Determinants of Family Ownership: The Choice between Control and Performance

Abstract

This paper analyzes what determines ownership structure of family firms in Korea. Our analysis shows that control is as important a factor as performance in the determination of whether a family in Korea chooses to own a firm. The controlling family prefers to own shares of de facto holding companies because they provide control over affiliated companies and firms that perform well. The family, however, allows its affiliated companies to own more shares of firms that perform poorly and of firms that do not provide the family with power to control the firm. In addition, controlling families own fewer shares of firms that make bond investments in affiliated companies because bond holding does not provide control. We carry out logit regressions for firms without family ownership and for firms with a positive family ownership. The family chooses not to own shares regardless of a firm's performance if the firm does not provide significant control over affiliated companies. We also show that the family values its control more for closely held firms.