Collectivist Cultures and the Emergence of Family Firms

Abstract

Using a sample of 1,103 Chinese private-sector firms that went public during 2004–16, we find that founders of firms from regions with stronger collectivist cultures engage more family members as managers, retain more ownership in the family, and share the controlling ownership with more family members. These findings are robust to a battery of diagnostic tests to account for alternative institutional factors that may induce the relationships. The results are consistent with the hypothesis that because the collectivist culture reduces information asymmetry, shirking problems, and associated monitoring costs among family members, more family ownership and management are expected in firms when founders are from collectivist regions. The overall evidence supports the theory of the firm pioneered by Harold Demsetz and his coauthors.