The Impact of Family Control and Board Characteristics on Corporate Policies

There exist two opposite arguments of family control. The interest-alignment hypothesis that suggests family control leads to efficient business operations; on the other hand, the entrenchment hypothesis claims a higher likelihood of asset expropriation due to the existence of a deviation between control and ownership. The literature documents that ownership concentration in Taiwan is higher than the Asian average, and that Taiwanese firms are mostly controlled by some families/groups via the active participation on boards and management appointments. The decisions made by insiders would thus be highly influenced by family control and board characteristics. This study comprehensively analyzes the effects of family control and board characteristics on major corporate policies, and confirms the endogenous relations among major corporate policies. We find that family-controlled firms are conservative in formulating dividend, compensation, and investment policies. The impact of board characteristics, especially director ownership, the proportion of director-ownership-in-pledge and the proportion of independent directors, on firm policies differs between familycontrolled and nonfamily-controlled firms. Furthermore, the study shows that the proportion of director-ownership-inpledge plays a very important role in the behavior of controlling families affecting corporate policies.