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Family control and the implied cost of equity: Evidence before and after the Asian financial crisis

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Author Info

  • Narjess Boubakri

    ([1] American University of Sharjah, Sharjah, UAE[2] HEC-Montreal, Quebec, Canada)

  • Omrane Guedhami

    ([1] University of South Carolina, Columbia, USA[2] Memorial University of Newfoundland, St John's, Canada)

  • Dev Mishra

    (University of Saskatchewan, Saskatoon, Canada)

Abstract

Recent research emphasizes that corporate governance becomes critical during economic crises, when the incentives for expropriation of minority shareholders increase. Using the high-profile Asian financial crisis of 1997–1998 and a sample of 566 firms from eight East Asian countries over 1996–1999, we examine the link between family control and agency costs evident in the cost of equity financing for firms. We find that, before the crisis, family control is unrelated to firms' equity financing costs, whereas, following the crisis, family control is related to a higher cost of equity. This suggests that the crisis made investors aware of the potential entrenchment of controlling families, prompting them to require a higher-equity premium from family firms. Our results are robust to various models of the cost of equity capital, additional firm- and country-level governance traits, and additional alternative explanations, including the presence of other types of large shareholders and potential survivorship bias. Our study contributes to our understanding of the corporate governance of family-controlled firms, especially during economic crises.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Journal of International Business Studies.

Volume (Year): 41 (2010)
Issue (Month): 3 (April)
Pages: 451-474

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Handle: RePEc:pal:jintbs:v:41:y:2010:i:3:p:451-474

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Cited by:
  1. Boubakri, Narjess & Guedhami, Omrane & Mishra, Dev & Saffar, Walid, 2012. "Political connections and the cost of equity capital," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(3), pages 541-559.
  2. Najah Attig & Sadok El Ghoul & Omrane Guedhami & Sorin Rizeanu, 2013. "The governance role of multiple large shareholders: evidence from the valuation of cash holdings," Journal of Management and Governance, Springer, Springer, vol. 17(2), pages 419-451, May.
  3. Victor Chen & Jing Li & Daniel Shapiro & Xiaoxiang Zhang, 2014. "Ownership structure and innovation: An emerging market perspective," Asia Pacific Journal of Management, Springer, Springer, vol. 31(1), pages 1-24, March.
  4. Muñoz-Bullón, Fernando & Sánchez-Bueno, Maria J., 2012. "Do family ties shape the performance consequences of diversification? Evidence from the European Union," Journal of World Business, Elsevier, Elsevier, vol. 47(3), pages 469-477.
  5. Espenlaub, Susanne & Khurshed, Arif & Sitthipongpanich, Thitima, 2012. "Bank connections, corporate investment and crisis," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(5), pages 1336-1353.
  6. El Ghoul, Sadok & Guedhami, Omrane & Kwok, Chuck C.Y. & Mishra, Dev R., 2011. "Does corporate social responsibility affect the cost of capital?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(9), pages 2388-2406, September.
  7. Yi Jiang & Mike Peng, 2011. "Principal-principal conflicts during crisis," Asia Pacific Journal of Management, Springer, Springer, vol. 28(4), pages 683-695, December.
  8. Sanchez-Bueno, Maria J. & Usero, Belen, 2014. "How may the nature of family firms explain the decisions concerning international diversification?," Journal of Business Research, Elsevier, Elsevier, vol. 67(7), pages 1311-1320.

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