Behavioral Logic of Formal Governance in Family Businesses: The Moderating Roles of Firm Size and Political Connection

Formal Governance of Family Businesses in China

The formal governance of Chinese family businesses exhibits distinctive local characteristics rooted in a unique institutional environment and cultural traditions (Li et al., 2015; Ma, 2021). Since the economic reforms and opening-up, China has progressively established a modern corporate system, encouraging enterprises—including family businesses—to move toward formal governance. Government exerts considerable influence over corporate governance, frequently intervening in private family businesses (Ge et al., 2019). China’s capital market remains relatively underdeveloped, and external governance mechanisms such as market-based acquisitions and institutional investor monitoring have not yet become fully effective (Jiang & Kim, 2015; Kang et al., 2008). Compared with Western developed economies, China’s corporate governance framework displays notable peculiarities (Clarke, 2003; Kang et al., 2008). Specifically, it is organized around laws and regulations such as the Company Law and Securities Law, which emphasize a tripartite governance structure comprising shareholders, the board of directors, and the supervisory board. This system aims to balance the interests of shareholders, management, and employees, reflecting a stakeholder orientation characteristic of the Chinese model (Kang et al., 2008).

Despite similarities with Western nations in basic governance structures—such as the establishment of boards of directors and the inclusion of independent directors (Bilimoria & Piderit, 1994)—Chinese family businesses tend to place greater emphasis on internal control, with familial relationships playing a more pronounced role (Dou & Li, 2013; Li et al., 2015). Moreover, Chinese family businesses are more likely to leverage political connections to access resources and legitimacy, a practice less prevalent in the West (Ge et al., 2019; Jia, 2014). An additional notable difference lies in more concentrated ownership structures in Chinese family businesses, contrasting with the more dispersed ownership observed in Western family enterprises (Fang et al., 2022; La Porta et al., 1999).

The formal governance models of Chinese family businesses reflect both global convergence trends and China’s distinctive institutional and cultural features. As the world’s second-largest economy and largest emerging market, China’s economic transition provides compelling empirical material for examining formal governance transformations (Peng et al., 2018; Tsui et al., 2004). Studying these models deepens understanding of how enterprises in emerging economies navigate institutional change and globalization pressures (Banalieva et al., 2015; Hoskisson et al., 2000; Peng, 2003), while offering insights for refining corporate governance theory and practice in comparable contexts.

Legitimacy Logic Based on Neo-Institutionalism Theory

Neo-institutionalism theory explains how organizations adapt to their environments to survive and compete amid challenges (Scott, 2013). The theory holds that organizations are products of shared understandings of accepted principles of collective activity (Meyer & Rowan, 1977). DiMaggio and Powell (1983) identify three fundamental forces shaping organizations: (1) coercive pressure from government entities and dominant organizations, (2) normative influence from professionals and societal expectations, and (3) mimetic pressure arising from decision-makers’ reliance on the actions of other organizations. These forces constitute the core functional mechanisms of legitimacy logic. This framework is particularly relevant for understanding family businesses’ governance choices, as these firms frequently face dual institutional pressures—balancing the preservation of family traditions with conformity to professional management norms (Chung & Kim, 2018). As family businesses grow and engage with diverse stakeholders, legitimacy-seeking behavior becomes increasingly vital (Zattoni & Cuomo, 2008).

Existing research indicates that family businesses adopt formal governance structures not merely for efficiency but also to gain legitimacy (DiMaggio & Powell, 1983). For example, Parada et al. (2020) find that family businesses establish governance structures in a sequential pattern: business governance mechanisms such as boards of directors and executive committees are set up first, followed by family governance mechanisms such as family councils and constitutions. This sequence reflects family businesses’ responses to institutional pressures to gain legitimacy and signal professionalism. Chung and Kim (2018) demonstrate that the adoption of independent directors in Taiwanese family businesses is shaped by global institutions and local filtering mechanisms, suggesting that legitimacy logic plays a role in prompting formal governance. The pursuit of legitimacy through formal governance is especially pronounced in emerging economies, where family businesses often confront institutional voids and must establish credibility with external stakeholders (Peng & Jiang, 2010). This legitimacy-seeking intensifies when family businesses enter international markets or seek external financing (Aguilera & Cuervo-Cazurra, 2004).

