The Effect of Ownership Structure and Board Independence Towards Overinvestment Behavior of Family Firm in Indonesia


Firms with concentrated ownership structures are commonly found in Southeast Asia. In Indonesia, the biggest control of the firm comes from the family. Concentrated ownership can lead to agency problem between controlling shareholders and non- controlling shareholders where, controlling shareholders together with management, can make decisions which bring personal benefit at the expense of non-controlling shareholders for example by investing on projects with negative NPV or known as overinvestment. This study explains the effect of the presence of directors and independent commissioners on relationship between family ownership and overinvestment. Using firms listed on Indonesia Stock Exchange from 2011 to 2017 as research samples, the presence of independent director is negatively related to overinvestment. From the regression results, only independent directors were found to have a moderating effect in weakening the positive relationship between family ownership and overinvestment. This effect is seen more clearly if family ownership  in the company is low. This is because if family ownership in the company is low the process of selecting a board of directors can be more objective so that the possibility of a number of independent directors sitting on the board of directors is much greater. Thus the effect of moderation by independent directors will be greater in companies with lower family ownership.

Keywords: ownership structure, board independence, overinvestment, corporate governance, Indonesia

[1] Anderson, R.C., & Reeb, D.M. (2003). Founding Family Ownership and Firm Performance: Evidence From the S&P500. The Journal of Finance, 58(3). 1301-1328

[2] Claessens, S., Djankov, S., & Lang, L. H. P. (2000). The Separation of Ownership and Control in East Asian Corporations. Journal of Financial Economics, 58(1–2), 81–112.

[3] Bhaumik, S. K., & Gregriou, A. (2009). “ Family ” ownership, tunneling and earnings management: A review of the literature.

[4] Cheng, Q. (2014). Family firm research – A review. China Journal of Accounting Research, 7(3), 149–163.

[5] Burkart, M., Panunzi, F., & Shleifer, A. (2003). Family Firms. Massachusets.

[6] Connelly, J. T. (2016). Journal of Economics and Business Investment policy at family firms: Evidence from Thailand. Journal of Economics and Business, 83, 91–122

[7] Jiang, F., Cai, W., Wang, X., & Zhu, B. (2018). Multiple large shareholders and corporate investment: Evidence from China. Journal of Corporate Finance Journal, 50, 66–83.

[8] He, W., & Kyaw, N. A. (2017). Ownership Structure and Investment Decisions of Chinese SOEs. Research in International Business and Finance.

[9] Tabalujan, D. B. S. (2002). Family Capitalism and Corporate Governance of Family Capitalism and Corporate Governance of Family- controlled Listed Companies In Indonesia. University of New South Wales Law Journal, 25(August), 1–39.

[10] Cai, J. (2013). Does Corporate Governance Reduce the Overinvestment of Free Cash Flow? Empirical Evidence from China. Journal of Finance and Investment Analysis, 2(3), 97–126.

[11] Jaffe

[12] Schulze, W. S., Lubatkin, M. H., & Dino, R. N. (2003). Exploring The Agency Cost of Ownership Dispersion Among The Directors of Private Family Firms. Academy of Management Journal, 46(2), 176–194.

[13] Carpenter

[14] Gomez-Meija, L., Larraza-Kintana, M., & Makri, M. (2003). The Determinants of Executive Compensation in Family-Controlled Public Corporations. Academy of Management Journal, 46, 226-237

[15] Kuo, Y., & Hung, J. (2011). Family Control and Investment-Cash Flow Sensitivity: Moderating Effects of Excess Control Rights and Board Independence. Corporate Governance: An International Review, (1986), 1–14.

[16] Chen, E. Te, & Nowland, J. (2010). Optimal Monitoring in Family-Owned Companies: Evidence From Asia. Corporate Governance: An International Review, 18(1), 3–17.

[17] Lu, J., & Wang, W. (2015). Review of Financial Economics Board independence and corporate investments. Review of Financial Economics, 24, 52–64.

[18] Anandha, S. P. (2018). Pengaruh Multiple Large Shareholders Terhadap Hubungan Family Ownership Dan Abnormal Investment. Universitas Indonesia.

[19] Stein, J. (1988). Threats and Managerial Myopia. Journal of Political Economy, 96, 61–80.

[20] Lai, S., & Liu, C. (2017). Management characteristics and corporate investment efficiency. Asia-Pacific Journal of Accounting & Economics, 1625( January), 1–18.

[21] Jensen, M.C. and Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics. 3, 305-360.

[22] Claessens, S., Djankov, S., Fan, J., Lang, L. (1999). Expropriation of Minority Shareholders: Evidence From East Asia. Policy Research Paper 2088. World Bank, Washington DC.

[23] Utama, C. A., Utama, S., & Amarullah, F. (2017). Corporate governance and ownership structure: Indonesia evidence. Corporate Governance: The International Journal of Business in Society, 17(2), 165–191.

