The Pivotal Role of Ownership

Authors


While not intentional, each of the articles published in this general issue focuses to varying degrees on how ownership influences corporate governance practices and outcomes. In our lead article, Mishra notes that previous literature has emphasized the role of external corporate governance mechanisms (e.g., legal systems, market for corporate control, etc.) and corporate risk taking practices. However, there has been a dearth of research on how ownership influences risk taking. Consequently, this scholarly study examines the ownership-risk taking relationship in nine East Asian governance environments (Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand). Previous literature has shown that family controlled firms dominate in these governance environments. Unlike Anglo-American environments, family ownership is the dominant form of governance in these environments. For example, 100 per cent of firms in Hong Kong in the study were family owned, 90 per cent in South Korea, and 60 per cent in Japan. Mishra hypothesizes that multiple large shareholders are more likely to check the power of a dominant family ownership structure in order to avoid the extraction of private benefits to the family. Using the criterion of 10 per cent ownership as a dominant blockholder, Mishra finds that multiple dominant blockholders enable the firm to pursue non-conservative (good) investment policies. Hence, this study shows that multiple large owners influence corporate risk taking, above and beyond the external governance environment in East Asia. As such, it suggests that the relative dispersion of ownership plays a central role in governance environments where blockholders dominate the governance scene, and that this dispersion can influence corporate risk taking and subsequent firm innovation.

Our second article examines family ownership in Italy, a developed economy that has been in the news quite a bit lately. Principe, Bar Yosef, Mazzola, and Pozza examine the question: “Do family-controlled firms differ from non-family controlled firms with respect to income smoothing?” These authors note that previous literature on income smoothing has focused on widely-held firms, so this is an interesting gap in the literature. Utilizing agency and institutional logic, these governance scholars hypothesize that income smoothing will be less common in family-controlled firms under the reasoning that family members adopt more of a stewardship approach to governance while non-family controlled firms adopt more of an agency approach. Interestingly, they find empirical support for these conjectures. Furthermore, the results are even stronger for family-controlled firms where a family member is both CEO and board Chair. As such, this study highlights the limitations of agency theory and focuses on the unique governance dynamics surrounding family ownership.

In our third article, Zhang, Tao, Li, and Liu seek to better understand the nature of top management team (TMT) turnover in Chinese firms. They note that the traditional view of turnover is the “attraction-selection-attrition” perspective, but venture into a demographic sociopolitical perspective in this study. Their fundamental argument is that demographic dissimilarity between the CEO and TMT makes TMT turnover more likely, and their data largely supports this hypothesized relationship. In addition, they explore whether the CEO's power base, operationalized as being the founder of the firm and/or level of ownership, moderates this relationship. Interestingly, they find that founding CEOs accentuate this relationship, as hypothesized. However, they find that CEO ownership attenuates this relationship, in opposition to what was hypothesized. As such, the role of CEO ownership appears to have an unexpected and yet powerful influence on TMT turnover in the Chinese economy.

Goyer and Jung provided our fourth article for this general issue. In this study, the nature of foreign institutional ownership in “institutionally hybrid” governance environments is examined. (Institutional hybrids are conceptualized as coordinated market economies where the state has withdrawn its involvement in the economy, but relatively strong laws and regulations exist to protect existing employment contracts). Using France as a case study and event history analysis, the dependent variable in question is foreign blockholding investments by institutional investors in the USA and UK. This deductive empirical study shows that foreign blockholdings from market economies are increasing in France, but there is a fundamental difference between the time horizon of the institutional investors and the nature of the ownership stake. Notably, firms led by CEOs trained at elite French schools (i.e., “Grande Ecoles”), are much less likely to have a foreign blockholder than firms with CEOs trained elsewhere. Overall, this fascinating study illustrates the power of the “varieties of capitalism” approach, and it highlights that both the level and type of ownership has major influences on governance practices and outcomes.

Next, Lin and Chaung examined principal-principal ownership conflicts and initial public offering (IPO) underpricing in our fifth article of this issue. Arguing that ownership rights are weaker in Taiwan than the USA (where most previous IPO underpricing studies have been conducted), this study reveals that CEO duality, institutional ownership, and family ownership are all positively related to IPO underpricing. In contrast, board independence is found to be negatively related to underpricing by IPOs. They conclude their study with a cautionary note to avoid generalizing Anglo-American findings to developing economies due to the fundamentally different institutional contexts and traditions.

Finally, Chahine and Saade complement the earlier IPO underpricing study in Taiwan by examining the causes of IPO underpricing in the United States. Their particular focus is on the role and nature of venture capital (VC) ownership and IPO underpricing. Specifically, they seek to understand how the governance environment of foreign VCs influences IPO underpricing. Interestingly, one-third of all VC-backed IPOs in the USA involved foreign VC money, and the average VC syndicate involved 3.5 different VC firms. As a result, Chahine and Saade constructed a weighted index of national ownership protection indices for each country in which the VC resided. They hypothesized that the lower the ownership protections offered by the governance environments in which the VCs operated, the higher the IPO underpricing. Indeed, their data supported this hypothesis. Furthermore, they found that the national level ownership protections index interacted with the level of board independence for the IPO. This finding is particularly noteworthy since it suggests that the IPO literature as well as the overall field of corporate governance should consider both national-level and firm-level governance mechanisms to predict governance practices and outcomes.

Overall, these six studies provide relatively robust theory and research on the pivotal role of ownership when attempting to develop a global theory of corporate governance – the central mission of our journal. In our increasingly global economy, ownership ties exist within and between countries. In addition, the legal context in which ownership operates appears to influence the governance impact of that same contractual relationship – even when it operates in another governance environment. We still do not know what level of analysis is most critical to describe and explain ownership effects, nor do we understand the interdependencies between ownership and other governance mechanisms very well. However, this issue adds a few more pieces to the puzzle. If you want to be a serious governance scholar, you need to understand the central role and nature of ownership. I commend this issue for all governance scholars throughout the world due to the rigorous and relevant nature of these six new empirical governance studies.

Ancillary