Mixing Family with Business: Succession and Marriage
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Transcript of Mixing Family with Business: Succession and Marriage
Joseph P.H. Fan 1
Mixing Family with Business:Succession and Marriage
Joseph P.H. Fan (范博宏)Director, Centre of Economics & Finance
Professor, School of Accountancy and Department of Finance
Phone: 852-26097839; Email: [email protected]: http://ihome.cuhk.edu.hk/~b109671/index.html
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Family firms are a dominant organizational form in almost all countries around the world.
Joseph P.H. Fan 3
Succession: The Roles of Specialized Assets
and Transfer Costs
Joseph P.H. Fan (CUHK)Ming Jian (NTU, Singapore)
Yin-Hua Yeh (Fu-Jen Catholic University, Taiwan)
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Some Observations about Family Business
Persistent concentration of ownership Family (heir or close relative) succession Mixed performance in succession,
especially in family succession Perez-Gonzales (2006), Bennedsen et al.
(2007), Villalonga and Amit (2006)
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Research Questions
We use firm ownership and leadership succession as an event to address the following questions: Why family succession, hence the emergence
of family firms? Why persistent concentration of ownership? What are fundamental determinants of
succession performance? How do firm governance structures evolve
around succession?
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Explanations of Mixed Performance of Family Ownership and Heir Succession
Outsider expropriation Though a professional manager is more productive, his
interest is not necessarily aligned with the family (Bhattacharya and Ravikumar, 2002).
Serious in weak institutional environments (Burkart, Panuzi, and Shleifer, 2003)
Insider expropriation Family firms are competitive, but insiders capture most
of the gain, leaving little to outside investors (Villalonga and Amit, 2007)
Transfer costs of specialized assets (our focus)
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Key hypothesis
We go back to the old property right literature (Alchian, 1965, 1969; Klen, Crawford, Alchian, 1979; Williamson, 1978), testing the possibility that
Family ownership and family succession are arrangements to protect specialized assets that are difficult to partition, value, and transfer across individuals or organizational boundaries
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Specialized assets in entrepreneurial activities
1. Entrepreneurial activities are special Entrepreneurs’ specialized human capital,
including superior management skills, creativity, leadership charisma, secret formula, reputation, business/political connections, etc.
These assets are specific to the entrepreneurs because they cannot be quickly learned or easily bought and sold in marketplace
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Specialized assets in entrepreneurial activities
2. There exist strong ideologies (personal interests) in entrepreneurial activities Entrepreneurial activities often consume a large amount
of entrepreneurs’ time, effort, and financial capital, dictating an ideology (strong personal interest) to take on these activities and associate risks
Because of their extraordinary interests and efforts, entrepreneurs attach a high value of their firms that are not comparably priced by the market
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Specialized assets in entrepreneurial activities
3. Entrepreneurial activities often have strong team spirit When the required labor, financial and human capital
inputs are large and beyond what an individual entrepreneur can supply, friends and/or family members often join to become both highly motivated and disciplined labor force and contributors of financial capital.
Bonded and enforced by friendship or blood tie, contracts with co-founders or family members are often short of details
These implicit contracts can be hard to enforce upon succession
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High transfer costs of specialized assets
Specialized assets contribute to the initial success of entrepreneurial activities
But difficulties arise when these assets are to be transferred across individuals or organizational boundaries
Even in standardized business, family members or business partners may dispute about their individual contributions to and hence rewards of their team activities, resulting in costly infighting
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Li Ka-shing ( 77) was sent to hospital on Sep. 6th , 2005.
