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Journal ArticleDOI

Paving the way for children: Family firm succession and corporate philanthropy in China

Wen He1, Xin Yu1
01 Oct 2019-Journal of Business Finance & Accounting (Wiley-Blackwell)-Vol. 46, pp 1237-1262
TL;DR: Li et al. as discussed by the authors investigated whether internal succession in family firms motivates founders to engage in corporate philanthropy and found that both the likelihood and the amount of philanthropic donations increase when listed family firms in China are in the internal succession process.
Abstract: We investigate whether internal succession in family firms motivates founders to engage in corporate philanthropy. We argue that founders who intend to pass control of the firm to their children are likely to prepare for the internal succession by building up family assets such as reputation and political connections through corporate philanthropy. Supporting our argument, we find that both the likelihood and the amount of philanthropic donations increase when listed family firms in China are in the internal succession process. The effect of successions on philanthropic donations is stronger for family firms that have political connections or are located in areas with stronger government influence in the local economy. The effect concentrates on family firms when heirs are young and inexperienced. When heirs are established, family firms actually make fewer philanthropic donations. Our results remain robust after addressing endogeneity issues.

Summary (4 min read)

Introduction

  • The authors extend this stream of research by examining whether successions in family firms could motivate firms to engage in corporate philanthropy.
  • The authors argue that family firms in the internal succession process are likely to invest more in specialized family assets that can continue to benefit the firm even after founders exit daily management.

2.1. Successions in family firms

  • Family firms are a common form of business organization around the world, accounting for a substantial portion of public firms around the world (La Porta et al., 1999; Claessens et al., 2000; Faccio and Lang, 2002; Anderson and Reeb, 2003; Villalonga and Amit, 2006).
  • While there is mixed evidence on whether family firms have superior performance (Anderson and Reeb, 2003; Maury, 2006; Pérez-González, 2006; Andres, 2008; Miller et al., 2007), a few studies have documented that family firms’ performance deteriorates after founders retire and their descendants manage the firm (Bennedsen et al., 2007; Pérez-González, 2006; Villalonga and Amit, 2006).
  • Bennedsen et al. (2015) propose a framework to understand founding families’ decisions to engage in firm ownership and management.
  • In the framework, families choose to manage their owner firms when specialized family assets are more important, and This article is protected by copyright.
  • Furthermore, if specialized family assets such as reputation and social and political connections that are critical to the success of family firms are dissipated during the successions, family firms are likely to have a deterioration in performance after successions.vi.

2.2. Corporate philanthropy and family assets in China

  • Corporate social responsibility, including corporate philanthropy, has received substantial attention in academic literature.
  • In China, corporate philanthropy has been particularly popular and accounts for over two thirds of total philanthropic donations, with over half of corporate donations contributed by private and family firms (The Conference Board, 2012).
  • First, trust, which underlies every business transaction, is largely based on various social connections, rather than the rule of law and an independent judiciary system (Allen et al., 2005).
  • Therefore, a good reputation is an important asset that will benefit family firms by winning trust from stakeholders.
  • Political connections can help family firms obtain preferable tax treatment (Wu et al, 2012) from tax authorities and have better access to bank loans (Chen et al., 2015; Wang, 2015).

2.3 Hypotheses

  • Family firms usually have succession plans to ensure a smooth transition from founders to successors.
  • While the evidence may suggest that internal successors seem to be less capable of running the firm than outside managers, Bennedsen et al. (2015) argue that the loss of family assets in the internal succession process could also explain the deteriorating performance after internal successions.
  • Therefore, the authors argue that founders considering internal All rights reserved.
  • Third, founders can cultivate their heirs and teach them how to invest in family assets such as corporate reputation and political connections.
  • The effect of internal successions on family firms’ philanthropic donations is stronger for firms whose political connections are more important for their success, also known as H2.

