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.
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.
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.
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.
