Succession And Efficiency Of Internal Capital Market

It is well known that family-controlled groups are omnipresent and family factors and group performance are interactive, however there are very few researches about how family factors affect the growth and behaviors of groups. Succession is the biggest challenge for family businesses, and the internal capital market (ICM) is one of reasons why groups exist, but so far there has not yet been any research on how succession influences ICM. The subprime and European debt crises make China a world economic engine faster, while the private enterprises are under severe financial pressure as a significant majority of Chinese economy, and family successions are heating up at present. The research on how the succession influences ICM efficiency in Chinese context is of great theoretical and practical value.Based on new institutional economics, this research is trying to answer the following questions:whether does succession improve the information transparency of Chinese family enterprises? Whether dose the improved information transparency influence ICM efficiency? If does, what kind of influence it is?Chinese institutional defects and the resulting uncertainties force family enterprises to rely on informal relation networks, which undoubtedly increase the specific assets and their transferring costs during family succession. The special assets owned by family founders are difficult to divide, transplant and evaluate due to the presence of transaction costs. Meanwhile, the special assets can strengthen the relational contracts and the private benefits, which are manifested as lower information transparency. However as the successors cannot inherit those special assets such as reputation, prestige, relations completely, they usually tend to improve corporate governance of their family businesses to make up for the losses caused by the leave of the founders. So Proposition One is put forward:succession can improve the information transparency of family enterprises.Information disclosure can improve production efficiency by screening investment plans better, supervising and motivating management more effectively, and reducing the information asymmetry actually. Substantially more information transparency is one kind of information disclosure. Information asymmetry is a main reason why corporate governance emerges, and more information transparency can undoubtedly bring about less information asymmetry and agency costs. The advantages of ICM over its external counterpart are resulting from its better information disclosure and information cost savings. So, Proposition Two is put forward:more information transparency resulted from succession can improve ICM efficiency.Chinese family business founders usually hand over their administrative powers while keeping back their ownership on account of such as historical or cultural traditions and the existing institutional environment. According to the definition of this study, succession is completed only after both administrative powers and ownership have been handed over. Therefore there are not sufficient samples for quantitative research, while qualitative research is more suitable for a fresh research field. This study chooses Hengdian Group which has completed succession and Guangsha Group which has only handed over administrative powers for a cross-case study. Both Proposition One and Two are supported to some extent, by comparing the differences in information transparency and ICM efficiency between Hengdian and Guangsha.Although cross-case study is more powerful than single case study, the facts that only one sample in each party is compared will undoubtedly weaken the conclusions’ university. And that is why Chinese succession research is so difficult and backward at present. At the same time, scholars are urgently required to advance in spite of hardships given China’s economic growth, family businesses’ importance as well as severe challenges for them. Therefore, this study struggles to explore even the lack of data may affect the validity and reliability, in order to be helpful for more mature research in the future.The theoretical contributions of this study are reflected as follows. Firstly, the study focuses on the impact of succession upon ICM, for the first time, and has pay attention to the impact of family factors upon the growth and behaviors of groups since ICM can affect its growth as one of group behaviors. Secondly, the study focused on such impact in Chinese context for the first time, especially after summarizing large sample of succession and ICM efficiency in Chinese context. Lastly, the study explores the information transparency by corporate governance and information opacity index, and explores ICM efficiency by the change of committed investment projects and ICM efficiency index.This paper is divided into six chapters. The first chapter is Introduction, stating the research background and significance, as well as research questions and frame. The second chapter is Literature Review, locating gaps after reviewing the current literatures on succession and ICM efficiency. The third chapter is Research Design, putting forward research model and propositions, and stating choice of research methods, sample selection and data collection, and definitions of quantitative indexes.The fourth chapter is Succession and ICM Efficiency in Chinese Context, summarizing large succession and ICM efficiency cases in Chinese context, and selecting sample companies for cross-case study. The fifth chapter is Empirical Research on Succession and ICM Efficiency in Chinese Context, exploring the possible relationship between succession and ICM efficiency quantitatively. The final chapter is Conclusion and Discussion.