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Cumulated Daily Stock Return
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Predictions
Ownership concentration Cross-sectionally, ownership concentration increase with asset
specificity, so that the costs and benefits of the specialized assets concentrate on the entrepreneur
Family or outside succession The choice of successor depends on how well the value of the
specialized assets can be preserved, or conversely how large is the value dissipation during and after the transfer
An heir or a close relative would be chosen as the successor if the extent of asset specificity is large
Firm value An overall decline in firm capitalized value within the process of
succession Across firms, the extent of value dissipation depends on the degree
of asset specificity in their business activities
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Predictions of governance structure changes
Assuming that the successor only partially inherits specialized assets, such as reputation, political connection, etc, he would need to shore up his credibility to stakeholders by enhancing internal governance More concentrated ownership More outsider participation on board and management Separating chairman and CEO positions More cash dividends
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Defining succession
An entrepreneur stepping down from the top executive position (typically the chairman in Asia), replaced by a family member or an unrelated professional
Different from an ordinary managerial turnover, succession is typically associated with transfer of controlling ownership completed at very old age or death of the old leader
A rare opportunity to observe the evolution of firm ownership, leadership, and governance
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Sampling procedure
Starting with all publicly traded firms in Hong Kong, Singapore, and Taiwan
Excluding SOEs, foreigner controlled firms, and financially distressed firms
Tracking top executive turnovers starting from the IPO year Excluding the first turnover if the subsequent
turnover occur within 5 years
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The Succession SampleYear Hong Kong Singapore Taiwan Total
1987 0 0 2 2
1988 0 0 4 4
1989 0 0 6 6
1990 0 0 6 6
1991 0 0 5 5
1992 0 4 6 10
1993 0 5 4 9
1994 0 6 7 13
1995 0 4 6 10
1996 4 5 11 20
1997 7 2 6 15
1998 3 3 8 14
1999 9 4 12 25
2000 12 4 13 29
2001 9 1 12 22
2002 8 3 0 11
2003 6 4 0 10
2004 2 1 0 3
2005 2 1 0 3
Total 62 47 108 217
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Sample by industryIndustry Hong Kong Singapore Taiwan Total
Agriculture, Forestry and Fishing 0 1 0 1
Construction and Real Estate 20 6 8 34
Food and Kindred Products 1 1 5 7
Textile and Apparel 3 1 13 17
Lumber, Furniture, Paper and Printing 1 2 4 7
Chemicals, Petroleum, Rubber, Plastic and Leather
5 0 15 20
Minerals and Metals 1 2 13 16
Machinery, Equipment and Instrument
11 7 26 44
Transportation and Communication 2 4 10 16
Utility 1 0 1 2
Commerce 8 5 6 19
Financial Company 4 7 3 14
Service 5 11 4 20
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Successor Choices
Hong Kong Singapore Taiwan Total
Family member
43 69% 17 36% 80 74% 140 65%
Heir 18 29% 4 9% 57 53% 79 36%
Relative 25 40% 13 28% 23 21% 61 28%
Outsiders 6 10% 17 36% 24 22% 47 22%
Sold-out 13 21% 8 17% 4 4% 25 12%
Unknown 0 0% 5 11% 0 0% 5 2%
Total 62 100% 47 100% 108 100% 217 100%
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Measurement of Asset Specificity
Ideology (personal interest) Whether the old chairman is the founder Whether the entrepreneur has any business in museum,
gallery, recreation facilities, club, garden, movie, newspaper or book publication, advertisement, restaurant and hotel (Demsetz and Lehn, 1985)
Indivisibility of common property Whether co-founded Number of family members co-managing the business
Relationship and reputation capital Whether the business is labor intensive Access to long term loans
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Summary statistics
Variable Obs. Mean Median Std. Dev.
Founder 217 0.5530 1.00 0.4983
Amenity 217 0.0553 - 0.2291
Co-founded 217 0.0461 - 0.2101
Family managed 210 2.4476 2.00 1.5027
Labor intensity 213 0.0089 0.0048 0.0239
Bank relation 216 0.0939 0.0491 0.1434
Experience 217 0.4378 - 0.4973
Education 217 0.5668 1.00 0.4967
Size 217 11.822 11.8315 1.494
Ultimate ownership 202 0.3355 0.3106 0.218
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Successor Choice and Ownership Structure
Successor Ultimate ownership (1) (2)
Founder 0.661 -0.023
(1.53) (0.39)
Amenity -0.156 0.035
(0.91) (0.69)
Co-founded -0.579*** -0.066
(3.09) (1.19)
Family managed 0.210*** 0.013***
(3.08) (4.07)
Labor intensity 5.313** 1.296***
(1.99) (3.54)
Bank relation 2.108*** 0.058
(4.38) (1.19)
Experience 0.655*
(1.82)
Education 0.494***
(3.37)
Size -0.057 -0.059***
(0.94) (39.68)
Constant 1.016***
(10.63)
Number of observations 201 198
Pseudo R-square 0.165 0.20
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Succession and firm valueMonthly cumulative abnormal stock return (CAR)
around succession
-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
