Financial Structure and Financial Crisis
Franklin Allen (Wharton School, University of Pennsylvania)

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Family Control and Corporate Governance: Evidence from Taiwan
Yin-Hua Yeh (Department of International Trade and Finance, Fu-Jen Catholic University, Taipei, Taiwan)
Tsun-Siou Lee (Department of Finance, National Taiwan University, Taipei, Taiwan)
Tracie Woidtke (Mays College of Business, Texas A&M University, College Station, Texas, USA)

A recent stream of literature shows that family control is central in most countries of the world, but little research exists regarding family control and corporate governance. This paper analyses family control and corporate governance using a sample of Taiwanese firms. The results suggest that family control is even more prevalent than previously suggested and that a non-linear relation exists between family control and relative firm performance. Family-controlled firms that have low levels of control have lower relative performance than both family-controlled firms with high levels of control and widely held firms. This is consistent with the conflict of interest between majority and minority shareholders being the greatest when the majority shareholder’s level of control is high enough to influence a firm’s decision-making process but ownership is low enough that the benefits of expropriation outweigh the costs. Furthermore, a positive valuation effect exists when controlling families hold less than 50% of a firm’s board seats. Taken together, the results in this paper suggest that when family control is central, high levels of family ownership and low levels of family board representation are effective ways of mitigating the separation of cash flow rights and control and, thus, decreasing the conflict of interest between majority and minority shareholders.
*We are especially grateful to an anonymous referee, K. C. Chan, Sheridan Titman (the editors) and Pei-Gi Shu for their insightful comments and Jun-yee Shy for excellent research assistance. We would also like to thank Joseph P. H. Fan, Ferdinand A. Gul, Judy Tsui and Takeshi Yamada; participants at the Seventh Asia Pacific Finance Association Annual Conference (2000), the 2000 APJAE Symposium, the Seventh Conference on Pacific Basin Finance, Economics, and Accounting (1999) and the NFA/APFA First Joint International Conference (1998); and seminar participants at National Taiwan University and National Central University for helpful comments. Yeh and Lee would like to thank the National Science Council of ROC for financial support under Contract No. NSC 86-2416-H-030-003. All remaining errors are our own.

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Privatization, Efficiency and Intra-industry Effects: Analysis of China’s Privatization
Isaac Otchere (Department of Finance, University of Melbourne, Australia)
Zonglan Zhang (ANZ Bank, Australia)

In this study, we use both accounting and stock market data to examine the performance of privatized firms in China and that of their rivals. Consistent with our conjecture, we find that competitors reacted negatively to the privatization announcements. However, the magnitude of the abnormal returns, together with the significance level, increases as the event window widens. For example, while the rivals marginally lost 0.5% of their value on the announcement date, they lost 1.3% (3.3%) of their value during the five-day (21-day) period surrounding the privatization announcement date. The results suggest that privatization of state owned enterprises in China signalled a change in the competitive balance in the industries, since most of the rivals reacted negatively to the announcements. Analysis of the operating performance measures also shows that the privatized firms outperformed their industry counterparts in the post-privatization period. Furthermore, we examine the long-term stock market performance of the privatized firms relative to that of the industry rivals and find that the privatized firms outperformed their industry rivals only by the end of the third year after privatization. Although most of the sample firms are partially privatized, and may probably be required to meet some social objectives during the post partial privatization period, we did not find any evidence that the proportion of government ownership explains the returns of the privatized firms.
*We thank the participants of the Asia Pacific Finance Association Conference in Shanghai, China, July 2000 for their helpful comments. We also gratefully acknowledge the helpful comments and suggestions of the referee and the editor Sheridan Titman.

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Investors’ Herding on the Tokyo Stock Exchange
Yoshio Iihara (Tokyo University, Graduate School of Business, Tokyo, Japan)
Hideaki Kiyoshi Kato (University of Tsukuba, Graduate School of Business Sciences, Tokyo, Japan)
Toshifumi Tokunaga (Nanzan University, Graduate School of Business, Nagoya, Japan)

Herding occurs when a group of investors intensively buy or sell the same stock at the same time. This study examines the tendency of individual, institutional and foreign investors to herd in Japan, where the yearly change in ownership is used as a proxy for investor herding. Using 20 years of aggregate data, we examine how investor herding is related to stock return performance around the herding interval. Both institutional and foreign investor herding impact stock prices. Further, Japanese institutional investors seem to follow positive-feedback trading strategies, and subsequent return reversals imply that these investors’ trades destabilize stock prices. On the other hand, foreign investors’ trades are related to information. Our results are robust to the effect of firm size, to portfolio formation methods, to initial ownership levels, and to the chosen time period.
*We are grateful to Marc Bremer, Takao Kobayashi, Sheridan Titman and Toshiki Yotsuzuka for their helpful comments. We also thank Ed Skrzypczak for editing the paper.

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The Hong Kong Currency Board During the 1997-8 Crisis: Problems and Solutions
Nai-Fu Chen (University of California, Irvine)

The note-based Hong Kong currency board was ineffective in dealing with currency speculations at the start of the Asian financial crisis in 1997. The makeshift modification implemented by the Hong Kong Monetary Authority imposed implicit controls on the capital outflow and produced high and volatile interest rates. There are simple solutions. We examine the merits and evidence related to the issuance of currency put options by the monetary authority as a commitment against devaluation. Furthermore, a simple mechanism linking the domestic credit demand to the reserve currency base will induce proper interest-rate dynamics for a currency board to function properly.
*This paper started as a joint project with Merton. H. Miller. An earlier version of the joint paper was presented as the 1999 EFA Bank of Finland sponsorship seminar. An abridged version was presented in a speech entitled ‘The Hong Kong Currency Board: Have They Finally Got It Right?’ by Miller. The final version was completed after Merton Miller passed away in June 2000 and the current authorship reflects the request of his estate. We thank Alex Chan, Katherine Miller, Sheridan Titman and the seminar participants at the Bank of Finland, INSEAD, HEC, the Hong Kong Monetary Authority and the Hong Kong University of Science and Technology for helpful comments.

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