3.1 Data and sample

  • The authors start their sample selection from all private sector firmsxii publicly traded in China’s A-share markets from 2002 to 2012, obtained from the China Center for Economic Research (CCER) Economic and Financial Database provided by SinoFin Information Services.
  • The authors also exclude 73 observations whose financial, ownership or stock trading data are missing from the China Securities Market and Accounting Research database, and 38 observations whose founders have exited from ownership and management of the family business because these observations have completed the succession process from the founder to the second generation.
  • The authors final sample covers 5,033 firm-year observations from 1,184 private sector listed firms where founders are still involved in the business, as owners, directors or managers.
  • The authors collected information about family relationships among owners, directors and senior managers manually from IPO prospectuses, share transfer announcements and annual reports of listed companies.

3.2 Regression models

  • The authors main hypothesis predicts that family firms in the internal succession process spend more on corporate philanthropy than other family firms.
  • To test this prediction, the authors first conduct a univariate test comparing the likelihood and amount of philanthropic donations in family firms in the succession process and other family firms.
  • Heir is an indicator variable taking a value of 1 for family firms where founders’ children or children’s spouses are involved in the firm management as senior managers or board members.

4.1 Internal succession and donations

  • Table 3 reports the result from a univariate test on whether family firms in the internal succession process donate more to charities.
  • The authors divide sample firms into two groups based on the indicator variable Heir.
  • This suggests that founders with stronger control of their firms are more likely to choose internal successions and pass control to their heirs.
  • Model 1 shows that Heir has a positive and statistically significant coefficient (coefficient = 0.803, t-statistic = 2.39), suggesting that family firms with ongoing internal successions have a larger value of philanthropic donations.
  • These results are consistent with the result from the univariate test reported in Table 3 and provide strong support to H1.

4.2 Effect of political connections

  • H2 predicts that the effect of internal successions on family firms’ philanthropic donations will be stronger when the importance of family assets such as political connection are more important to firms.
  • So existing political connections signal the importance of such connections to firms.
  • Government size is the annual decile ranking of the number of employees in public administration organizations divided by the population in the province where the firm is registered.
  • Consistent with their expectation, the authors find that in both columns, the interaction term between Heir and PC has positive and statistically significant coefficients, suggesting that firms with political connections are more likely to donate and donate more during the succession process.
  • The authors construct interaction terms between Heir and the two measures of government power, and include the interaction terms and government power measures in the multivariate regressions.

4.3 Effect of founders’ age

  • H3 predicts that the effect of internal successions on corporate philanthropy becomes weaker when heirs are more established and more experienced in managing the This article is protected by copyright.
  • Panel A in Figure 1 plots the time series of the median industryadjusted donations by family firms with internal successions.
  • This seems a sensible assumption given that Chinese couples usually have their first child in their mid- or late 20s.xvii.
  • The authors estimate Equations 1 and 2 separately for these two subsamples and report the results in Table 7.
  • In contrast, in columns 4 and 6 where the authors examine family firms with founders over 65 years old, Heir has negative and statistically significant coefficients, implying that these firms actually donate less.

4.4 Endogeneity issues

  • The authors main results show that family firms in internal succession processes spend more on philanthropic donations than other family firms do.
  • When matching the firms, the authors consider firm size, the ownership of the largest controlling shareholder, firm age and founder’s age as key determinants of firms’ decisions on whether to have an internal succession.
  • The small sample size prevents us from having more powerful tests and making stronger statistical inference.
  • This variable aims to capture the intensity of intangible assets in the industry, with higher intangible intensity indicating greater importance of specialized knowledge (Srivastava, 2014).
  • In the second stage regression, the authors find that the predicted value of Heir has a positive and statistically significant coefficient, suggesting that their main results remain robust to the use of the instrument variable.

4.5 Robustness tests

  • The results are not tabulated for brevity but available on request.
  • Both univariate and multivariate analyses show that family firms with heirs’ involvement have more donation than firms with other family members’ involvement.
  • The evidence suggests that the results on government power are not driven by local market development.
  • Furthermore, the authors examine whether their main results presented in Table 4 are sensitive to controls for local market development in two robustness tests.
  • The results from these two robustness tests are similar to those reported in Table 4.