-60 -48 -36 -24 -12 0 12 24 36
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Succession and firm valueMonthly cumulative abnormal stock return (CAR)
around succession, by economy
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
-60 -48 -36 -24 -12 0 12 24 36
Hongkong
Singarpore
Taiwan
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Regression results of firm value changes around succession
CAR (-60, 0) CAR (-36, 0) CAR (0,+48) (1) (2) (3) (4) (5)
Family members -0.378*** -0.236 -0.018 -0.019
(4.79) (0.90) (0.13) (0.21)
Sold-out -0.549 -0.591* 0.118 0.075
(1.34) (1.85) (0.40) (0.51)
Ultimate ownership -1.259** -0.696 -0.568 0.238
(2.51) (1.58) (1.33) (0.59)
Founder -0.402* -0.058 0.126***
(1.74) (0.36) (3.15)
Amenity -0.223 0.031 -0.059
(0.34) (0.06) (0.37)
Co-founded -1.113*** -0.792*** -0.015
(8.98) (4.88) (0.06)
Family managed -0.081*** -0.075*** 0.001
(4.43) (3.70) (0.02)
Labor intensity -1.513 -3.486*** -2.613
(0.46) (3.73) (1.28)
Bank relation 0.804 0.528 0.046
(1.03) (1.48) (0.07)
Experience -0.168 0.212*** 0.040
(1.22) (5.83) (0.80)
Education 0.035 0.016 -0.070
(0.32) (0.13) (0.38)
Size 0.003 -0.035 -0.080 -0.129*** 0.044**
(0.04) (0.43) (0.83) (3.12) (2.30)
Intercept -0.062 0.633 1.408 1.752*** -0.690
(0.05) (0.82) (1.12) (2.88) (1.10)
Industry dummies Yes Yes No No No
Number of observations 131 131 131 146 161
Adjusted R-square 0.10 0.12 0.17 0.13 0.02
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Does poor performance lead to succession?
Likely only part of the story Although CAR is significantly related to accounting
performance measure, it is also related to proxies for asset specificity which is not caused by performance but rather causing performance outcome
Almost all turnovers occur at old age or even death of the controlling owner
Distressed firms are excluded Firm performance do not recover after succession
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Daily cumulative net of market stock return of a HK-based conglomerate around death
of the founder at age 90
Li sted Company 1
0
0. 1
0. 2
0. 3
0. 4
0. 5
0. 6
-12
-10 -8 -6 -4 -2 0 2 4 6 8 10
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Daily cumulative net of market stock return of a HK listed company around the news that its
98 year-old founder was sent to hospital
Department Retreat @ Shenzhen 2008
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Cumulated Daily Stock Return
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The Role of Entrenchment
It is sometimes difficult to remove an owner-manager refusing to change until he is very old or dead. Firm value deteriorate until the entrenchment problem is corrected by succession
Is the stock return pattern primarily driven by entrenchment? Overall, CAR did not increase after the old chairman left
position, suggesting entrenchment is not the full story We are investigating this possibility more thoroughly
Finding that both pre- and post-turnover CAR unrelated to whether the outgoing chairman remains on board after turnover
No effects of outgoing chairman’s age and tenure
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Regression results of governance structure changes around succession
Outside
Directors Duality Ownership Dividend
(1) (2) (3) (4)
Founder -0.654*** -0.424 -0.117 0.053
(14.18) (0.90) (1.58) (0.46)
Amenity 0.690*** -0.056 0.618*** 0.295*
(4.84) (0.46) (4.05) (1.88)
Co-founded 0.716 1.011 1.242** 1.257**
(1.61) (1.39) (2.56) (2.40)
Family managed 0.085*** -0.105 -0.032 0.098
(6.76) (0.76) (0.69) (1.03)
Labor intensity 4.790 7.563*** 7.942* 10.330***
(1.15) (3.30) (1.96) (3.56)
Bank relation -0.476 -7.853** -0.234 -0.196
(1.52) (2.45) (0.22) (0.13)
Size -0.102 -0.386*** 0.165*** 0.218*
(0.51) (4.89) (3.33) (1.85)
Market-to-book -0.156 -0.448*** 0.065 -0.079
(1.46) (6.01) (0.95) (0.56)
Return on assets -0.001 0.073* 0.219* -0.092**
(0.16) (1.86) (1.91) (2.32)
Intercept 0.693 4.177*** -2.415*** -3.852*
(0.31) (5.47) (4.89) (1.91)
Number of observations 178 178 178 178
Pseudo R2 0.1353 0.3268 0.0794 0.1011
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Summary and Conclusion
Specialized assets play a crucial role in the emergence of family firms A tendency that entrepreneurial firms, through family successions,
evolve into family owned and managed firms A tendency that family ownership stays concentrated across
generations of management The slow (or lack of) diffusion of ownership and control can be
explained by the desire to protect value associated with specialized assets
A pronounced dissipation of firm value during succession, which is positively related to asset specificity
Firm ownership and governance structures evolve to adapt to the new leadership
Family institution and relationship based contracting substitues weak market institution
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Extension
Relationship-based contracting and accounting properties Succession, corporate life cycle, and evolution
of accounting properties
Specific governance mechanisms of family firms Marriage and long-term network creation
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Why Do Shareholders Value Marriage?
