Filling or Abusing the Institutional Void? Ownership and Management Control of Public Family Businesses in an Emerging Market

much of the research on family firms is carried out in mature markets, a small but burgeoning literature has examined the role of family businesses in emerging markets characterised by an institutional void. We examine publicly listed family firms in Taiwan to shed light on a key debate: is family control beneficial because it fills the institutional void or is it harmful because it abuses it. One side of the debate holds that informal family norms, such as trust and obligation, substitute for weak formal institutions and hence reduce costs that stem from owner-management conflicts (i.e.PA agency cost). The other side of the debate argues that the lack of legal protection for minority shareholders gives the family more incentive and leverage to exploit minority shareholder wealth, which can lead to costs from conflicts between family owners and minority owners (i.e. PP agency cost). International organisations, like the IMF and World Bank, and emerging market governments tend to favour the latter view and have advocated or mandated the appointment of independent directors in order to provide checks and balances between family and minority shareholders. Many of the institutional voids in emerging markets such as absence of laws protecting shareholders or difficulty in enforcing contracts, resulting in more opportunities to abuse shareholders, have corporate governance implications. Furthermore, the lack of trust between owners and professional managers is another serious governance issue with the latter not always working in the best interest of the former. Due to weaker market institutions, i.e. lack of sophisticated firms that help connect buyers and sellers, such as stock analysts, head hunters, market research firms, lack of monitoring and sophisticated information gathering, etc. there is a higher chance for professional managers to deceive owners or for family insiders to deceive external shareholders. Under this setting, whether family governance fills or abuses the institutional void depends on the particular firm's pattern of family control. Our approach underscores the importance of unpacking the heterogeneity within family firms, and of examining the performance implications. We look at the different types of family firms and analyse which one is the best configuration for the company: 1) family ownership control alone; 2) family ownership control plus control over strategy but not operation; 3) family control in ownership, strategy and operation. Our finding is that there is an optimal pattern of family ownership and control that fills the institutional void and contributes to better …