Family Ownership, strategy risks and firm's performance

Abstract

A corporate governance framework is required for a successful operation of firms. This framework is generally known to include various aspects of corporate governance, including ownership structure, characteristics of the board of directors and the strategic risks (including both systematic and non-systematic risk) of the firms. And the list of factors included in this corporate governance framework does not stop there. This study is conducted to consider the potential impact of the following two fundamental issues on firm’s performance: (i) family ownership, together with other corporate governance factors; and (ii) strategic risk. Firm’s performance is proxied by each of three dimensions of measurement: (i) the market factor (Tobin’s Q); (ii) the accounting factor (ROA); and (iii) the risk of bankruptcy factor (Z-Score). Data were collected from 289 listed companies in the Ho Chi Minh stock exchange in 2013. This study employs multivariate analysis to identify the effect from family ownership on firm’s performance whereas generalized structural equation model is utilized to investigate the possible link between strategic risk and the performance of listed firms via both direct and indirect channels, Findings from this study indicate that family ownership (the ownership and family involvement in the board of directors; presence of relatives to the founders in the company; and family members being the CEO) could negatively affect firm’s performance which then results in a lower level of firms’ performance (lower ROA) and a higher risk of bankruptcy (higher Z-score). In addition, the relationship between the strategic risks and firm’s performance is presented in both direct and indirect channels. Findings from this study also provide an empirical evidence to confirm the positive effect on firm’s performance from the experienced directors and foreign investors. However, this study fail to support the link between a number of corporate governance factors such as: (i) the board size; the duality (being a chairman and the CEO), the diversity (a presence of female directors in the board structure) and outside directors to firm’s performance. These findings are somewhat consistent with the conclusions from various reports published by the IFC; the State Securities Commission Vietnam (2006, 2010); and International Finance Corporation (2012), in relation to weak applications of the standard corporate governance framework in the Vietnam’s corporate environment. In addition, while there is a significant positive effects of capital expenditure on firm’s performance, the effect is negative for impact of increasing more debt on firm’s performance.