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Real option, idiosyncratic risk, and corporate investment: Evidence from Taiwan family firms

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  • Chen, I-Ju
  • Wang, David K.

Abstract

Using a Taiwan dataset with restrictive family definitions, we examine the relation between family presence and corporate investment policy. Our analysis centers on two incentives that potentially lead to differences in investment policy between family firms and nonfamily firms: family owners' risk aversion and their real option to invest. Our findings indicate that family firms devote significantly more resources to total investment activity and R&D projects than nonfamily firms; and the investment policy appears to be driven by the significantly stronger relation between total investment and idiosyncratic risk for families with more real options (i.e., investment opportunities). Our robustness tests using IV-3SLS regressions provide further support of the real option argument. Further testing indicates that family firms receive more patents/patent citations per R&D dollar than nonfamily firms; suggesting that active family control (holding top management position) may explain the higher R&D efficiency associated with family firms. To our knowledge, this paper is the first of its kind to propose the real option argument to explain the relation between family presence and firm investment policy.

Suggested Citation

  • Chen, I-Ju & Wang, David K., 2019. "Real option, idiosyncratic risk, and corporate investment: Evidence from Taiwan family firms," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x17303256
    DOI: 10.1016/j.pacfin.2018.05.011
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    2. Hoang, Khanh & Arif, Muhammad & Nguyen, Cuong, 2022. "Corporate investment and government policy during the COVID-19 crisis," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 677-696.

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    More about this item

    Keywords

    Family presence; R&D investments; Real option; Idiosyncratic risk; Instrumental variable three-stage least squares (IV-3SLS) regressions;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • K2 - Law and Economics - - Regulation and Business Law
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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