1. Joseph P.H. Fan1 Mixing Family with Business: Marriage and Succession 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.hkpjfan@cuhk.edu.hk Web: http://ihome.cuhk.edu.hk/~b109671/index.html

2. Joseph P.H. Fan2 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)

3. Joseph P.H. Fan3 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)

4. Joseph P.H. Fan4 Research Questions  We use 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 the fundamental determinants of succession performance?  How do firm governance structures evolve around succession?

5. Joseph P.H. Fan5 The property right approach  Coase (1937)  Firms exist to mitigate costs in market exchanges  Klein, Crawford, Alchian (1979), Williamson (1979), Grossman and Hart (1985)  Holdup problems in transactions involving specialized investments, and vertical integration as a viable governance structure of the transactions  Demsetz (1967), Demsetz and Lehn (1985)  The structure of corporate ownership and how it evolves over time  Jensen and Meckling (1976) and most subsequent papers in accounting and finance  Conflict of interest between managers and shareholders as firm ownership become diffused

6. Joseph P.H. Fan6 Key hypothesis  We go back to the old property right literature (Alchian, 1965, 1969), 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

7. Joseph P.H. Fan7 Specialized assets in entrepreneurial activities  1. Entrepreneurial activities are special  Entrepreneurs’ 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

8. Joseph P.H. Fan8 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

9. Joseph P.H. Fan9 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

10. Joseph P.H. Fan10 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

11. Joseph P.H. Fan11 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

12. Joseph P.H. Fan12 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

13. Joseph P.H. Fan13 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 ordinary a managerial turnover, succession is typically associated with transfer of controlling ownership

14. Joseph P.H. Fan14 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  Excluding any cases that an entrepreneur steps down from chairmanship but remains a director on the board

15. Joseph P.H. Fan15 The Succession Sample YearHong KongSingaporeTaiwanTotal 19870022 19880044 19890066 19900066 19910055 199204610 19930549 199406713 199504610 1996451120 199772615 199833814 1999941225 20001241329 2001911222 200283011 200364010 20042103 20052103 Total6247108217

16. Joseph P.H. Fan16 Sample by industry IndustryHong KongSingaporeTaiwanTotal Agriculture, Forestry and Fishing0101 Construction and Real Estate206834 Food and Kindred Products1157 Textile and Apparel311317 Lumber, Furniture, Paper and Printing1247 Chemicals, Petroleum, Rubber, Plastic and Leather 501520 Minerals and Metals121316 Machinery, Equipment and Instrument1172644 Transportation and Communication241016 Utility1012 Commerce85619 Financial Company47314 Service511420

17. Joseph P.H. Fan17 Successor Choices Hong KongSingaporeTaiwanTotal Family member 4369%1736%8074%14065% Heir 1829%49%5753%7936% Relative 2540%1328%2321%6128% Outsiders 610%1736%2422%4722% Sold-out 1321%817%44%2512% Unknown 00%511%00%52% Total 62100%47100%108100%217100%

18. Joseph P.H. Fan18 Measurement of Asset Specificity  Ideologies  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

19. Joseph P.H. Fan19 Summary statistics

20. Joseph P.H. Fan20 Successor Choice and Ownership Structure

21. Joseph P.H. Fan21 Succession and firm value Monthly cumulative abnormal stock return (CAR) around succession

22. Joseph P.H. Fan22 Succession and firm value Monthly cumulative abnormal stock return (CAR) around succession, by economy

23. Joseph P.H. Fan23 Statistics of CAR around succession VariableObs.MeanMedianStd. Dev. Full sample CAR (-60, 0)144-0.5558-0.54121.1225 CAR (-36, 0)161-0.1560-0.27280.8471 CAR (0, +48)179-0.0288-0.07540.8302 Hong Kong CAR (-60, 0)54-1.2567-1.02240.8656 CAR (-36, 0)58-0.5400-0.76000.7163 CAR (0, +48)540.0233-0.09301.0643 Singapore CAR (-60, 0)300.22170.04840.7734 CAR (-36, 0)320.1884-0.09500.7176 CAR (0, +48)32-0.1849-0.37340.8080 Taiwan CAR (-60, 0)60-0.3139-0.41011.1270 CAR (-36, 0)710.0025-0.22440.8902 CAR (0, +48)93-0.0054-0.04090.6712

