Yin-Hua, Y. (2005). Do Controlling

Yin-Hua, Y. (2005). Do controlling shareholders enhance corporate value? Corporate

Governance: An International Review. 13(2), 313-325.

According to Y. Yin-Hua's 2005 article "Do controlling shareholders enhance corporate value?" from Corporate Governance: An International Review, when managers have a larger personal investment in a company, they have a greater incentive to make wise policy decisions for that company. They also have a greater personal incentive to take measures to ensure company's financial health over the long-term. Yin-Hua analyzed Taiwanese companies and found that concentrated ownership enhanced the positive effects of having a personal interest in a firm, given that there were fewer competing interests embedded in the corporate government structure. Concentrated ownership means the positive incentive effect of owning shares will weigh against the negative entrenchment effect of caution which may result if a leader fears losing personal wealth and does not wish to embark upon a potentially risky but potentially profitable firm decision.

Yin-Hua specifically chose Taiwanese firms because he felt that previous studies were misleading in terms of their portrayal of firm ownership and its effects upon corporate risk-taking. Taiwanese family-owned firms have dispersed shareholdings on paper, so they will not have to disclose their shareholdings. Earlier findings suggested the benefit of concentrated ownership eventually tapered out and resulted in entrenched decision-making. But Taiwanese firms with concentrated leadership often made good decisions. Yin-Hua took care to examine the actual nature of the proportion of concentration of leadership, rather than simply looking at how the leadership structure appeared 'on paper.'

However, one of the problems of using Yin-Hua's study is that American firms tend to have fairly idiosyncratic ownership patterns, compared with other nation's firms. The question of how shareholdings affect value enhancement, and the costs of large shareholdings and entrenchment was first studied by Stulz (1988) who suggested that as managerial ownership and centralized shareholding control increased, the negative effect on firm value associated with the entrenchment of manager-owners started to exceed the positive incentive benefits of personal, managerial ownership of a large proportion of stock. This resulted in blocking value-enhancing takeovers. The fact that Yin-Hua's analysis contradicts Stulz's findings may be particular to the family-based nature of the Taiwanese firms Yin-Hua studied. In family-lead firms, a more long-term focus might be natural to the leadership. But in the United States, firm ownership, even by large shareholders, is often more transient and is characterized by less of a personal, emotional investment in publically-traded companies (Claessens et al. 2002, p. 2742).

Corporate culture must be taken into account when analyzing the effects of concentrated ownership and investment. At Taiwanese firms there may be a greater sense of obligation between the corporate managers and employees, and thus more positive and less negative risk taking and risk avoidance. In the United States, at many firms there is a higher level of expectation of self-interest of managers in the pursuit of profit-making, most notably amongst executives that negotiate so-called 'golden parachutes' which allow them to receive a large amount of compensation after leaving the company, regardless of how well they perform, or if their performance is salutary for the corporation's long-term health.