5. Conclusions

  • Corporate philanthropy has been increasing over time and attracts a lot of attention from researchers.
  • The authors study contributes to the literature in two ways.
  • That internal successions could motivate family firms to make donations, offering another explanation for the unusually large proportion of philanthropic donations by private firms in China.
  • Consistent with Bennedsen et al. (2015), their evidence suggests that establishing and preserving family assets is a key consideration for internal succession in family firms.
  • The percentage of shares owned by the largest controlling shareholder.

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This is the author manuscript accepted for publication and has undergone full peer review but has not
been through the copyediting, typesetting, pagination and proofreading process, which may lead to
differences between this version and the Version of Record. Please cite this article as doi:
10.1111/jbfa.12402.
This article is protected by copyright. All rights reserved.
Paving the Way for Children: Family Firm Succession and Corporate Philanthropy in China
1
Wen He
UQ Business School
University of Queensland
St Lucia, QLD 4072, Australia
wen.he@uq.edu.au
Xin Yu
UQ Business School
University of Queensland
St Lucia, QLD 4072, Australia
x.yu@business.uq.edu.au
Running head: Family Firm Succession and Corporate Philanthropy
Abstract
We investigate whether internal succession in family firms motivates founders to engage in
corporate philanthropy. We argue that founders who intend to pass control of the firm to
their children are likely to prepare for the internal succession by building up family assets
such as reputation and political connections through corporate philanthropy. Supporting
our argument, we find that both the likelihood and the amount of philanthropic donations
increase when listed family firms in China are in the internal succession process. The effect
of successions on philanthropic donations is stronger for family firms that have political
connections or are located in areas with stronger government influence in the local
economy. The effect concentrates on family firms when heirs are young and inexperienced.
When heirs are established, family firms actually make less philanthropic donations. Our
results remain robust after addressing endogeneity issues.
Keywords: Family firms; succession; corporate philanthropy; donation
JEL classifications: G39, M14
1. Introduction
Corporate philanthropy, as an important dimension of corporate social
responsibility, has received increasing attention from academics and business leaders
around the world.
i
The literature has explored companies’ motivations to make gifts to
1
Corresponding author: Xin Yu. For helpful comments, we thank Donghua Chen, Fang Hu, Jilu Jiang, Baolei
Qi, Gaoliang Tian, and participants in seminars at Central South University of China, Guangdong University of
Foreign Studies, Nanjing University, and Xi’an Jiaotong University.

This article is protected by copyright. All rights reserved.
charitable organizations, such as committing to common goods (Campbell et al., 1999; Shaw
and Post, 1993), maximizing profits (Zhang et al., 2010), seeking political connections
(Sánchez, 2000; Lin et al., 2015), disguising corporate misconduct (Du, 2015), meeting
stakeholder expectations (Wang and Qian, 2011), among others. In this study, we extend
this stream of research by examining whether successions in family firms could motivate
firms to engage in corporate philanthropy. We argue and find evidence that when founders
have the intention to cultivate their heirs for successions, the family firms invest more in
philanthropic donations in order to build up more family assets such as political connections
to help the heirs have a smooth and successful succession.
Our interest in studying family firms’ philanthropic donation arises from the fact the
family firms account for a substantial portion of businesses across countries. La Porta et al.
(1999) find that in 27 countries families control over 53% of listed firms with at least $500
million in market capitalization. Claessens et al. (2000) find that over two thirds of the firms
in nine East Asian economies are controlled by families or individuals. Faccio and Lang
(2002) find that family-controlled firms account for 44% of public corporations in 13
Western European countries. Even in the U.S. where diffused ownership seems to be the
norm, almost one third of S&P 500 firms and 37% of the Fortune 500 firms are family firms
(Anderson and Reeb, 2003; Villalonga and Amit, 2006). Therefore, studying the behaviour of
family firms potentially helps us better understand the motivations underlying the vast and
increasing amount of corporate philanthropic donations around the globe.
Succession is a critical issue in family firms around the world. When the founder of a
successful family business approaches retirement, the founder needs to appoint an heir or
an outside manager to run the business. Founders often prefer an heir as the successor to