Taken together, the emphasis on institutional characteristics and legitimacy logic is closely aligned with neo-institutionalism theory. This underscores the institutional embeddedness of organizations, a characteristic that family businesses exhibit prominently (Banalieva et al., 2015; Berrone et al., 2022; Peng et al., 2018). Compared with non-family enterprises, family businesses may be more vulnerable to institutional pressures (Berrone et al., 2010; Miller et al., 2013). Accordingly, neo-institutionalism theory offers robust explanatory power for analyzing the formal governance of family businesses and its evolution from a legitimacy logic perspective. This lens is particularly valuable for understanding how family businesses reconcile their distinctive characteristics with institutional demands (Nordqvist et al., 2014) and how they strategically respond to governance expectations across varying institutional contexts (Solinas et al., 2022).

Efficiency Logic Based on Agency Theory

Agency theory addresses conflicts of interest between principals and agents (Jensen & Meckling, 1976). Its core premise is that individuals are self-interested and tend to make decisions that maximize personal benefits (Fama & Jensen, 1983a). Such self-interest may manifest as opportunistic behavior when agents prioritize their own interests over those of principals, giving rise to moral hazard problems (Eisenhardt, 1989). In family businesses, agency problems are particularly intricate, owing to varying degrees of separation between ownership and management and potential conflicts between family and non-family members (Schulze et al., 2001). Opportunism in family firms can take distinctive forms, including nepotism, entrenchment of family managers, and expropriation of firm resources for family benefit (Gómez-Mejía et al., 2001). These opportunistic behaviors translate directly into reduced firm performance through inefficient resource allocation, suboptimal decision-making, and diminished organizational capabilities (Dalton et al., 2007). According to agency theory, adopting formal governance structures can reduce agency costs and enhance governance efficiency by constraining opportunistic behavior (Fama & Jensen, 1983b). For family businesses, formal governance mechanisms help mitigate specific agency problems, such as lax supervision arising from altruism among family members (Schulze et al., 2003) and information asymmetries between family and non-family members (Chua et al., 2009).

Existing research demonstrates that formal governance structures can enhance efficiency in family businesses by directly addressing opportunism. First, formal governance mechanisms such as boards of directors and executive committees clarify decision-making authority and improve decision-making efficiency by limiting opportunistic interventions from family members lacking formal authority (Mustakallio et al., 2002). Second, independent directors bring external expertise and monitoring capabilities that constrain self-serving behavior, thereby enhancing the quality of strategic decisions (Anderson & Reeb, 2004; Pepper & Gore, 2015). Third, formal compensation and incentive mechanisms align the interests of family and non-family managers, strengthening agency efficiency by reducing incentives for opportunism (Gómez-Mejía et al., 2003). These governance interventions directly disrupt the link between opportunism and performance decline by constraining both the ability and motivation for opportunistic behavior—reducing inefficient resource allocation, improving decision quality, and ultimately enhancing firm performance (Dalton et al., 2007). Furthermore, formal governance structures promote risk management and innovation in family businesses by guarding against opportunistic risk aversion or excessive risk-taking by family managers (Kraiczy et al., 2015; Patel & Chrisman, 2014). Beyond legitimacy considerations, therefore, efficiency factors also drive formal governance in family firms. Efficiency logic holds that organizations should systematically address sources of opportunism and their consequences to improve governance efficiency and organizational performance in market competition.

In sum, legitimacy and efficiency logic constitute two critical mechanisms driving formal governance in family businesses. Yet their relative importance varies across contexts and warrants deeper investigation. This study analyzes how these two behavioral logics operate under different boundary conditions to illuminate the internal mechanisms underlying formal governance in family businesses.

