Yin-Hua Yeh

Family Control and Corporate Governance: Evidence from Taiwan

A recent stream of literature shows that family control is central in most countries of the world, but little research exists regarding family control and corporate governance. This paper analyses family control and corporate governance using a sample of Taiwanese firms. The results suggest that family control is even more prevalent than previously suggested and that a non-linear relation exists between family control and relative firm performance. Family-controlled firms that have low levels of control have lower relative performance than both family-controlled firms with high levels of control and widely held firms. This is consistent with the conflict of interest between majority and minority shareholders being the greatest when the majority shareholder’s level of control is high enough to influence a firm’s decision-making process but ownership is low enough that the benefits of expropriation outweigh the costs. Furthermore, a positive valuation effect exists when controlling families hold less than 50% of a firm’s board seats. Taken together, the results in this paper suggest that when family control is central, high levels of family ownership and low levels of family board representation are effective ways of mitigating the separation of cash flow rights and control and, thus, decreasing the conflict of interest between majority and minority shareholders.

The interaction and volatility asymmetry of unexpected returns in the greater China stock markets

Abstract The response of investors to unexpected returns and the information transmission in the stock markets of the Greater China area are investigated in this study. First, we analyze the asymmetric reaction of return volatility to good and bad news by utilizing generalized autoregressive conditional heteroskedasticity (GARCH) model. We find that the impact of bad news (negative unexpected return) on future volatility is greater than the impact of good news (positive unexpected return) of the same magnitude in Taiwan and Hong Kong, consistent with the previous literature. However, just the opposite is found in the Shanghai and Shenzhen markets, implying good-news-chasing behavior of the investors. This phenomenon also indicates that behaviors of the investors in Mainland China may be inclined to support the trading noise hypothesis. Further, this study examines information transmission of contemporaneous and cross-period by exploring the interaction of unexpected returns among these four markets. The results of a near vector autoregressions (VAR) model reveal that the Hong Kong stock market plays a most influential role (regional force) among the Taiwan, Shanghai, and Shenzhen B-share stock markets. Finally, the stock returns in the Taiwan market, which has been quite independent of the Mainland China stock markets, became negatively correlated with the Shanghai B-share market during the Taiwan Strait Crisis period. The interaction among financial markets seems to be strengthened by political incidents.

The behavior of Taiwan mutual fund investors—performance and fund flows

Abstract We examine the investment flow of open-end equity mutual funds. With a unique data from Taiwan, we are able to investigate the buy and sell behavior of mutual investors separately. We find that most investors that invest in large mutual funds are small-amount investors, while those that invest in small funds invest a much larger amount. Small-amount investors of large funds tend to chase past winners and redeem shares once fund performance improves. They are more likely to avoid actively managed funds with high turnover. On the other hand, large-amount investors of small funds appear to be dispassionate buyers whose purchases are not remarkably affected by short-term performance. They are more likely to keep performance-improving funds, redeem the losers, and pay higher management fees.

Non‐Tradable Share Reform and Corporate Governance in the Chinese Stock Market

Prior to China’s split-share structure reform, domestic A shares were divided into non-tradable and tradable shares. Non-tradable shareholders represent the government, hold roughly a two-thirds majority, and manage the firms, while tradable shareholders have little power to affect the decisions made by non-tradable shareholders. This is a typical structure to exhibit agency problems. The 2005 structure reform program stipulates that non-tradable shareholders have to bargain with tradable shareholders in order to gain liquidity. The price that non-tradable shareholders pay to tradable shareholders for gaining liquidity is defined as “compensation.” We explore the issue of why corporate governance might play an important role in affecting the level of compensation. Firms with a weak governance structure or severe agency problems are required to have a higher level of compensation. The level of compensation is positively correlated with the non-tradable shareholding, the pledge ratio, and related-party transactions, and is negatively correlated with foreign shareholdings. The same set of variables dictates the ex-post wealth effect of tradable shareholders, but in the reverse direction. The share reform provides a natural setting that allows tradable shareholders to reflect their concerns with agency problems. The mechanism could ameliorate the agency problems. Corporate governance, in a broad sense, is related to compensation and the ex-post wealth effect of tradable shares. A successful mechanism should be designed to have minority shareholders involved in the process and have the final compensation reflect the quality of corporate governance.

Committee Independence and Financial Institution Performance during the 2007-08 Credit Crunch: Evidence from a Multi-country Study

Manuscript Type: Empirical. Research Question/Issue: Using the data of the 20 largest financial institutions from G8 countries, we explore whether the performance is higher for financial institutions with more independent directors on different committees during the 2007–08 financial crisis. We also examine the moderating effect of a country‐level civil law dummy and firm‐level excessive risk‐taking behaviors on the independence‐performance relationships. Research Findings/Insights: The empirical evidence shows that the performance during the crisis period is higher for financial institutions with more independent directors on auditing and risk committees. The influence of committee independence on the performance is particularly stronger for civil law countries. In addition, the independence‐performance relationships are more significant in financial institutions with excessive risk‐taking behaviors. Theoretical/Academic Implications: Our findings complement existing works to partially resolve the independence‐performance relationship controversies by exploring the independence of different committees. The moderating effects of civil law countries and excessive risk‐taking firms further address the governance environments role in the effectiveness of director independence. Practitioner/Policy Implications: Our results provide important policy implications for financial institutions. The regulation authorities should enhance regulation compliance to improve director independence, particularly for auditing and risk committees in banking industry. Independent directors in the banking industry are supposed to put more emphasis on excessive risk‐taking behaviors, as the financial institutions profit from risk‐bearing earnings.

