When Family Trusts Affect the Value of Firms
Share transfer restriction may induce family shirking problems, make family conflicts difficult to resolve, and distort firm decisions
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Ownership structure plays a critical role in the incentives and behaviour of business organisations. The effects of firm ownership dispersion across managers and investors have been examined in past studies. Yet Prof. Joseph P.H. Fan from The Chinese University of Hong Kong (CUHK) has extended the literature by examining the roles of ownership structure within a controlling family.
His research “The impact of ownership transferability on family firm governance and performance: The case of family trusts” examines family trust structure commonly used among Fortune 500 family firms.
Companies controlled by family trusts or similar structures include The New York Times newspaper, department store chain Walmart and global furniture retailer IKEA.
“Family trusts are typically established for inheritance tax avoidance, asset protection against undesirable events such as divorce, bankruptcy, taxation and hostile takeovers,” says Prof. Fan of Department of Finance and School of Accountancy at CUHK Business School. “The trust structure often locks controlling ownership within a family for a very long period.”
In collaboration with Dr. Winnie S.C. Leung from the University of Hong Kong, the study focused on 216 distinct family firms listed on the Hong Kong Stock Exchange, including 72 firms using family trusts and 144 firms using direct ownership.