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Commitment or Entrenchment?: Controlling Shareholders and Board Composition

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  • Yeh, Yin-Hua
  • Woidtke, Tracie

Abstract

This paper examines the determinants of board composition and firm valuation as a function of board composition in Taiwan - a country that features relatively weak protection for investors, firms with controlling shareholders, and pyramidal groups. The results suggest that there is poor governance when the board is dominated by members who are affiliated with the controlling family but good governance when the board is dominated by members who are not affiliated with the controlling family. In particular board affiliation is higher when negative entrenchment effects - measured by (1) divergence in control and cash flow rights, (2) family control, and (3) same CEO and Chairman - are strong and lower when positive incentive effects, measured by cash flow rights, are strong. Moreover, relative firm value is negatively related to board affiliation in family-controlled firms. Thus, the proportion of directors represented by a controlling family appears to be a reasonable proxy for the quality of corporate governance at the firm level when investor protection is relatively weak and it is difficult to determine the degree of separation between ownership and control.

Suggested Citation

  • Yeh, Yin-Hua & Woidtke, Tracie, 2004. "Commitment or Entrenchment?: Controlling Shareholders and Board Composition," CEI Working Paper Series 2004-8, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hitcei:2004-8
    Note: Journal of Banking and Finance (SSCI), forthcoming
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/13898/wp2004-8a.pdf
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    1. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    2. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer & Robert Vishny, 2002. "Investor Protection and Corporate Valuation," Journal of Finance, American Finance Association, vol. 57(3), pages 1147-1170, June.
    3. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    4. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
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    Cited by:

    1. Kim, In Joon & Eppler-Kim, Jiyeon & Kim, Wi Saeng & Byun, Suk Joon, 2010. "Foreign investors and corporate governance in Korea," Pacific-Basin Finance Journal, Elsevier, vol. 18(4), pages 390-402, September.

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