Legitimacy Logic and Formal Governance in Family Businesses

The adoption of formal governance structures by family businesses can be understood through neo-institutionalism theory, which emphasizes legitimacy as a key driver of organizational behavior (DiMaggio & Powell, 1983; Scott, 2013). Family businesses may formalize their governance structures not necessarily to improve efficiency and performance but to gain legitimacy by conforming to institutionalized norms and expectations (Meyer & Rowan, 1977). The underlying reason is that formal governance systems and norms are recognized by various stakeholders (Aguilera & Cuervo-Cazurra, 2004; Zattoni & Cuomo, 2008), signaling modernization and even internationalization, and demonstrating reduced reliance on traditional personalized governance (Chung & Kim, 2018). Through adopting a modern enterprise system, the organization standardizes its structure and behaviors, even if the system does not necessarily enhance performance (Banalieva et al., 2015; DiMaggio & Powell, 1983). In doing so, the enterprise signals rationality, modernity, and reliability to strengthen its social image and legitimacy (Aguilera & Cuervo-Cazurra, 2004). Neo-institutionalism theory identifies three primary isomorphism mechanisms through which organizations seek legitimacy: coercive, normative, and mimetic logic (DiMaggio & Powell, 1983).

Efficiency Logic and Formal Governance in Family Businesses

According to agency theory, especially in transitional Chinese family businesses, formal governance mechanisms are often lacking due to insufficient internal and external supervision and control systems (Randøy & Goel, 2003) and a scarcity of external directors and managers (Cowling, 2003). With limited pressure from external stakeholders to supervise and disclose information (Carney, 2005; Schulze et al., 2001), a family firm’s governance and decision-making processes tend to be informal, intuitive, unpredictable, and lacking in rigorous analysis (Naldi et al., 2007). These traits manifest as opportunism, which generates agency problems that ultimately undermine firm performance (Eisenhardt, 1989). In family businesses, opportunism takes distinctive forms, including nepotistic hiring, entrenchment of underperforming family managers, and expropriation of firm resources for family benefit at the expense of overall firm performance (Gómez-Mejía et al., 2001; Schulze et al., 2001). The link between agency problems and performance decline is mediated by these opportunistic behaviors, which produce suboptimal resource allocation, compromised decision quality, and diminished organizational effectiveness (Dalton et al., 2007).

Agency theory holds that these characteristics can generate increased agency costs and weakened governance efficiency, ultimately eroding corporate value. This occurs through mechanisms unique to family businesses, including nepotism, excessive altruism, self-control problems, free-riding behavior, and conflicts of interest (Jeong et al., 2022; Oswald et al., 2009; Schulze et al., 2001, 2002). Larger family businesses often employ pyramidal and other control-amplification mechanisms, confronting two distinct agency problems: those between family entrepreneurs and professional managers, and those between family entrepreneurs and minority shareholders (Almeida & Wolfenzon, 2006; Villalonga & Amit, 2006). Formal governance interventions target these opportunistic behaviors by establishing monitoring mechanisms, decision protocols, and incentive alignments that constrain self-interested actions (Pepper & Gore, 2015). For instance, independent directors can check opportunistic resource allocation by family executives; formal board procedures can limit arbitrary decision-making that favors family members at the expense of firm performance; and professional management systems can counteract nepotistic tendencies in hiring and promotion (Anderson & Reeb, 2004).

Drawing on agency theory, when managers recognize that the current structure is misaligned with the external environment and is adversely affecting performance, they are motivated to implement structural adjustments to improve organizational outcomes (Fama & Jensen, 1983a, 1983b; Jensen & Meckling, 1976). A rational formal governance system can effectively coordinate and control excessive personalization and individualistic governance within family businesses. The pursuit of efficiency and performance, as emphasized by agency theory, drives enterprises to adopt more efficient organizational structures and governance mechanisms—including shareholder-oriented corporate governance, formal control systems, and codified rules and regulations prevalent in Western business practices (Fama & Jensen, 1983a; 1983b). These governance interventions directly disrupt the link between opportunism and performance decline: by constraining opportunistic behavior, they reduce inefficient resource allocation, improve decision quality, and enhance firm performance (Dalton et al., 2007). By establishing clear accountability structures, formal governance mechanisms also reduce the information asymmetries that enable opportunistic behaviors and create transparency that makes such behaviors more detectable and therefore less likely (Pepper & Gore, 2015).

Agency theory further suggests that formal governance mechanisms can reduce agency costs, maximize shareholder value, expand investment opportunities, facilitate access to external capital, and enhance firm value (Dekker et al., 2015; Manne, 1965). Adopting formal governance systems to counterbalance overreliance on informal relationship governance has become essential for the sustainable operation and growth of family businesses (Carney, 2005; Chrisman et al., 2018; Mustakallio et al., 2002). Driven by the pursuit of efficiency and performance, family businesses seek to achieve these objectives through formal governance structures. Accordingly, we propose.

