Effects of corporate governance on risk taking in Taiwanese family firms during institutional reform

Can internal corporate governance mechanisms (such as boards of directors) and external corporate governance mechanisms (such as institutional reform) promote risk-taking behavior in family firms? This paper argues that conflicts between majority and minority owners, known as principal-principal conflicts, and cronyism in the board of directors affect firm risk taking. Moreover, institutional corporate governance reform to appoint outside directors may not have an immediate effect on reducing these problems. Based on a sample of family firms in Taiwan, we find that outside directors reduce the negative relationship between family ownership/involvement and risk taking. However, when their influence is examined further, it is found that in those sample firms that went public after institutional reform, outside directors did not improve the relationship between family ownership/involvement and risk taking.