1. 企業資源規劃報告 THE EFFECT OF CORPORATE GOVERNANCE ON RISK-TAKING BEHAVIOR IN TAIWANESE FAMILY BUSINESS DURING THE INSTITUTIONAL REFORM 班級：碩研科管二甲 學號： MA0Q0106 姓名：吳崟愷

2. INTRODUCTION OF THE PAPER Cheng-Yu Lee Department of Management and Information Technology Southern Taiwan University Weichieh Su School of Management University of Texas at Dallas

3. RESEARCH PROCESS INTRODUCTION LITERATURES REVIEW AND HYPOTHESES DEVELOPMENT METHODOLOGY RESULTS DISCUSSION CONCLUSION

4. INTRODUCTION What are the effects of corporate governance on family firms? Mainly the discussions were focused on Western contexts, arguing that the concentration of family ownership and control favors entrepreneurship (Aldrich and Cliff, 2003; Astrachan, Zahra and Sharma, 2003; Zahra, 2005) Little has been explored about the effects of corporate governance on family firms’ risk-taking behavior in newly industrialized economies.

5. INTRODUCTION Positive relationship between family firms and risk- taking behavior is found in a Western setting, such positive relationship seems skeptical in an Asian setting because of the diffident social contexts Are family firms positively associated with risk-taking in an Asian setting? Are the corporate governance reforms of introducing outside directors effective enough to facilitate family firm’s risk taking?

6. LITERATURES REVIEW AND HYPOTHESES DEVELOPMENT Family ownership  Based on 209 U.S. manufacturing family firms, Zahra (2005) finds that family ownership and involvement facilitate entrepreneurship.  Firms with high family ownership have incentives and power to control managers’ behaviors not only to increase their wealth but also to entrench family’s position

7. LITERATURES REVIEW AND HYPOTHESES DEVELOPMENT Family ownership  Family members with majority ownership and concentrated management might appropriate the wealth of minority shareholders, causing another agency problem—principal-principal conflict (Cronqvist and Nilsson, 2003; Villalonga and Amit, 2006). Hypothesis 1a Family ownership is negatively related to risk-taking behavior.

8. LITERATURES REVIEW AND HYPOTHESES DEVELOPMENT Family involvement  Some studies show that family members that are highly involved in the board of directors are likely to exhibit altruism (Schulze et al., 2003)  This altruistic behavior arising from family members not only facilitates the communication but also enhances the cooperation, thus decreasing the asymmetrical information among board members (Daily and Dollinger, 1992).

9. LITERATURES REVIEW AND HYPOTHESES DEVELOPMENT Family involvement  Altruism eventually causes family board members to make decisions arbitrarily and brings about perquisites and privileges (Schulze, et al., 2003). Hypothesis 1b Family involvement is negatively related to risk-taking behavior.

10. LITERATURES REVIEW AND HYPOTHESES DEVELOPMENT Outside directors  The introduction of outside directors can help family business access specific professional knowledge (Carpenter and Westphal, 2001) and connect with other networks (Certo, Daily and Dalton, 2001).  Anderson and Reed (2004) find that outside directors usually represent minority shareholders to counter the opportunistic behaviors of the majority shareholders in the family business

11. LITERATURES REVIEW AND HYPOTHESES DEVELOPMENT Outside directors  Shldeifer and Vishny (1997) argue that outside directors play roles in balancing the power in the family business to avoid the appropriation of resources. Hypothesis 2a Outside directors weaken the negative relationship between family ownership and risk-taking behavior.

12. LITERATURES REVIEW AND HYPOTHESES DEVELOPMENT Outside directors  Assuming family firms voluntarily appoint outside directors before the law requires it, this demonstrates that family members are not conservative and are willing to let outside directors participate in board decisions, and even supervise business operations.  Family firms that appoint outside directors due to law requirements might do so reluctantly, that is they appoint someone who is outside the company but closely connected to the family.

13. LITERATURES REVIEW AND HYPOTHESES DEVELOPMENT Outside directors  It is difficult to distinguish the motivations of firms to appoint outside directors when the policy becomes compulsory rather than voluntary. Hypothesis 3 Outside directors have stronger moderating effect on family firm's risk taking behavior in the family firms that voluntarily appoint outside directors than in those that compulsorily appoint outside directors.

14. METHODOLOGY Sample selection  All data are obtained from Taiwan Economic Journal (TEJ)  Considering one of the issues in this study is risk taking, we take companies in the ICT industries as our samples.  Our sample finally contains total 314 listed ICT companies in Taiwan. Data for these public-listed firms covered a 3-years period, 2005-2007.

15. METHODOLOGY Measures  In TEJ, it reports the name and the relative relationships between of the largest shareholders, managerial shareholders and board-member shareholders.  Family ownership is therefore measured by a number measure which indicates the percentage of equity owned by family members.

16. METHODOLOGY Measures  Family Involvement is measured by the ratio of family board members to the total board members.  Outside Director is measured by the ratio of outside directors to the total board members.  The above main variables are measured as a three-year average.

17. METHODOLOGY Measures  We take total assets, employee numbers, debt ratio, return on assets (ROA), and CEO duality as our control variables.  These control variables are measured as a three- year average.  This paper utilizes hierarchical regression models to examine the effects of corporate governance on risk-taking behavior in family firms.

18. RESULTS

22. DISCUSSION The conflict of interests between the family (majority) and shareholders (minority) dampens the risk-taking behavior in family firms The cronyism makes the board of directors lose their roles of monitoring and controlling. Outside directors can weaken the negative relationship between family firm and risk taking, the effect only sustains when firms voluntarily appoint outside directors.

23. CONTRIBUTIONS First  We empirically support that principal-principal conflicts exist in Asian environment.  The main potential problem of corporate governance in such setting is the asymmetry between majority shareholders (family ownership) and minority shareholders.  Prior studies find that family firms are relatively risk- taking in Anglo-American setting, this study finds that family firms are less risk-taking in an Asian setting.

24. CONTRIBUTIONS Second  Outside directors favor risk-taking in family firms, we argue that the effects of outside directors have limitation, especially in the institutional transition.  During institutional transition some firms are less prepared to be such transparency and partly because some firms are less supportive of the policy of outside directors.

25. CONTRIBUTIONS Third  Family firms with high ownership involvement are less risk-taking based on the sample of Taiwanese listed firms in the ICT industries  family firms voluntarily introduce outside directors, their inclination to risk-taking changes from avoidance to preference.  This effect demonstrates that family firms can intrinsically change their own attitude via professional supervision and suggestions from outsiders.

26. CONTRIBUTIONS Fourth  The larger firms that are under stricter control by the government have higher representation of outside directors because large firms highly depend on the government for resources.  The firms with weak prior performance also have high representation of outside directors in order to lower the environmental uncertainty and to send a positive signal to stakeholders.

27. CONTRIBUTIONS limitations  Firms in ICT industries are relatively risk-taking, this study provide a conservative results.  Future studies may take other industries into considerations so as to make our arguments generalizable.  We choose data between years 2005-2007 because we would like to target the period of corporate governance reform.

28. CONTRIBUTIONS Principal-principal logic to explain the opposite perspectives of risk-taking behavior in family firms. Data from Taiwan support our arguments that family ownership and involvement hamper firms to invest in risk-taking Firms voluntarily introduce outside directors, can outside directors play their roles to impel firms to more risk-taking.

29. Thank you !