Hypothesis 4 (H4)

Efficiency logic is positively related to formal governance in family businesses.

Firm Size as a Key Boundary Condition

Firm size represents a critical organizational characteristic that shapes the resource endowments and institutional pressures facing family businesses (Ahlstrom & Bruton, 2001; Miller et al., 2017; Peng & Jiang, 2010). Drawing on neo-institutionalism theory, we examine how firm size moderates the relationship between legitimacy logic and formal governance. Small and medium-sized family enterprises are often disadvantaged in market access, resource acquisition, and social recognition, lacking the organizational structures and reputational capital that confer legitimacy and authority in the eyes of external stakeholders (Fama & Jensen, 1983a; Jensen & Meckling, 1976). These firms are particularly vulnerable to institutional pressures and legitimacy challenges due to limited market power and resource constraints (DiMaggio & Powell, 1983). Moreover, smaller family firms frequently struggle to establish credibility with external stakeholders, rendering them more susceptible to institutional pressures for conformity and more in need of signaling alignment with prevailing norms (Meyer & Rowan, 1977). In such contexts, adopting formal governance structures serves as a crucial symbolic mechanism, enabling these firms to demonstrate compliance with institutional expectations and enhance social acceptance and legitimacy (Aronoff & Ward, 1996; Siebels and zu Knyphausen‐Aufseß, 2012). Accordingly, the influence of legitimacy logic on formal governance is expected to be particularly pronounced in small and medium-sized family businesses, where the pursuit of legitimacy is a central organizational concern. Thus, we propose.

Hypothesis 5 (H5)

In small and medium-sized family businesses, the positive relationship between legitimacy logic and formal governance is stronger than in larger firms.

By contrast, the relationship between efficiency logic and formal governance is likely to vary with firm size. Large family enterprises typically possess greater resource endowments, more complex organizational structures, and broader market reach, which inherently confer higher social status and legitimacy (Ahlstrom & Bruton, 2001; Ndofor et al., 2011). As organizations expand, they encounter escalating complexity and internal management challenges, demanding more sophisticated governance mechanisms for effective coordination and control. The separation of ownership and management becomes more pronounced, and family managers may lack the capacity to handle diverse and specialized tasks efficiently (Schulze et al., 2001). These conditions generate substantial agency costs and operational inefficiencies, which can only be mitigated through formal governance structures that provide clear professional management and robust internal controls (Fama & Jensen, 1983b). The scale and complexity of large family firms necessitate a shift from informal, relationship-based management to formalized systems that prioritize efficiency, accountability, and performance (Carney, 2005; Mustakallio et al., 2002). Accordingly, the adoption of formal governance in large firms is driven primarily by efficiency considerations—optimizing resource allocation, reducing agency costs, and sustaining competitive advantage. Thus, we hypothesize.

Hypothesis 6 (H6)

In large family businesses, the positive relationship between efficiency logic and formal governance is stronger than in small and medium-sized firms.

Political Connection as a Key Boundary Condition

Political connections constitute a pivotal boundary condition shaping the institutional landscape and strategic behavior of family businesses, especially in transition economies characterized by institutional voids and regulatory uncertainty (Peng & Luo, 2000; Xin & Pearce, 1996). Without strong political ties, family firms are more exposed to institutional risks and heightened scrutiny by regulators and market actors (Li & Zhang, 2007; Wang & Qian, 2011). These firms often lack privileged access to resources, policy support, and regulatory protection, rendering their organizational legitimacy more fragile and more contingent on visible conformity to prevailing institutional norms (Haveman et al., 2017). Under such circumstances, adopting formal governance structures becomes a critical strategy for signaling compliance, reducing institutional uncertainty, and gaining acceptance from key stakeholders (DiMaggio & Powell, 1983; Meyer & Rowan, 1977). The pursuit of legitimacy through formal governance is therefore especially salient for politically unconnected family businesses, as it compensates for the absence of political endorsement and enhances credibility with external audiences. Prior research further indicates that in the Chinese context—where institutional pressures are pronounced and regulatory environments are evolving—the lack of political connections amplifies the need for legitimacy-seeking behaviors (Haveman et al., 2017; Li & Zhang, 2007). Accordingly, we hypothesize.