24. Joseph P.H. Fan24 Regression results of firm value changes around succession

25. Joseph P.H. Fan25 Regression results of governance structure changes around succession

26. Joseph P.H. Fan26 Summary and Conclusion  Specialized assets play a crucial role in the emergence of family ownership  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

27. Joseph P.H. Fan27 The Value of Family Network: Marriage and Network Formation in Family Business Groups Pramuan Bunkanwanicha (ESCP-EAP European School of Management) Joseph P.H. Fan (Chinese University of Hong Kong) Yupana Wiwattanakantang (Hitotsubashi University)

28. Joseph P.H. Fan28 Research motivation  Family networks and family structure play an important role in shaping the business organization and its efficiency. [Bertrand et al. (2005), Perez-Gonzales (2006), Bennedsen et al. (2007)]  However, little is known about “the formation of the family networks”

29. Joseph P.H. Fan29 Objective  This paper try to understand how the family networks are established and how they can bring value to networked firms.  More precisely, we focus on the formation of family networks via marriage of the offspring of big-business families.

30. Joseph P.H. Fan30 Research questions  Does marriage of offspring create family networks that benefit the networked firms?  The stock market reactions to the wedding announcements of the offspring of big-business families.  Do family business and family structure influence the offspring’s marital choice?  The determinants of the offspring’s marital decision.

31. Joseph P.H. Fan31 Wedding events  Data source: "Celebrity Headline News" on Page 4 of the most popular local newspaper: "Thairath“ *Note that the policy of the newspaper in searching the news independently through hotel reservations and invitation cards helps us to mitigate the sample selection bias (not self-reported from the family).  Where did we get the data? Hand collected from the newspaper microfilm collections at the National Library of Thailand.  Period: 1991-2006.  There were 2,225 wedding announcements.  Our sample includes 200 events in which the bride and/or the groom is a member of the top 150 families.

32. Joseph P.H. Fan32 The events Year Number Percentage 1991 126.0% 1992136.5% 1993 84.0% 1994157.5% 1995126.0% 1996157.5% 1997 73.5% 1998136.5% 1999115.5% 2000115.5% 2001189.0% 2002136.5% 2003105.0% 2004 94.5% 20052311.5% 2006105.0% Total200100.0% Note: These 200 events are from 91 families

33. Joseph P.H. Fan33 The offspring and their families Number Percentage A.Gender Male 11356.5% Female 8743.5% B.Generation to founder One 4 2.0% Two 7939.5% Three 7135.5% Four 3115.5% Five 15 7.5% C.Relationship to current head Current head 1 0.5% Sibling12 6.0% Son/Daughter8341.5% Nephew/Niece 10050.0% Grand-son/Grand-daughter 3 1.5% Grandnephew/Grandniece 1 0.5%

34. Joseph P.H. Fan34 Number Percentage D. From the main line Main line 8442.0% Others 11658.0% E. Holding a board position Yes 8341.5% No 11758.5%

35. Joseph P.H. Fan35 The partner’s background Number Percentage A.Family background Royal, noble [1] 17 8.5% Politician, military, civil servants [2]4924.5% Big business [3] 4221.0% Business [4] 5125.5% Foreigner [5] 11 5.5% Others [6] 3015.0% B.By type of networks Political networks [1]+[2] 6633.0% Business networks [3]+[4]9346.5% Others [5]+[6] 4120.5% C.Well-connected family? Political/Business networks 15979.5% Others 4120.5%

36. Joseph P.H. Fan36 Market reaction to the wedding announcements Network marriages (N=110) Mean (clustering) 1.08%*** 1.54%*** Median (sign-test) 0.71%*** 0.91%*** Positive CAR(%) 72% 71% - Political networks (N=44) Mean (clustering) 1.29%*** 1.88%*** Median (sign-test) 0.74%** 1.22%** Positive CAR(%) 68% 68% - Business networks (N=66) Mean (clustering) 0.94%*** 1.31%*** Median (sign-test) 0.65%*** 0.85%*** Positive CAR(%) 74% 73% Other marriages (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) * Standard errors are clustered at the family and firm levels since the observations include multiple firms from the same group that may not be completely independent.