This article is protected by copyright. All rights reserved.
preserve control of the business within the family to enjoy “amenity potential” or
nonpecuniary private benefits of control (Demsetz and Lehn, 1985; Ehrhardt and Nowak,
2001), maintain the benefits associated with family reputation (Faccio, 2006), prevent
expropriation by professional managers (Burkart et al., 2003), and protect non-transferable
family assets (Bennedsen et al., 2015).
ii
However, founders’ heirs may not be the most
capable managers to run the firm, and incompetent heirs may hurt firm performance and
lead to the termination of the family business (Beckhard and Dyer, 1983; Pérez-González,
2006; Bennedsen et al., 2007).
To ensure the continued success of their business, founders who intend to pass
control to their heirs (internal successions) usually have a succession plan to cultivate the
successors and make them ready for the top job. The plan may include sending heirs to
graduate schools to get a business education, involving heirs in the management of the
family business while founders are still active in managing the firm, and gradually passing
control to the heirs. During the succession process,
iii
one of the most challenging tasks is to
transfer the specialized family assets from founders to the next generations (Bennedsen et
al., 2015). Such family assets are typically intangible in nature, such as founders’ personal
talent and charisma, family values, reputation, and social and political connections. When
these family assets dissipate during successions, the performance of family firms
deteriorates and firm value decreases (Bennedsen et al., 2007, 2015).
In this study, we argue that family firms in the internal succession process are likely
to invest more in specialized family assets that can continue to benefit the firm even after
founders exit daily management. In the internal succession process, founders’ talents and
skills are likely to be tied to the founders themselves and thus difficult to be fully inherited

This article is protected by copyright. All rights reserved.
by family successors. However, other family assets, such as reputation and political
connections, can be passed on to heirs and benefit the family firms in the long run (Faccio,
2006; Faccio et al., 2006). Therefore, founders have incentives to invest more in such family
assets for the heirs so that heirs can inherit more family assets when the founders step
down.
iv
Furthermore, when heirs often lack the experience in establishing family assets,
founders can cultivate them and give them hand-on experience by involving them in
building up family assets during the internal succession process. Prior studies have
documented that corporate philanthropic donations can help firms establish a good
reputation among stakeholders (Wang and Qian, 2011) and build up political connections
with government officials (Sánchez, 2000; Lin et al., 2015). Following these studies, we focus
on corporate philanthropy and hypothesize that founders have incentives to spend more on
philanthropic donations for the sake of their heir successors.
We test our hypotheses using a large sample of listed family firms in China. We
choose China as the setting for several reasons. First, since China’s economic reform in the
early 1980s, thousands of family firms have emerged in China in the past 30 years and many
of these family firms are now in the succession process. This allows us to examine the
internal succession from founders to the second generation or the most important
succession in the history of family businesses. Second, due to the strict implementation of
the one-child policy over the past 30 years, many founders of Chinese family firms have only
one child as the successor, making it extremely important to cultivate heirs and build up
family assets for succession. Third, specialized family assets such as reputation and political
connections are critically important for family firms in China due to a weak legal system and
strong government intervention in the economy (Li et al., 2008; Wong, 2016). Therefore,