Hypothesis 7 (H7)

In family businesses without political connections, the positive relationship between legitimacy logic and formal governance is stronger than in those with political connections.

By contrast, family businesses with strong political connections operate in a markedly different context. Political ties provide direct access to valuable resources, policy advantages, and regulatory protection, serving as powerful sources of organizational legitimacy (Ge et al., 2019; Zhang et al., 2016). Such connections can substitute for the legitimacy normally conferred by formal governance mechanisms, reducing external pressure to adopt these structures for legitimacy purposes (Haveman et al., 2017; Peng, 2003). The strategic focus of politically connected family firms shifts toward leveraging their position to enhance internal efficiency and address agency problems arising from organizational growth and complexity (Carney, 2005; Fama & Jensen, 1983b). The resources and policy support afforded by political connections facilitate efficiency-driven governance reforms, enabling firms to professionalize management, strengthen internal controls, and optimize resource allocation (Mustakallio et al., 2002; Peng & Luo, 2000). Consequently, efficiency logic becomes a more salient driver of formal governance adoption in politically connected family businesses, as these firms seek to sustain competitive advantage and operational effectiveness in a complex, dynamic market environment. Accordingly, we propose.

Hypothesis 8 (H8)

In family businesses with political connections, the positive relationship between efficiency logic and formal governance is stronger than in those without political connections.

Data Sources

The data come from the CPES, conducted jointly by the United Front Work Department of the CPC Central Committee, the All-China Federation of Industry and Commerce, and the Chinese Academy of Social Sciences. This database represents one of the longest-running and largest national sample surveys of private enterprises in China, conducted biennially since 1993. The CPES offers several key advantages for our research: its longitudinal nature enables examination of governance trends over time; its large sample size enhances statistical power and representativeness; its consistent design across years enables reliable comparisons; it focuses specifically on private and family businesses, aligning with our research objectives; and its comprehensive questionnaire covers various aspects of firm governance and characteristics, allowing us to construct key variables and control for relevant factors.

To date, the survey has been conducted 13 times (1993, 1995, 1997, 2000, 2002, 2004, 2006, 2008, 2010, 2012, 2014, 2016, and 2018). The survey covers private enterprises of varying sizes and industries across 31 Chinese provinces, autonomous regions, and municipalities, ensuring broad representation. A multiphase stratified random sampling strategy is employed: counties and county-level cities are first selected based on economic development levels, followed by proportional sampling of firms across urban and rural areas and industries, with entrepreneurs or firm owners then interviewed directly. This rigorous design ensures broad representativeness and coverage, making the CPES widely recognized and utilized in academic research (Ge et al., 2019; Haveman et al., 2017; Jia, 2014; Jia & Mayer, 2017; Marquis & Qiao, 2020). Although survey contents have evolved over time, most items have remained consistent, enabling the construction of a mixed cross-sectional dataset—a key advantage of which is an increased sample size, yielding better estimators and more effective test statistics.

This paper uses data from eight surveys conducted from 2000 to 2014 for the following reasons: before 2000, the survey was still in an exploratory stage with inconsistent questions and answers, and many missing variables; additionally, many private enterprises during this period were restructuring from state-owned enterprises, and their internal formal governance transitions may not have begun. Currently, the CPES database is open for applications only from 1993 to 2014, precluding access to the 2016 and 2018 waves. The corresponding total samples per survey year were 3,073, 3,256, 3,593, 3,837, 4,098, 4,614, 5,073, and 6,144, respectively. To ensure accuracy and consistency, we exclude samples that did not conform to objective facts, had excessive missing values, or contained abnormal values, yielding a final sample of 23,571 observations: 1,951 in 2000, 2,634 in 2002, 2,640 in 2004, 2,633 in 2006, 2,712 in 2008, 3,226 in 2010, 3,666 in 2012, and 4,109 in 2014. The number of observations with family ownership concentration within the range of [50, 100] was 23,046, accounting for 97.77%. Within this segment, 525 samples were characterized by 100% family ownership (2.23% of the total sample). Furthermore, among these wholly family-owned enterprises, 393 firms employed professional managers, constituting 74.86% of this subgroup. Consequently, the number of samples corresponding to “companies entirely owned and managed by families” was exceptionally small. The vast majority of family businesses exhibited, to varying degrees, a set of principal–agent problems, confirming that our sample is suitable for testing our research questions.

