Family Management and Corporate Bond Spreads: Do Foreign and Government Ownerships Matter?

ABSTRACT

This research hand-collects data on family CEOs of family-controlled firms (named family management) to investigate the relation between family management and corporate bond spreads in Taiwan with a sample of 1,660 firms for the period 1996–2015. We show new evidence on the impact of financial constraints and CEOs’ characteristics on corporate bond spreads. Results find an impact of family management on increasing corporate bond spreads after considering firms’ and bonds’ characteristics. Moreover, the effect of family management on higher bond spreads is offset by firms under foreign or government ownership, as interacting family management with such ownership effect would give outside investors more assurance and protect minority shareholders from exploitation. Finally, firms’ financial constraints and CEOs’ weak characteristics lead to a detrimental impact of family management on bond spreads.

KEYWORDS:

• Family management
• foreign ownership
• government ownership
• corporate bond yield spreads

JEL:

• G3
• G34.

Acknowledgments

The authors are grateful to the Editor and the two anonymous referees for helpful comments and suggestions. Chien-Chiang Lee acknowledges the financial supports from the funding.

Supplementary Material

Supplemental data for this article can be accessed on the publisher’s website.

Notes

1. Gao et al. (2020) presents the founding family ownership causes higher yield spreads of the bonds because high costs of debt and less protections for creditors. Lu et al. (2010) and Chen et al. (2013) emphasize that high yield spreads depend on investors’ sensitivity to bonds’ credit risks, which are transmitted through asymmetry information between firm’s suppliers and customers or information uncertainty. Other factors that affect high bond yields include fluctuations in union power, information asymmetry, ownership and family control, and poor country governance (Capelle-Blancard et al. 2019; Chen et al. 2013; Chen et al. 2011; Boubakri and Ghouma 2010).

2. Take several family heirs’ scandals as examples. In 2010, Jeffery Koo Jr. and his father are accused of embezzling a total of $300 million from CTBC financial. One of the scandals involving bribery for college admissions in 2020 is Michelle Janavs, an heiress to a frozen food company called “Hot Pockets,” who pleaded guilty to pay $300,000 in bribes.

3. Two identifications of family management have been used by Kellermanns et al. (2012).

4. Family control is particularly prevalent, as 69% of Taiwanese firms involve families whose members are the controlling shareholders (Chiu and Wang 2019).

5. The data for the CEOs of family-controlled firms is available from authors upon requested.

6. We use the TSE industry classification in Supplementary Material Table S7.

7. A detailed description of the variable definitions and data sources is summarized in Supplementary Material Table S1, available online.

8. To save space, we report the summary statistics, correlation and univariate analysis in Supplementary Material Tables S2-4.

9. Another additional analysis and the robustness of our main findings are reported in the online Supplementary Material Tables S5-6.

Additional information

Funding

This paper is supported by the National Science Foundation of Jiangxi Province of China [20202BAB201006].