Pramuan Bunkanwanicha (ESCP-EAP European School of Management)
Joseph P.H. Fan (Chinese University of Hong Kong)
Yupana Wiwattanakantang (Hitotsubashi University)
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Family networks
In emerging economies, businesses are in the hands of small network connected by family networks.
Because institutions are weak, family networks play very important role.
Family relationships provide a degree of trust.
Family relationships in business are regarded as the next-best solution to imperfections in the financial markets and corporate governance
[Arrow (1974), Burkart et al. (2003), Bertrand and Schoar (2006)].
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Lamsam
Wanglee
Chatikavanij (4)
Srivikorn
Krairiksh (3, 4)
Bodiratnangkura
Tangkaravakoon
Bulsook
Hetrakul
Osathanugrah
Thienprasidda (4)
Sukosol
Piya-oui
Sarasin
Lim-atibul (4)
Chearavanont
Virameteekul
PoolvoralaksYip In Tsoi/
Lailert
Charoen-Rajjapak
Bhirombhakdi
Royal families (2)
Chirathivat
Techakraisri (4)Promphan (4)
Tejapaibul
Uahchukiat
Bisalputra (4)
Karnchanachari
Navaphan
PhongsathornPhenjati
Kitikachorn (3)
Tantranont
Na Songkla (3)
Mahagitsiri
Karnasuta
Chutrakul (4)
Sosothikul
Sethteewan (4)
Thavisin (4)
Sethpakdi (4)Uahwatanasakul
Sethpornpong (4)
Leeissaranukul/Phannachet
Rattanin (4)
Chaichanian (4)
Chakkaphak (4)
Wattanavekin
Angubolkul
Mahaphan (4)
Vuthinantha (4)
Maleenont
Attakravisunthorn (3)
Jirakiti (3)
Benjarongkul
Nitibhon (3)Phaoenchoke
Nandhapiwat
Leenutaphong
Noonbhakdi (3)Sibunruang (4)
Osathanont (4)
Teepsuwan (4)
Cholvijarn (4)
Harnpanich (4)
Asavabhokin
Sarasas (4)
Thepkanjana (3)
Jarusatien (3)
Panyarachoon (3)
Tapparangsi (3)
Thailand
Family Network in Thailand
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The Mitsui zaibatsu pre WWII Networks via marriage
---the imperial household, the court nobility, the
former Tokukawa shogunate, the Shinto hierarchy, the bureaucrats, and other important zaibatsu (such as Sumitomo), as well as independent industrialists…”
“such alliances, which much cost the Mitsuis an enormous amount of thought, research, and negotiations of the most sensitive kind, served to entwine the clan with the most powerful and prestigious families in the empire
[Roberts, Mitsui, 1973, p. 228]
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Networks via marriage: Japan dynasties
Mitsui (ex zaibatsu) Toyoda (Toyota Motors) Kajima (Top 5 general construction) Shimizu (Top 5 general construction) Ishibashi (Bridge Stone) Sumitomo (ex zaibatsu) Nakasone (top politician family and ex PM) Hatoyama (top politician family and ex PM) etc
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Korea
Lee (Samsung) Hak (LG) The top five business groups, are linked via marriage of the
offspring of the two group founders. A daughter of the Samsung Group’s founder and sister of
the current chairman is married to Koo Ja Hak, who was the chairman of LG Semiconductor.
Koo Ja Hak’s brother was the chairman of the LG Group.
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Canada
Andre Desmarais wed France who is a daughter of former PM Jean Chretien.
Andre Desmarais is the son of Paul Desmarais who is the 6th richest person in Canada.
Paul Desmara owns Power Corporation and extensive companies.
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Marriage as a method of building business network –
It’s Not All about Love
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The role of marriage in business
Marriage has remained, long into the age of romantic love, a business transaction.
Sons and daughters could be used the same way as they were treated by the royal families.