Regarding sample selection and processing, most survey respondents in this paper were owners of small and medium-sized family businesses, whose ownership and governance structures are less standardized than those of listed companies. Accordingly, following He et al. (2014), enterprises with a family shareholding ratio of 50% or above are selected as the family business sample. Indicators of the regional institutional environment come from China’s Marketization Index (2011) compiled by Fan et al. (2011) and China’s Provincial Marketization Index Report (2016) compiled by Wang et al. (2017). Since the period covered by Fan et al. (2011) is 1997–2009 and that of Wang et al. (2017) is 2008–2014, we use data from Fan et al. (2011) for surveys before 2010 and data from Wang et al. (2017) for those thereafter.

Variable Measurement

Appendix A (please kindly see all Appendices in the Online Supplementary File for Review) presents the measurement (i.e., original questionnaire items) and coding methods for all variables.

Formal Governance Trends in Chinese Family Businesses

This section reports the annual trends of formal governance in family businesses. For brevity, we use the sum of three sub-indicators—board of directors, depersonalization of key decisions, and professional managers—as the measurement standard for family formal governance, yielding a formal governance score ranging from 0 to 3. Figure 1 reports the nationwide trend of formal governance in family businesses from 2000 to 2014. The trend of formal governance transformation in Chinese family businesses is prominent, especially from 2000 to 2006. From 2008 onward, the level of formal governance in family businesses generally maintained a steady upward trajectory. Accordingly, with the deepening of China’s market-oriented reforms and institutional changes, the level of formal governance in family businesses has been increasing. However, what are the specific driving forces? This is the core question explored in this paper.OPEN IN VIEWER

Descriptive Statistics

Table 1 reports the correlation coefficients, means, and standard deviations of the main variables. The correlation analysis provides preliminary insights into our research questions regarding how legitimacy and efficiency logic influence the formal governance of family businesses. Regarding the role of legitimacy and efficiency logic in formal governance, the correlations suggest that legitimacy logic-related variables are positively associated with formal governance. Specifically, corporate system (r = 0.3555, p < 0.05), government/state-owned equity (r = 0.0886, p < 0.05), professional certification (r = 0.1850, p < 0.05), industry association membership (r = 0.1436, p < 0.05), regional average formal governance (r = 0.1045, p < 0.05), and industry average formal governance (r = 0.0992, p < 0.05) all exhibit significant positive correlations with formal governance. These relationships suggest that isomorphic pressures from institutional environments may drive the formalization of family business governance, providing initial support for H1, H2, and H3. With respect to efficiency logic, performance below target shows a significant positive correlation with formal governance (r = 0.0160, p < 0.05), offering preliminary support for H4. By contrast, performance above target does not show a significant correlation with formal governance (r = 0.0048, p > 0.05). Although these correlations provide preliminary insights, they cannot establish causality or explore the boundary conditions of firm size and political connections. Moreover, correlation analysis alone is insufficient to determine the relative strengths of legitimacy and efficiency logic in driving formal governance. To address these limitations, we proceed to regression analyses.

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Table 1.

Correlation Coefficient of Variables (N = 23571)