Stock Returns and Volatility under Market Segmentation: The Case of Chinese A and B Shares

In most countries where firms list separate shares for trading by foreign and domestic investors, the prices of the foreign shares tend to be higher. In China, the reverse tends to be true. In this paper, we would like to focus on the information content in lagged premiums of Chinese A over B traded shares. The lagged premiums are found to have certain predictive power over the future returns and volatility of both A and B shares, with some interesting patterns. Specifically, an increase in the premium ratio of A shares will be followed by a rise in the return of A shares and a fall in the return of B shares. It is found that both of the investors in Chinese A- and B-share markets reveal positive feedback trading behavior. Moreover, the liquidity and information availability will affect the magnitude of such behavior especially in B-share markets. By using multivariate GARCH model, it is also demonstrated that the unexpected changes in the premium ratio of A-share price over B-share price contribute to the return volatility of both A shares and B shares. These patterns may provide foundations for the development of pricing models for equity shares under market segmentation.

Managerial Overconfidence and Share Repurchases

Following prior studies, we use keywords in press portrayals to gauge managerial overconfidence. We hypothesize that managerial overconfidence is related to a managers perception that the firm is undervalued. Results from 2744 share repurchase programs launched by 783 listed firms in Taiwan confirm this hypothesis. We find that managerial overconfidence is positively correlated with the intensity of share repurchasing, which is measured by scale, execution, frequency, and the difference between the announced price and post‐execution price. Moreover, the programs launched by overconfident managers were not undervalued and therefore were associated with reduced post‐announcement returns.

The Year-End Anomaly of Taiwanese Family-Controlled Groupings

The average abnormal return of Taiwanese family-controlled grouping (1.60 percent) is significantly higher than that of individually listed companies (0.03 percent) in December. Within the same family-controlled grouping, the average abnormal return in December is also higher than that of the rest of the months (-0.13 percent) in the sampling periods 1992 through 1997. We cautiously set five joint criteria to define the anomaly in December that pertains only to the family-controlled grouping. The empirical results supported our argument by which the ornamenting motive of the family-controlled grouping is to account for the anomaly. For illustration, we further identify company size, losses from currency translation and bad debt, cash flow, and the gain from selling long-term investment which can effectively contrast the willingness and capability of family-controlled grouping to engage in the year-end earning management.

Stock Price and Trading Volume Effects Associated with Changes in the MSCI Free Indices: Evidence from Taiwanese Firms Added to and Deleted from the Indices

This study analyzes price-volume relation for Taiwanese listed firms that are added to or deleted from the MSCI free indices in the sampling period from May 17, 1999 to May 21, 2001. Additions to the indices found a positive abnormal return of 3.9% in the run-up window from the announcement day up to one day before the change was implemented. This was followed by a significant reversal on the change day. The deleted firms exhibit an even stronger announcement effect, with a significant abnormal return of -9.1% in the run-up, followed by a reversal of 1.6% on the change day. Even when reversals occurred on the change day, the abnormal returns in the post-announcement window are positive for additions and negative for deletions. The results support the price-pressure and long-run downward-sloping-demand hypothesis and are inconsistent with the efficient market hypothesis. The abnormal trading volume for deletions is negative following the announcement, contradicting the findings of Lynch and Mendenhall (1997). This difference is due to the innate of the Taiwanese stock market, in which no dedicated market makers accommodate block trading. Moreover, the regression results confirm a positive volume-return relation before and a negative relation on and after the change day. Finally, the QFII net buy (sell) the added (deleted) stocks up to ten days after the change was implemented, while the Securities Investment Trusts and Securities dealers, having a shorter frame net, buy the added stocks up to two days after the effective change. Individual investors reversing position on the change day are responsible for the price reversal on the change day.

Decisions of Initial Public Offering Review Committees: Causes and Consequences

We investigate the causes and consequences of the decisions made by an initial public offering (IPO) reviewing committee using a unique data set from Taiwan. Firms that were approved for listing are associated with better financial performance measures and are larger in equity size. Whether the committee unanimously approves an IPO firm depends on whether the firms associated auditor changes or gives a nonunqualified report. The voting outcome has a discernable effect in the sense that unanimously approved firms are associated with higher financial performance measures (returns on equity, returns on assets, earnings per share, and the price-to-earnings ratio) than are nonunanimously approved firms, with the differences being more significant in the two years after the IPO.