This article is protected by copyright. All rights reserved.
Chinese family firms are more likely to be concerned about the loss of specialized family
assets during succession and thus invest more in corporate philanthropy to build up
reputations and political connections.
The empirical results support our hypotheses. Relative to other family firms, family
firms in the internal succession process are more likely to make philanthropic donations and
they donate more money. This result is obtained after we control for a number of firm
characteristics including profitability, firm size, leverage, cash holding, firm age, and
ownership structure.
We then explore cross-sectional variations in the effect of internal succession on
donations to provide corroborating evidence. A feature of the Chinese economy is that
governments have a strong influence on the operations and profitability of both public and
private firms, through various policies, regulations, and taxations. As a result, political
connections in China are a critically important family asset that founders would like to pass
to their heirs to ensure the continued success of the family business (Xu et al., 2015). Lin et
al. (2015) show that corporate philanthropy can be an effective and legitimate way to build
up political connections with the newly appointed government officials. We expect that
family firms invest more in philanthropic donations when political connections are
particularly important and valuable. We use two variables to measure the value of political
connections. One is an indicator variable showing whether firms have political connections,
assuming that firms would have built up some political connections if they think such
connections are valuable. The other is the extent to which local government can intervene
in the local economy, proxied by the size of local government and the amount of local
government spending. The results are consistent with our expectations. Succession has a

Citations
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Abstract: We use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means’s image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash f low rights, primarily through the use of pyramids and participation in management.

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"Paving the way for children: Family..." refers background in this paper

  • ...…heir as the successor to preserve control of the business within the family to enjoy “amenity potential” or nonpecuniary private benefits of control (Demsetz & Lehn, 1985; Ehrhardt & Nowak, 2001), maintain the benefits associatedwith family reputation (Faccio, 2006), prevent expropriation by…...

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TL;DR: The authors investigated the relation between founding-family ownership and firm performance and found that family ownership is both prevalent and substantial; families are present in one-third of the S&P 500 and account for 18 percent of outstanding equity.
Abstract: We investigate the relation between founding-family ownership and firm performance. We find that family ownership is both prevalent and substantial; families are present in one-third of the S&P 500 and account for 18 percent of outstanding equity. Contrary to our conjecture, we find family firms perform better than nonfamily firms. Additional analysis reveals that the relation between family holdings and firm performance is nonlinear and that when family members serve as CEO, performance is better than with outside CEOs. Overall, our results are inconsistent with the hypothesis that minority shareholders are adversely affected by family ownership, suggesting that family ownership is an effective organizational structure. FOUNDING-FAMILYOWNERSHIPAND CONTROL in public U.S. firms is commonly perceived as a less efficient, or at the very least, a less profitable ownership structure than dispersed ownership. Fama and Jensen (1983) note that combining ownership and control allows concentrated shareholders to exchange profits for private rents. Demsetz (1983) argues that such owners may choose nonpecuniary consumption and thereby draw scarce resources away from profitable projects. Shleifer and Vishny (1997) observe that the large premiums associated with superiorvoting shares or control rights provide evidence that controlling shareholders seek to extract private benefits from the firm. More generally, firms with large, undiversified owners such as founding families may forgo maximum profits because they are unable to separate their financial preferences with those of outside owners.1 Families also often limit executive management positions to family

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  • ...Even in theUSwhere diffused ownership seems to be the norm, almost one-third of S&P500 firms and 37% of Fortune 500 firms are family firms (Anderson & Reeb, 2003; Villalonga & Amit, 2006)....

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Frequently Asked Questions (2)
Q1. What are the contributions mentioned in the paper "Paving the way for children: family firm succession and corporate philanthropy in china" ?

The authors investigate whether internal succession in family firms motivates founders to engage in corporate philanthropy. 

While the literature has offered some explanations for firms ’ motivations to donate to charitable organizations, the authors explore a new explanation based on the family firms ’ incentives to cultivate their heirs for internal successions. This evidence suggests that establishing and maintaining political connections for their heirs is a strong motivation for family firms to donate. The authors further find that the effect concentrates on family firms whose heirs are relatively young and inexperienced. Consistent with Bennedsen et al. ( 2015 ), their evidence suggests that establishing and preserving family assets is a key consideration for internal succession in family firms.