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39,4

Ownership structure, capital structure, and performance of group affiliation

404

Evidence from Taiwanese group-affiliated firms

Received 25 December 2011
Revised 13 September 2012
18 December 2012
Accepted 18 December 2012

Jonchi Shyu
Department of Business Administration,
National Taiwan University of Science and Technology, Taiwan,
Republic of China
Abstract
Purpose – This study seeks to examine how agency problems and internal capital markets in group-affiliated firms are mutually influenced by the ownership structure, capital structure, and performance. It also aims to examine the endogeneity in group affiliation.
Design/methodology/approach – Using panel data, this study employs two-stage least squares regression with the instrumental variable technique to examine the relationship among capital structure, ownership structure, and performance of group-affiliated firms. Simultaneous equation models are constructed to identify the effects of interdependent decisions.
Findings – The empirical results indicate a U-shaped relationship between insider ownership and performance. Moreover, the alignment of ownership and control rights determines the relationship between ownership structure and performance for group-affiliated firms. The capital structure decisions of group-affiliated firms are independent of firm performance and insider ownership, supporting the view that capital structure decisions of group-affiliated firms are determined by the overall characteristics of the business group, rather than those of the individual firms.
Practical implications – Business groups can reduce the agency problems that occur in group affiliation by increasing the insider ownership (after a certain tunneling point), debt financing, and dividend payout.
Originality/value – Previous studies have paid little attention to the effects of the

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