​	1	2	3	4	5	6	7	8	9	10	11	12
1. Formal governance	1.0000	​	​	​	​	​	​	​	​	​	​	​
2. Corporate system	0.3555*	1.0000	​	​	​	​	​	​	​	​	​	​
3. Government/state-owned equity	0.0886*	0.0416*	1.0000	​	​	​	​	​	​	​	​	​
4. Professional certification	0.1850*	0.1458*	0.0378*	1.0000	​	​	​	​	​	​	​	​
5. Members of industry associations	0.1436*	0.1009*	0.0138	0.1861*	1.0000	​	​	​	​	​	​	​
6. Formal governance_regional average	0.1045*	0.1055*	0.0188*	0.0144	0.0166*	1.0000	​	​	​	​	​	​
7. Formal governance_industry average	0.0992*	0.0923*	0.0147*	0.0359*	0.1073*	0.0468*	1.0000	​	​	​	​	​
8. Performance above aspirations	0.0048	0.0051	−0.0011	0.0145	0.0111	−0.011	−0.0060	1.0000	​	​	​	​
9. Performance below aspirations	0.0160*	0.0079	−0.0023	0.0120	0.0100	−0.0015	−0.0106	−0.0006	1.0000	​	​	​
10. Gender	0.0275*	0.0077	0.0027	−0.0111	0.0088	0.0222*	0.0756*	−0.0123	0.0049	1.0000	​	​
11. Entrepreneur age	0.0382*	0.0267*	0.0075	0.0124	0.0381*	0.0081	0.0934*	0.0003	0.0050	0.0783*	1.0000	​
12. Education level	0.1213*	0.1145*	0.0190*	0.0313*	0.0749*	0.0285*	0.0097	−0.0026	0.0012	−0.0223*	−0.1413*	1.0000
13. Party member	0.0640*	0.0458*	0.0149*	0.0251*	0.0604*	0.0204*	0.0961*	0.0018	−0.0022	0.0958*	0.1995*	0.0966*
14. Political identity	0.0913*	0.0218*	0.0162*	0.0213*	0.0458*	0.0073	0.0706*	0.0002	−0.0012	0.0803*	0.1355*	0.0934*
15. Institutional experience	0.1089*	0.0597*	0.0215*	0.0152	0.0411*	0.0186*	0.0289*	−0.0026	−0.0011	0.0101	0.1428*	0.1157*
16. Enterprise age	0.0450*	0.0319*	−0.0046	0.0313*	0.0780*	0.0123	0.0986*	0.0028	0.0010	0.0500*	0.3137*	0.0343*
17. Firm size	0.2151*	0.0786*	0.0303*	0.0393*	0.0918*	0.0717*	0.1806*	0.0053	−0.0058	0.1457*	0.1660*	0.1690*
18. Restructuring	0.0533*	0.0047	0.0266*	−0.0138	−0.0032	0.0053	0.0368*	−0.0046	0.0021	0.0664*	0.1191*	0.0134*
19. Equity	0.1194*	0.0547*	0.0364*	0.0292*	0.0375*	0.0476*	0.0864*	0.0005	−0.0144*	0.0995*	0.0911*	0.0776*
20. Asset liability ratio	0.0324*	0.0251*	0.0098	0.0251*	0.0152*	0.0035	0.0183*	−0.4081*	0.4191*	0.0097	0.0153*	0.0073
21. Entertainment expense	−0.0111	−0.0015	−0.0017	−0.0123	−0.0122	−0.0080	−0.0138*	−0.0002	0.0060	−0.0188*	0.0135*	−0.0048
22. Foreign direct investment	−0.0034	−0.0201*	−0.0107	0.0088	−0.0795*	0.0282*	−0.0808*	−0.0021	−0.0022	0.0124	−0.0135*	−0.0435*
23. Coastal areas	−0.0139*	−0.0171*	−0.0045	0.0078	0.0145*	0.0048	0.0488*	−0.0111	0.0025	0.0340*	0.0128	−0.0728*
24. Marketization level	0.0019	0.0736*	−0.0079	0.1074*	0.1261*	0.0301*	0.0888*	−0.0044	0.0084	0.0119	0.0795*	0.0619*
Mean	0.0000	0.7342	0.7292	0.3176	0.5322	0.5417	0.5707	80.2911	58.2641	0.8636	45.1186	3.7777
Standard deviation	1.0000	0.4417	5.8785	0.4656	0.4990	0.4983	0.4950	3387.7210	2278.4440	0.3432	8.4880	1.1517
​	13	14	15	16	17	18	19	20	21	22	23	24
13. Party member	1.0000	​	​	​	​	​	​	​	​	​	​	​
14. Political identity	0.0979*	1.0000	​	​	​	​	​	​	​	​	​	​
15. Institutional experience	0.1191*	0.0654*	1.0000	​	​	​	​	​	​	​	​	​
16. Enterprise age	0.0532*	0.2111*	0.0428*	1.0000	​	​	​	​	​	​	​	​
17. Firm size	0.1770*	0.3867*	0.0940*	0.2804*	1.0000	​	​	​	​	​	​	​
18. Restructuring	0.2075*	0.0998*	0.1079*	−0.0831*	0.1883*	1.0000	​	​	​	​	​	​
19. Equity	0.0925*	0.1980*	0.0850*	0.1093*	0.3663*	0.1115*	1.0000	​	​	​	​	​
20. Asset liability ratio	0.0079	0.0118	−0.0028	0.0184*	0.0177*	0.0036	0.0205*	1.0000	​	​	​	​
21. Entertainment expense	−0.0068	−0.0099	0.0070	0.0062	−0.0108	−0.0026	0.0001	0.0049	1.0000	​	​	​
22. Foreign direct investment	−0.0146*	0.0192*	−0.0124	−0.0248*	0.0584*	0.0425*	0.0309*	−0.0076	0.0005	1.0000	​	​
23. Coastal areas	0.0079	−0.0505*	−0.0238*	0.0579*	0.0476*	0.0228*	0.0490*	0.0069	0.0044	0.0475*	1.0000	​
24. Marketization level	0.0594*	−0.0609*	−0.0243*	0.1586*	0.0449*	−0.0089	0.0140*	0.0296*	0.0050	−0.0610*	0.5614*	1.0000
Mean	0.3302	0.4268	0.5834	8.3249	3.9071	0.1450	4.7438	14.3542	0.1680	0.5883	0.5563	6.7560
Standard deviation	0.4703	0.4946	0.5111	5.1112	1.5720	0.3521	2.7230	156.0200	8.9923	6.7369	0.4968	1.9943

