Determinants of family ownership: The choice between control and performance

Hyung Cheol Kang, Kyung Suh Park, Hasung Jang

Research output: Contribution to journalArticlepeer-review

7 Scopus citations


Family ownership is a common form of ownership around the world. Numerous studies have documented family ownership in different economies, and they show that family ownership and control is not confined to privately held firms; it is also dominant among publicly traded firms. These studies also report that controlling families have power over their firms significantly in excess of their cash flow rights; they maintain this controlling power through pyramidal ownership structures and cross-holdings among affiliated companies. Existing literature has analyzed the relationship between family ownership and firm performance. These studies do not, however, analyze factors that determine the family's ownership. In a family controlled firm, the controlling shareholder and his family would value its control as much as it would value the firm's performance, if not more. The pyramidal ownership structure shows that the family really cares about securing the control on its groups. We hypothesize that controlling families are as much interested in their controlling power as they are interested in firm performance. Firm performance is important, but controlling families may forgo the performance, and subsequent economic benefit therein, for the sake of securing the control over the firm if their private benefit from having the control exceeds economic rewards from good performance of their firms. If the family must choose between performance and control, it is highly likely to choose control over performance in many emerging-market countries where the monetary and non-monetary benefits of having the control may far exceed cash rewards from good firm performance. Whether controlling families value their controlling power as much as monetary rewards - either in cash dividends or in capital gains - from the firm's performance is what this paper sets out to analyze. It is the purpose of this paper to investigate the factors that render a controlling Korean family to own shares of some companies on its own while it lets affiliated companies own the shares of other companies. This paper also explores the question of what makes the family and the affiliated companies own more or fewer shares among these companies. We analyze non-financial firms listed on the Korea Stock Exchange as of December 31 of each year for the 1998 ∼ 2001 period. We chose this particular period because during this period the ceiling on the amount of equity investment that can be invested in other affiliated companies' equity was removed. Our period selection is justified by this deregulation that firms are allowed to make equity investment without limit into affiliated companies. To maintain consistency of ownership data that is constructed as of the end of each calendar year, we restrict our sample to firms whose fiscal year ends on December 31. We also exclude from our sample those firms which have missing financial data. We identify for each firm a controlling shareholder who is related to the founding family regardless of the number of shares the controlling shareholder owns. If there is no founding family, we identify an individual shareholder and those family members who own a substantial fraction of outstanding shares and have effective control of the firm. Firms with no controlling family are excluded from our sample because our analysis focuses on what determines family ownership. The final sample selection filter is the existence of affiliated companies. If a firm does not have an affiliated company and stands alone as a business entity, all controlling power should be secured by family ownership. These firms are excluded from our sample. The application of the above selection criteria stated above leaves 1,530 firms for the sample period. Our analysis shows that control is a more important factor than firm value in the determination of whether an entrepreneurial family in Korea chooses to own a firm and how much to own. Controlling families prefer to own the shares of de facto holding companies that hold relatively larger ownerships of other affiliated firms in the group because they provide the controlling families with more control over affiliated companies. On the other hand, controlling families force their affiliated companies to own more shares of firms that provide the families with less of controlling power over other member firms. To control for the endogeneity problem between family ownership and other variables such as firm value, affiliated ownership and debt ratio, we also set up simultaneous models where two-stage least square method is used to estimate the coefficients. The results remain almost the same, and the holding company effect is more strongly supported. We also test a model where we use the changes in family ownership and affiliated ownership to accommodate the dynamic aspect of the model, and find that the results remain the same.

Original languageEnglish
Pages (from-to)39-75
Number of pages37
JournalAsia-Pacific Journal of Financial Studies
Issue number6
StatePublished - 2006


  • Control rights
  • De facto holding company
  • Family business group
  • Family ownership
  • Ownership structure


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