Controlling ownership and firm performance in Taiwan: The role of external competition and internal governance

• We study controlling ownership and firm performance in Taiwan.
• The effect of controlling ownership on firm performance is inverted U-shaped.
• External competition and internal governance lower the adverse impact of ownership.
• External competition is more effective and subsumes internal governance.

This study examines the relationship between controlling ownership and firm performance in Taiwan. We focus on whether external competition and internal governance alleviate the adverse impact of controlling ownership on firm performance and whether external governance dominates internal governance. We find that the relationship between controlling ownership and firm performance is inverted U-shaped. Firm performance increases with controlling ownership at a low ownership level but decreases with controlling ownership at a high ownership level. The negative effect of controlling ownership on firm performance at a high level of controlling ownership exists when external competition or internal governance is weak but disappears when external competition or internal governance is strong. Moreover, external competition is more effective and subsumes internal governance in mitigating the negative effect of controlling ownership on firm performance.