Does Firm Location Affect Management Team Size and Reputation? Evidence from Taiwan*☆

• DOI: http://doi.org/10.1111/ajfs.12306
• Published date: 01 August 2020
• Date: 01 August 2020

Does Firm Location Affect Management

Team Size and Reputation? Evidence from

Taiwan*

Tsung-Kang Chen

Department of Management Science, National Chiao Tung University, Taiwan

Yijie Tseng**

Department of Accounting, Fu Jen Catholic University, Taiwan

Yu-Ting Hsieh

Department of Accountancy, National Cheng Kung University, Taiwan

Yi-Fang Yeh

Department of Finance and International Business, Fu Jen Catholic University, Taiwan

Received 8 September 2016; Received in current form (3

rd

revision) 10 March 2020; Accepted 12 April 2020

Abstract

This study explores the effect of the location of a firm’s headquarters on the firm’s manage-

ment team size and reputation (MS&R) in a geographically small country (i.e., Taiwan) with

numerous founding family firms. The results show that firm location quality positively relates

to MS&R, and the association becomes weaker when firm profitability is higher or the found-

ing family is present in the firm. Furthermore, the effect of firm location quality on manage-

ment team reputation (team size) becomes stronger (weaker) when the CEO position is held

by the founding family. Finally, the results are robust when considering endogeneity issues

and other model settings.

Keywords Firm location quality; Founding family firms; Geographical characteristics; Man-

agement team size; Team reputation

JEL Classification: M10, M12, R10

*We thank Prof. John Nowland, Prof. Emma Y. Peng, and participants of the 2014 AAA

Annual Meeting for their helpful comments and suggestions. We also thank Prof. Yan-Shing

Chen (the author of Yen et al., 2015) for generously providing the founding family firm data

for Taiwan.

**Corresponding author: College of Management, Fu Jen Catholic University, Rm. SL 259,

No. 510, Jhongjheng Rd., Sinjhuang Dist., NewTaipei City 24205, Taiwan. Tel: +886-2-2905-

3781, email: 081647@mail.fju.edu.tw.

Asia-Pacific Journal of Financial Studies (2020) 49, 625–651 doi:10.1111/ajfs.12306

©2020 Korean Securities Association 625

1. Introduction

A firm’s operating performance and its competences are not only affected by

macroeconomic conditions but also by the characteristics of its management team.

Managers obviously play an important role in determining a firm’s operating strate-

gies and performance. Although many studies have been dedicated to investigating

the economic consequences (e.g., leverage ratio, dividend policy, and credit risk) of

the characteristics of a firm’s management team, few studies have explored their

determinants. This study aims to fill this gap by exploring how the quality of a

firm’s location affects its management team size and reputation (MS&R), which are

the two main characteristics of a management team (Chemmanur and Paeglis,

2005).

The quality of a firm’s location is often determined by aspects such as the avail-

ability of resources, the convenience of communications, and the degree of prosper-

ity of business and financial activities of its headquarters location. Previous studies

have shown that firm location quality plays an important role in determining orga-

nizational outcomes, including board structure (Yang and Chen, 2012; Knyazeva

et al., 2013), information asymmetry (Lang and Lizenberger, 1989; Smith and

Watts, 1992; Petersen, 2004; Loughran, 2008), and dividend policy (John et al.,

2011). Among these issues related to firm location quality, the characteristics of

management teams have rarely been discussed.

1

Moreover, most previous studies

have addressed the geography effect using firm location data from the United

States, a geographically large and culturally heterogeneous country. This motivated

us to explore whether geography matters in a geographically small and culturally

homogeneous country with a convenient public transportation system (i.e., Tai-

wan). This study therefore employs firm location data from Taiwan to address the

issue of the geography effect on MS&R.

The relationship between firm location quality and MS&R is built on the pre-

mise that a firm’s location quality affects its manager market conditions. It is

expected that firms located in urban environments are more likely to have larger

and better human resources and higher bargaining power in their manager market,

leading to a higher probability of recruiting more and reputable managers. There-

fore, it is hypothesized that the quality of a firm’s location is positively associated

with its MS&R. That is, a firm’s distance from an urban area is negatively correlated

with its MS&R, while the firm’s other geographical characteristics such as popula-

tion or business activities have the opposite effect.

In the current study, we employ the proxies of firm location quality and hand-

collected MS&R data of 8415 Taiwanese observations from 2006 to 2012 to explore

whether the quality of a firm’s headquarters location affects its MS&R. We follow

Chemmanur et al. (2009), Chen et al. (2011), and Chen et al. (2013) to define a

1

Chen et al. (2013) show that the locations of U.S. firms affect the characteristics of their

management teams.

T.-K. CHEN et al.

626 ©2020 Korean Securities Association