37. Joseph P.H. Fan37 Nouveau riche vs. Old money - Nouveau-riche families (N=40) Mean (clustering) 1.25%*** 2.02%*** Median (sign-test) 0.88%** 0.87%** Positive CAR(%) 75% 75% - Old-money families (N=70) Mean (clustering) 0.99%*** 1.26%*** Median (sign-test) 0.54%*** 0.79%*** Positive CAR(%) 70% 69% CAR (-1,+1) Event: Announcement Date CAR (-2,+2) Hypothesis: Benefits of having family networks via marriage are likely to be higher for nouveau riche than old money families. Nouveau riche is defined as the family that the founder is still active in business.

38. Joseph P.H. Fan38 Determinants of the offspring’s marital decision Prob (marry to a member of well-connected families) = f (family business, family structure, individual attributes, other factors) Estimation models: 1. Probit model  Network marriages vs. Others 2. Multinomial logistic model  Political networks vs. Others  Business networks vs. Others

39. Joseph P.H. Fan39 Hypothesis 1: family businesses matter The offspring is likely to marry to a person from a well-connected family if H1.1: Family business is based on concessions/state contracts.  Obtain new government contracts H1.2: Family business is in the property and construction.  Access to inside information (e.g., new highway construction)  Obtain insightful information about the demand and supply of the real estate market H1.3: Family business is a diversified business group.  Seek trustworthy business partnerships (pooled resources, risk-sharing, etc.) H1.4: Family business has more leverage.  Access to financial resources

40. Joseph P.H. Fan40 Hypothesis 2: family structure matters The offspring is likely to marry to a person from a well-connected family if H2: He or she is an heir candidate  From the main line  A board member of the group firms

41. Joseph P.H. Fan41 Control variables 1.The “ Same Circle Effect ”  A dummy variable, business dynasty, if the family has been in business for more than two generations [Landes, 2006] 2. Personal attributes  Gender  Age: age difference between the bride and groom  Race: no variation in the sample  Education: no variation in the sample (whether he/she has a BA degree) 3. Other factors  Business group size  Group profitability

42. Joseph P.H. Fan42 Probit results of the Determinants of the offspring’s marital decision (1) (2) (3) A. Family business Concession 0.929*** 1.004***0.712*** Property and construction 1.224*** 1.192***0.917*** Diversified business group 0.426** 0.732*** 0.868*** Leverage 0.801* 0.952** 0.873* B. Family structure Main line 0.786*** 0.753***0.669*** Board member 0.584* 0.505 0.510 Business dynasty 0.785*** 0.828*** 1.432*** C. Individual attributes and other control variables Male -0.010 -0.009 -0.053 Age difference-0.025 Log (total assets) -0.192 -0.060 EBIT/total assets 0.909 1.305 Number of obs. 200 200 165 Pseudo R 2 0.227 0.2370.268 Log pseudo-likelihood -78.441 -77.386 -54.985 Standard errors are clustered at the family level

43. Joseph P.H. Fan43 Multinomial results (1) (2) (3) (4) A. Family business Concession 1.350 2.075***1.423 2.097*** Property and construction 2.029*** 2.485***2.015*** 2.453*** Diversified business group 1.107*** 0.062 1.784*** 0.457 Leverage 1.141 1.785** 1.460* 1.983** B. Family structure Main line 1.337** 1.347***1.295** 1.299** Board member 1.294** 0.765 1.146* 0.695 Business dynasty 1.262*** 1.356*** 1.358*** 1.374*** C. Individual attributes and other control variables Male -0.258 0.222 -0.285 0.228 Log (total assets) -0.390 -0.184 EBIT/total assets2.566 1.635 Number of obs. 200 200 Pseudo R 2 0.149 0.158 Log pseudo-likelihood -178.093 -176.365 Business network vs. Others Political network vs. Others Business network vs. Others Political network vs. Others Standard errors are clustered at the family level

44. Joseph P.H. Fan44 Conclusion  It is not just about love!  Marriage can be used to create family networks, especially in emerging economies with weak institutions.  Family networks are firm-value enhancing to networked family firms.  Family business and family structure do matter to the offspring’s marital choice.

45. Joseph P.H. FanPassing on the Crown, The Economist, Nov. 4, 2004 45 Thank you