Do Controlling Families Downgrade Corporate Governance? The Roles of Intra-Family Governance

Building on the theory of Burkart et al. (2003) that family ownership and control of firms mitigate the twin conflicts between owners and managers and between majority and minority owners, we suggest that the allocation of firm ownership rights and informal governance within controlling families helps mitigate conflicts among family members, a third type of agency problem unique to family firms. We analyze the internal governance of firms’ controlling families and its effects on corporate governance outcomes with a large sample of Chinese private-sector firms. We report that when firm ownership and management are shared by more family members, the volumes of suspicious related-party transactions are lower. The curtailing effects are stronger when founders collaborate with more distant relatives, when families are influenced by collectivist culture, and when firms have higher levels of free cash flow and are subject to weaker market disciplines. Overall, intra-family governance manifested by the partition of family ownership rights strengthens corporate governance.