Family Controlled Groups and Return Covariation in Taiwan Stock Market

Abstract

After removing the influence of overall market, industry and corporate groups control emerges as important extra-market sources of the stock return covariation. Corporate groups control over a number of companies can be achieved both through interlocking stock holdings and through interlocking directorates. In Taiwan stock market, stock ownership is relatively highly concentrated in the hands of a few institutions and ultimately, a few wealthy families. In addition to share ownership, family company is said to be under family control. Companies controlled by the same family are said to be in the same "family group". The empirical results of this paper suggest: (1) Stock returns of companies under the control of the same family or corporate groups tend to covary strongly and form homogeneous groups. (2) The influencing of the family groups effect to the covariation of stock return is stronger than the industry groups effect. (3) The higher percentage of the family control stock holding, the stronger covariation of stock returns between the family groups. (4) The results of cluster analysis also corroborate the above statements.
An implication of the paper is that, in construction a portfolio, investors must not overlook the importance of classifying the stocks by family control. Specifically, investors would have to diversify their portfolio outside a family group in order to avoid the return covariation of homogeneous family stocks.