Corporate-governance-and-investment-in-East-Asian-firms—empirical-analysis-of-family-controlled-firms_2007_Journal-of-Asian-Economics.pdfVIP

Journal of Asian Economics 18 (2007) 76–97 Corporate governance and investment in East Asian firms—empirical analysis of family-controlled firms Masaharu Hanazaki a,*, Qun Liu b,1 a Research Institute of Capital Formation, Development Bank of Japan, 1-9-3 Otemachi Chiyoda-ku, Tokyo 100-0004, Japan b Institute of Economic Research, Hitotsubashi University, 2-1 Naka Kunitachi-shi, Tokyo 186-8603, Japan Received 6 October 2006; received in revised form 27 October 2006; accepted 12 November 2006 Abstract In this paper, we analyze in quantitative terms the influence of family control on the pattern of corporate investment, using firm-level data from Indonesia, Korea, Malaysia, the Philippines, and Thailand to regress the investment function and focusing on the family ownership structure that characterizes East Asian corporate governance. Our results present evidence that family-controlled firms, the majority of the firms in our data set, face more severe internal financing constraints than nonfamily-controlled firms. Our findings suggest that the mechanism in East Asian countries, which is commonly assumed to permit smooth reallocation of money among investment projects through the internal capital markets of family-controlled group firms, does not work well, and that, coupled with the difficulty of obtaining financing from external capital markets, it may lead to strict internal financing constraints on investment. # 2007 Elsevier Inc. All rights reserved. JEL classification : G32; E22; O53 Keywords: Family-controlled firm; Corporate Investment; Asian crisis 1. Introduction The East Asia region, while recording remarkable economic growth over the long term, experienced a serious financial crisis in 1997. In the wake of the crisis, the view that there was some kind of relationship between the structure of corpora