Family control and the implied cost of equity: Evidence before and after the Asian financial crisis

Journal of International Business Studies (Impact Factor: 3.56). 04/2010; 41(3):451-474. DOI: 10.1057/jibs.2009.77
Source: RePEc


Recent research emphasizes that corporate governance becomes critical during economic crises, when the incentives for expropriation of minority shareholders increase. Using the high-profile Asian financial crisis of 1997–1998 and a sample of 566 firms from eight East Asian countries over 1996–1999, we examine the link between family control and agency costs evident in the cost of equity financing for firms. We find that, before the crisis, family control is unrelated to firms' equity financing costs, whereas, following the crisis, family control is related to a higher cost of equity. This suggests that the crisis made investors aware of the potential entrenchment of controlling families, prompting them to require a higher-equity premium from family firms. Our results are robust to various models of the cost of equity capital, additional firm- and country-level governance traits, and additional alternative explanations, including the presence of other types of large shareholders and potential survivorship bias. Our study contributes to our understanding of the corporate governance of family-controlled firms, especially during economic crises.

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    • "Boubakri et al. (2010) and Lins et al. (2013), we proxy for family control using FAMILY, a dummy variable equal to 1 if the ultimate owner is a family, and 0 otherwise. Carney and Child (2013) identify ultimate owners at the 10% and 20% thresholds. "
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    ABSTRACT: Using newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we find that family control is negatively related to the dividend payout ratio. Family firms are also less (more) likely to increase (omit) dividends than nonfamily firms. These negative associations between family firms and dividend policy are more pronounced during the recent global financial crisis suggesting that controlling families have incentives to expropriate more firm resources during crises than in normal times.This article is protected by copyright. All rights reserved
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    • "voting shares) or one of its top officers (CEO, president, vice-president, chairman, or secretary) is a member of parliament, a minister, or is closely related to a top politician or party. " Besides its extensive country coverage, an important upside of this database is its considerable detail on Chaney et al. (2011) on the links between political ties and corporate earnings quality, Faccio (2010) on the differences between politically connected and unconnected firms, and Boubakri et al. (2010) on the governance of East Asian firms around the Asian financial crisis. the type of connection (i.e., connection with members of parliament, a minister or the head of state, and close relationship to a top official) and whether the connection involves a large shareholder or a top officer. "
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    ABSTRACT: Firms with political connections represent a relatively high share of the world’s stock market capitalization. For a large sample of firms from 28 countries, we extend recent research on the links between political connections and financial reporting by examining the role of auditor choice. Our strong, robust evidence that public firms with political connections are more likely to appoint a Big Four auditor supports the intuition that insiders in these firms are eager to improve accounting transparency to convince outside investors that they refrain from exploiting their connections to divert corporate resources. In evidence consistent with another prediction, we find that this link is stronger for connected firms with ownership structures conducive to insiders seizing private benefits at the expense of minority investors. We also find that the relation between political connections and auditor choice is stronger for firms operating in countries with relatively poor institutional infrastructure, implying that tough external monitoring by Big Four auditors becomes more valuable for preventing diversion in these situations. Finally, we report that connected firms with Big Four auditors exhibit less earnings management and enjoy greater transparency, higher valuations, and cheaper equity financing.
    Full-text · Article · Jan 2013 · Journal of Accounting Research
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    • "We follow Hail and Leuz (2006), Dhaliwal et al. (2006), Boubakri et al. (2007), among others, and use four models to estimate our cost of equity capital. These models are based on the principles advanced in the residual income valuation methods of "
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    ABSTRACT: Motivated by recent research on the costs and benefits of political connection, we examine the cost of equity capital of politically connected firms. Using propensity score matching models, we find that politically connected firms enjoy a lower cost of equity capital than their non-connected peers. We find further that political connections are more valuable for firms with stronger ties to political power. In additional analyses, we find that the effect of political connection on firms’ equity financing costs is influenced by the prevailing country-level institutional and political environment, and by firm characteristics. Taken together, our findings provide strong evidence that investors require a lower cost of capital for politically connected firms, which suggests that politically connected firms are generally considered less risky than non-connected firms.
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