. (2003), Bertrand and Schoar (2006)].

Joseph P.H. Fan 39

Lamsam

Wanglee

Chatikavanij (4)

Srivikorn

Krairiksh (3, 4)

Bodiratnangkura

Tangkaravakoon

Bulsook

Hetrakul

Osathanugrah

Thienprasidda (4)

Sukosol

Piya-oui

Sarasin

Lim-atibul (4)

Chearavanont

Virameteekul

PoolvoralaksYip In Tsoi/

Lailert

Charoen-Rajjapak

Bhirombhakdi

Royal families (2)

Chirathivat

Techakraisri (4)Promphan (4)

Tejapaibul

Uahchukiat

Bisalputra (4)

Karnchanachari

Navaphan

PhongsathornPhenjati

Kitikachorn (3)

Tantranont

Na Songkla (3)

Mahagitsiri

Karnasuta

Chutrakul (4)

Sosothikul

Sethteewan (4)

Thavisin (4)

Sethpakdi (4)Uahwatanasakul

Sethpornpong (4)

Leeissaranukul/Phannachet

Rattanin (4)

Chaichanian (4)

Chakkaphak (4)

Wattanavekin

Angubolkul

Mahaphan (4)

Vuthinantha (4)

Maleenont

Attakravisunthorn (3)

Jirakiti (3)

Benjarongkul

Nitibhon (3)Phaoenchoke

Nandhapiwat

Leenutaphong

Noonbhakdi (3)Sibunruang (4)

Osathanont (4)

Teepsuwan (4)

Cholvijarn (4)

Harnpanich (4)

Asavabhokin

Sarasas (4)

Thepkanjana (3)

Jarusatien (3)

Panyarachoon (3)

Tapparangsi (3)

Thailand

Family Network in Thailand

Joseph P.H. Fan 40

The Mitsui zaibatsu pre WWII Networks via marriage

---the imperial household, the court nobility, the

former Tokukawa shogunate, the Shinto hierarchy, the bureaucrats, and other important zaibatsu (such as Sumitomo), as well as independent industrialists…”

“such alliances, which much cost the Mitsuis an enormous amount of thought, research, and negotiations of the most sensitive kind, served to entwine the clan with the most powerful and prestigious families in the empire

[Roberts, Mitsui, 1973, p. 228]

Joseph P.H. Fan 41

Networks via marriage: Japan dynasties

Mitsui (ex zaibatsu) Toyoda (Toyota Motors) Kajima (Top 5 general construction) Shimizu (Top 5 general construction) Ishibashi (Bridge Stone) Sumitomo (ex zaibatsu) Nakasone (top politician family and ex PM) Hatoyama (top politician family and ex PM) etc

Joseph P.H. Fan 42

Korea

Lee (Samsung) Hak (LG) The top five business groups, are linked via marriage of the

offspring of the two group founders. A daughter of the Samsung Group’s founder and sister of

the current chairman is married to Koo Ja Hak, who was the chairman of LG Semiconductor.

Koo Ja Hak’s brother was the chairman of the LG Group.

Joseph P.H. Fan 43

Canada

Andre Desmarais wed France who is a daughter of former PM Jean Chretien.

Andre Desmarais is the son of Paul Desmarais who is the 6th richest person in Canada.

Paul Desmara owns Power Corporation and extensive companies.

Joseph P.H. Fan 44

Marriage as a method of building business network –

It’s Not All about Love

Joseph P.H. Fan 45

The role of marriage in business

Marriage has remained, long into the age of romantic love, a business transaction.

Sons and daughters could be used the same way as they were treated by the royal families.

To make strategic alliances between firms on a secure and long term basis.

(Harold James, “Family Capitalism”, 2006)

Joseph P.H. Fan 46

The role of marriage in business

Rich families will look for a bride who can take care of household finances and most important, give birth to sons to inherit the wealth of the family.

Poor families will look for a bride who can work hard in the fields and give birth to sons to help out on the farm.