To make strategic alliances between firms on a secure and long term basis.
(Harold James, “Family Capitalism”, 2006)
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The role of marriage in business
Rich families will look for a bride who can take care of household finances and most important, give birth to sons to inherit the wealth of the family.
Poor families will look for a bride who can work hard in the fields and give birth to sons to help out on the farm.
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Research question
What role do the family and their business play in the decision of the heirs to choose whom to marry?
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Marriage Sample from Thailand
Year Number Percentage
1991 12 5.9%1992 14 6.9%1993 8 3.9%1994 15 7.4%1995 12 5.9%1996 15 7.4%1997 7 3.5%1998 13 6.4%1999 12 5.9%2000 11 5.4%2001 18 8.9%2002 13 6.4%2003 11 5.4%2004 9 4.4%2005 23 11.3%2006 10 4.9%
Total 203 100.0%
Note: The sample includes 91 families (2 marriages/family on average)
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The newlyweds (top business family’s offspring): Who is he/she?
Number Percentage
A. Gender Male 115
56.7%Female 88 43.3%
B. Generation to founderOne 4
2.0%Two 80
39.4%Three 73 36.0%Four 31
15.3%Five 15
7.4%
C. Relationship with founderFounder 1 0.5%Sibling 3 1.5%Son/Daughter 58 28.6%Nephew/Niece 22
10.8%Grand-son/Grand-daughter 73 36.0%GG-son/GG-daughter 31 15.3%GGG-son/GGG-daughter 15 7.4%
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Number Percentage
D. Relationship to current headCurrent head 1 0.5%Sibling 12
5.9%Son-Daughter 84
41.4%Nephew/Niece 102
50.2%Grand-son/Grand-daughter 3 1.5%Grand-nephew/Grand-niece 1
0.5%
E. From the main lineMain line 85 41.9%Others 118 58.1%
F. First son of current headFirst son of current head 37
18.2%Others 166 81.8%
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Number Percentage
G. He/she is holding a board positionYes 83
40.9%No 120
59.1%
H. He is the first son & holding a board positionYes 39 19.2%No 164
80.8%
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Marriages & Networks
Number Percentage
A. Family backgroundTop business (i) 42 20.7%Business, Professional (ii) 52 25.6%Royal, Noble (iii) 17 8.4%Politician, Military, Civil servant (iv) 50
24.6%Foreigner (v) 11 5.4%Others (vi) 31 15.3%
B. By type of networkBusiness network (i)+(ii) 94
46.3%Political network (iii)+(iv) 67 33.0%Others (v)+(vi) 42 20.7%
C. By type of marriageBusiness & Political networks 161 79.3%Others 42 20.7%
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Where are network marriage prevalent?
No. % No. %
A. Concession-based businessesConcession-based 14 93.3% 1 6.7%Others 147 78.2% 41 21.8%
B. Real estate businessesReal estate 43 95.6% 2 4.4%Others 118 74.7% 40 25.3%
C. Diversified businessesDiversified 48 84.2% 9 15.8%Others 113 77.4% 33 22.6%
Network marriage Other marriage
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Stock Price Effects of Marriages
A. Total sample (N=140)Mean (clustering) 0.85%***
1.22%*** Median (sign-test) 0.54%*** 0.81%*** Positive CAR(%) 67% 69%
B. By type of marriage - Network marriage (N=110)
Mean (clustering) 1.08%*** 1.54%***Median (sign-test) 0.71%*** 0.91%***Positive CAR(%) 72% 71%
- Other marriage (N=30) Mean (clustering) -0.02% 0.03%Median (sign-test) 0.00% 0.21%Positive CAR(%) 50% 63%
CAR(-1,+1)
Event: Announcement Date
CAR(-2,+2)
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C. By type of network
- Business network (N=66) Mean (clustering) 0.94%*** 1.31%***Median (sign-test) 0.65%*** 0.85%***Positive CAR(%) 74% 73%
- Political network (N=44) Mean (clustering) 1.29%*** 1.88%***Median (sign-test) 0.74%** 1.22%**Positive CAR(%) 68% 68%
CAR(-1,+1)
Event: Announcement Date
CAR(-2,+2)
Stock Price Effects of Marriages
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Summary
Marriages are not just about love, in particular to those couples in network based businesses
Network marriages, though sometimes involve sacrifices, create value for businesses
Joseph P.H. Fan Passing on the Crown, The Economist, Nov. 4, 2004
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Thank you