When Too Much Monitoring is Costly: Evidence from Asian Family Firms

In this study, we propose that increased monitoring is not always in the best interests of minority shareholders. In family-owned companies we expect an optimal level of monitoring that reduces the conflict of interest between the family group and minority shareholders but does not hinder the ability of the family group to create wealth for all shareholders. Using fixed effects regressions to control for omitted variable bias, we find concave relationships between measures of board governance and firm performance for family-owned companies but not for other companies. The optimal level of board governance for our sample of Asian family-owned companies equates to board independence of 38%, separation of the Chairman and CEO positions and establishment of audit and remuneration committees. Additional testing shows that the optimal level of monitoring is sensitive to the magnitude of the agency conflict between the family group and minority shareholders and the presence of substitute monitoring. Analysis of disclosure practices provides some evidence that increased disclosure is relatively costly in family-owned companies. Overall, the results confirm that more monitoring is not always associated with better performance but that the governance practices of family-owned companies are still well below optimal levels.