Joseph P.H. Fan 47

Research question

What role do the family and their business play in the decision of the heirs to choose whom to marry?

Joseph P.H. Fan 48

Marriage Sample from Thailand

Year Number Percentage

1991 12 5.9%1992 14 6.9%1993 8 3.9%1994 15 7.4%1995 12 5.9%1996 15 7.4%1997 7 3.5%1998 13 6.4%1999 12 5.9%2000 11 5.4%2001 18 8.9%2002 13 6.4%2003 11 5.4%2004 9 4.4%2005 23 11.3%2006 10 4.9%

Total 203 100.0%

Note: The sample includes 91 families (2 marriages/family on average)

Joseph P.H. Fan 49

The newlyweds (top business family’s offspring): Who is he/she?

Number Percentage

A. Gender Male 115

56.7%Female 88 43.3%

B. Generation to founderOne 4

2.0%Two 80

39.4%Three 73 36.0%Four 31

15.3%Five 15

7.4%

C. Relationship with founderFounder 1 0.5%Sibling 3 1.5%Son/Daughter 58 28.6%Nephew/Niece 22

10.8%Grand-son/Grand-daughter 73 36.0%GG-son/GG-daughter 31 15.3%GGG-son/GGG-daughter 15 7.4%

Joseph P.H. Fan 50

Number Percentage

D. Relationship to current headCurrent head 1 0.5%Sibling 　 　 12

5.9%Son-Daughter 　　　　　　　 84

41.4%Nephew/Niece 　 　　　　 102

50.2%Grand-son/Grand-daughter 3 1.5%Grand-nephew/Grand-niece 1

0.5%

E. From the main lineMain line 85 41.9%Others 118 58.1%

F. First son of current headFirst son of current head 　　 　　 37

18.2%Others 166 81.8%

Joseph P.H. Fan 51

Number Percentage

G. He/she is holding a board positionYes 　 83

40.9%No 120

59.1%

H. He is the first son & holding a board positionYes 39 19.2%No 164

80.8%

Joseph P.H. Fan 52

Marriages & Networks

Number Percentage

A. Family backgroundTop business (i) 42 20.7%Business, Professional (ii) 52 25.6%Royal, Noble (iii) 17 8.4%Politician, Military, Civil servant (iv) 50

24.6%Foreigner (v) 11 5.4%Others (vi) 31 15.3%

B. By type of networkBusiness network (i)+(ii) 94

46.3%Political network (iii)+(iv) 67 33.0%Others (v)+(vi) 42 20.7%

C. By type of marriageBusiness & Political networks 161 79.3%Others 42 20.7%

Joseph P.H. Fan 53

Where are network marriage prevalent?

No. % No. %

A. Concession-based businessesConcession-based 14 93.3% 1 6.7%Others 147 78.2% 41 21.8%

B. Real estate businessesReal estate 43 95.6% 2 4.4%Others 118 74.7% 40 25.3%

C. Diversified businessesDiversified 48 84.2% 9 15.8%Others 113 77.4% 33 22.6%

Network marriage Other marriage

Joseph P.H. Fan 54

Stock Price Effects of Marriages

A. Total sample (N=140)Mean (clustering) 0.85%***

1.22%*** Median (sign-test) 0.54%*** 0.81%*** Positive CAR(%) 67% 69%

B. By type of marriage　 - Network marriage (N=110)

Mean (clustering) 1.08%*** 1.54%***Median (sign-test) 0.71%*** 0.91%***Positive CAR(%) 72% 71%

- Other marriage (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)

Joseph P.H. Fan 55

C. By type of network

- Business network (N=66) Mean (clustering) 0.94%*** 1.31%***Median (sign-test) 0.65%*** 0.85%***Positive CAR(%) 74% 73%

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

CAR(-1,+1)

Event: Announcement Date

CAR(-2,+2)

Stock Price Effects of Marriages

Joseph P.H. Fan 56

Summary

Marriages are not just about love, in particular to those couples in network based businesses

Network marriages, though sometimes involve sacrifices, create value for businesses

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

57

Thank you