Paving the way for children: Family firm succession and corporate philanthropy in China

• Date: 01 October 2019
• DOI: http://doi.org/10.1111/jbfa.12402
• Author: Wen He,Xin Yu
• Published date: 01 October 2019

DOI: 10.1111/jbfa.12402

Paving the way for children: Family firm succession

and corporate philanthropy in China

Wen He Xin Yu

UQ Business School, University of Queensland,

St Lucia, QLD 4072, Australia

Correspondence

XinYu, UQ Business School, University of

Queensland,St Lucia, QLD 4072, Australia.

Email:x.yu@business.uq.edu.au

Fundinginformation

NationalNatural Science Foundation of China,

Grant/AwardNumber: 71272101

Abstract

We investigate whether internal succession in family firms moti-

vates founders to engage in corporate philanthropy. We argue that

founders who intend to pass control of the firm to their children are

likely to prepare for the internal succession by building up family

assets such as reputation and political connections through corpo-

rate philanthropy. Supporting our argument, we find that both the

likelihood and the amount of philanthropic donations increase when

listed family firms in China are in the internal succession process.

The effect of successions on philanthropic donations is stronger

for family firms that have political connections or are located in

areas with stronger government influence in the local economy.

The effect concentrates on family firms when heirs are young and

inexperienced. When heirs are established, family firms actually

makefewer philanthropic donations. Our results remain robust after

addressing endogeneity issues.

KEYWORDS

corporate philanthropy, donation, family firms, succession

JEL CLASSIFICATION

G39, M14

1INTRODUCTION

Corporatephilanthropy, as an important dimension of corporate social responsibility,has received increasing attention

from academics and business leaders around the world.1The literature has explored companies’ motivations to make

gifts to charitable organizations, such as committing to common goods (Campbell, Gulas, & Gruca, 1999; Shaw & Post,

1993), maximizing profits (Zhang, Zhu, Yue,& Zhu, 2010), seeking political connections (Lin, Tan, Zhao, & Karim, 2015;

Sánchez, 2000), disguising corporate misconduct (Du, 2015), and meeting stakeholder expectations (Wang & Qian,

2011), among others. In this study,we extend this stream of research by examining whether successions in family firms

1Fora comprehensive review of the literature on corporate philanthropy,see Gautier and Pache (2015). According to a survey of 261 leading firms worldwide

(CECP,2014), the amount of corporate philanthropy of these companies totals $25 billion, with a median of $18 million per companyin 2013.

J Bus Fin Acc. 2019;46:1237–1262. wileyonlinelibrary.com/journal/jbfa c

2019 John Wiley & Sons Ltd 1237

1238 HE ANDYU

could motivate firms to engage in corporate philanthropy. Weargue and find evidence that when founders have the

intention to cultivate their heirs for succession, family firms invest more in philanthropic donations in order to build

up more family assets such as political connections to help the heirs have a smooth and successful succession.

Ourinterest in studying family firms’ philanthropic donations arises from the fact that family firms account for a sub-

stantial proportion of businesses across countries. La Porta, Lopez-de-Silanes,and Shleifer (1999) find that in 27 coun-

tries families control over 53% of listed firms with at least $500 million in market capitalization. Claessens, Djankov,

and Lang (2000) find that over two-thirds of the firms in nine East Asian economies are controlled by families or indi-

viduals. Faccio and Lang (2002) find that family-controlled firms account for 44% of public corporations in13 Western

European countries. Evenin the US where diffused ownership seems to be the norm, almost one-third of S&P 500 firms

and 37% of Fortune 500 firms are family firms (Anderson & Reeb, 2003; Villalonga & Amit, 2006). Therefore, studying

the behaviourof family firms potentially helps us better understand the motivations underlying the vast and increasing

amount of corporate philanthropic donations around the globe.

Succession is a critical issue in family firms around the world. When the founder of a successful family business

approaches retirement, the founder needs to appoint an heir or an outside manager to run the business. Founders

often prefer an heir as the successor to preserve control of the business within the family to enjoy “amenitypotential”

or nonpecuniary private benefits of control (Demsetz & Lehn, 1985; Ehrhardt & Nowak, 2001), maintain the benefits

associated with family reputation (Faccio, 2006), prevent expropriationby professional managers (Burkart, Panunzi, &

Shleifer, 2003), and protect non-transferablefamily assets (Bennedsen, Fan, Jian, & Yeh, 2015).2However, founders’

heirsmay not be the most capable managers to run the firm, and incompetent heirs may hurt firm performance and lead

to the termination of the family business (Beckhard & Dyer,1983; Bennedsen, Nielsen, Pérez-González, & Wolfenzon,

2007; Pérez-González, 2006).

Toensure the continued success of their business, founders who intend to pass control to their heirs (internal suc-

cessions) usually have a succession plan to cultivate the successors and makethem ready for the top job. The plan may

include sending heirs to graduate schools to get a business education, involving heirs in the management of the fam-

ily business while founders are still active in managing the firm, and gradually passing control to the heirs. During the

succession process,3one of the most challenging tasks is to transfer the specialized family assets from founders to

the next generations (Bennedsen et al., 2015). Such family assets are typically intangible in nature, such as founders’

personal talent and charisma, family values, reputation, and social and political connections. When these family assets

dissipate during successions, the performance of family firms deteriorates and firm value decreases (Bennedsen et al.,

2007, 2015).

In this study, we argue that family firms in the internal succession process are likely to investmore in specialized

family assets that can continue to benefit the firm even after founders exit daily management. In the internal succes-

sion process, founders’ talents and skills are likely to be tied to the founders themselves and thus are difficult to be

fully inherited by family successors. However, other family assets, such as reputation and political connections, can

be passed on to heirs and benefit the family firms in the long run (Faccio, 2006; Faccio, Masulis, & McConnell, 2006).

Therefore, founders have incentives to invest more in such family assets for the heirs so that heirs can inherit more

family assets when the founders step down.4Furthermore, when heirs often lack the experiencein establishing family

assets, founders can cultivate them and give them hand-on experience by involving them in building up family assets

2A related literaturehas documented that family firms can effectively control the business through a pyramid ownership structure, multiple classes of stock

withdifferent voting rights, cross-shareholding, and so forth (see, e.g., Almeida & Wolfenzon, 2006; Claessens et al., 2000; La Porta et al., 1999; Masulis, Pham,

&Zein, 2011).

3Successionis usually marked by the turnover of the CEO or chairman, but the succession process can last for a few years or decades depending on when the

starting point is defined. In this study,we identify family firms in the succession process if founders are still active in management and heirs hold important

corporatepositions (e.g., executives or directors).

4Given the importance of the family assets for the firms’ operations and success, founders and family firms would haveinvested in such assets even with-

out considerations of internal succession, after taking account of the cost of investments.However, internal successions provide an additional incentive for

foundersto invest in these family assets. We argue and document evidence that internal successions lead to incremental investments in family assets that can

bepassed to founders’ heirs.