[24] LA Porta, R., Lopez-de-silanes, F., & Shleifer, A. (1999). Corporate Ownership Around the World. The Journal of Finance, LIV(2), 471–517.

[25] Claessens, S., & Fan, J. P. H. (2003). Corporate Governance in Asia: A Survey. International Review of Finance, 3(2), 71–103.

[26] Tate, G., & Malmendier, U. (2005). CEO Overconfidence and Corporate Investment. The Journal of Finance, LX(6).

[27] Larwood, L., & Whittaker, W. (1977). Managerial Myopia: Self-Serving Biases in Organizational Planning. Journal of Applied Psychology, 62(2), 194–198.

[28] Svenson, O. (1981). Are We All Less Risky and More Skillful Than Our Fellow Drivers. Acta Psychologica, 47, 143–148.

[29] Alicke, M. D. (1985). Global self-evaluation as determined by the desirability and controllability of trait adjectives. Journal of Personality and Social Psychology, 49(6), 1621-1630

[30] Miller, D. T., & Ross, M. (1975). Self-serving biases in the attribution of causality: Fact or fiction? Psychological Bulletin, 82(2), 213-225.

[31] March, J. G., & Shapira, Z. (1987). Managerial Perspectives on Risk and Risk Taking. Management Science, 33(11), 1404–1418.

[32] Heaton, J. B. (2002). Managerial Optimism and Corporate Finance. Financial Management, 31, 33–45.

[33] Heaton malendier and tate 2005

[34] Tulung, J. E., & Ramdani, D. (2018). Independence, size, and performance of the board: an emerging market research. Corporate Ownership & Control, 15(2), 201–208.

[35] Anderson, R.C., & Reeb, D.M. (2004). Board Composition: Balancing Family influence in S&P500 firms. Administrative Science Quarterly, 49(2), 209-237.

[36] Herwidiyatmo. (2000). Implementasi Good Corporate Governance untuk Perusahaan Publik Indonesia. Majalah Usahawan No.10 Tahun XXIX, Oktober.

[37] Muntoro, Ronny K. (2006) Membangun Dewan Komisaris yang Efektif. Jurnal Manajemen Usahawan Indonesia, 36(11), 9-14.

[38] Achmad, T. (2008). Concentrated Family Ownership Structures Weakening Corporate Governance: A Developing Country The Case of Indonesian Companies. MAKSI, 8.

[39] Husnan, S. (2001). Corporate Governance and Finance in East Asia. A Study of Indonesia, Republic of Korea, Malaysia, Philippines, and Thailand.

[40] Hidayat, A. A., & Utama, S. (2003). Board Characteristics and Firm Performance: Evidence from Indonesia. International Research Journal of Business Studies, 8(3), 137–154.

[41] Titman, S., Wei, K. C. J., & Xie, F. (2004). Capital Investments and Stock Returns. The Journal of Financial and Quantitative Analysis, 39(4), 677–700.

[42] Naecsu I. (2015). Three Essays On Strategic Decision making and CEO Behavior in Family Firms. Universidad Carlos III de Madrid. Departamento de Economia de la Empresa. Spain.

[43] Khurana, R., (2002). Searching For a Corporate Savior: The Irrational Quest for Charismatic CEOs. Princeton University Press, Princeton, NJ.

[44] Pan, Y., Wang, T. Y., & Weisbach, M. S. (2016). CEO Investment Cycles. The Review of Financial Studies, 29(11), 2955–2999.

[45] Ahuja 2008

[46] Corbetta, G., & Salvato, C. A. (2016). The Board of Directors in Family Firms: One Size Fits All? Family Business Review, XVII(2), 119–134.

[47] Khanchel, I. (2007). Corporate Governance: Measurement and Determinant Analysis. Managerial Auditing Journal, 22(8), 740–760.

[48] Boo, E. B., & Sharma, D. (2008). Effect of Regulatory Oversight on The Association Between Internal Governance Characteristics and Audit Fees. Accounting and Finance, 48, 51–71.

[49] Klein, A. (2002). Audit Committee, Board of Director Characteristics, and Earning Management. Journal of Accounting and Economics, 33(3), 375–400.

[50] Pulliam, S., & Frank, R. (2004). Boardroom ties inside Adelphia. Wall Street Journal Jan 26 A1

[51] Fitzpatrick, D., (2000). Indonesian Corporate Governance: Would Outside Directors or Commissioners Help? in Chris Manning and Peter Van Diermen (eds). Indonesia in Transition. 293-296.

[52] Urtiaga, M. G., & Saez, M. (2012). Deconstructing Independent Directors ECGI Working Paper Series in Law.

[53] Cools, S. (2005). Real Difference in Corporate Law Between the United States and Continental Europe: Distribution of Powers. Delaware Journal of Corporate Law, 30, 697ss.

[54] Main & Main 2016

[55] Zhou dan cgen 2004