Effects of Legitimacy and Efficiency Logic

Table 2 reports the regression results of the formal governance transformation mechanism test for family businesses. Model 1 is the baseline regression model; Model 2 tests coercive convergence logic; Model 3 tests normative logic; Model 4 tests mimetic logic; Model 5 tests efficiency logic; and Model 6 presents the regression results after including both institutional legitimacy and efficiency pressure variables.

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Table 2.

The Main Effects of Legitimacy and Efficiency Logics on Family Businesses’ Formal Governance

​	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6
Corporate system	​	0.7526***	​	​	​	0.8564***
	​	(54.7771)	​	​	​	(49.9456)
Government/state-owned equity	​	0.0112***	​	​	​	0.0099***
	​	(11.9522)	​	​	​	(8.8125)
Professional certification	​	​	0.3265***	​	​	0.2200***
	​	​	(17.8653)	​	​	(12.9341)
Members of industry associations	​	​	0.1403***	​	​	0.1081***
	​	​	(7.6204)	​	​	(6.4999)
Formal governance_regional average	​	​	​	0.1963***	​	0.0787***
	​	​	​	(13.5753)	​	(4.5488)
Formal governance_industry average	​	​	​	0.1518***	​	0.0473**
	​	​	​	(9.4504)	​	(2.5190)
Performance above aspirations	​	​	​	​	0.0000*	0.0000
	​	​	​	​	(1.8759)	(1.1764)
Performance below aspirations	​	​	​	​	0.0000	0.0000
	​	​	​	​	(0.2959)	(0.6207)
Gender	−0.0084	−0.0099	−0.0204	−0.0079	−0.0079	−0.0193
	(-0.4473)	(-0.5639)	(-0.7862)	(-0.4265)	(-0.4242)	(-0.8273)
Entrepreneur age	0.0010	0.0011	−0.0031***	0.0009	0.0010	−0.0020*
	(1.2071)	(1.3634)	(-2.7443)	(1.0635)	(1.2051)	(-1.9729)
Education level	0.0611***	0.0439***	0.0089	0.0586***	0.0611***	−0.0023
	(9.8096)	(7.4993)	(1.1106)	(9.4745)	(9.8250)	(-0.3198)
Party member	0.0128	0.0113	−0.0027	0.0141	0.0128	0.0049
	(0.8887)	(0.8377)	(-0.1378)	(0.9839)	(0.8861)	(0.2793)
Political identity	0.0103	0.0092	0.0283	0.0085	0.0104	0.0173
	(0.7164)	(0.6854)	(1.4844)	(0.5988)	(0.7227)	(1.0035)
Institutional experience	0.1341***	0.0947***	0.1246***	0.1273***	0.1342***	0.0681***
	(10.3957)	(7.7595)	(6.9730)	(9.9234)	(10.4024)	(4.2087)
Enterprise age	−0.0034*	−0.0009	0.0003	−0.0033*	−0.0034*	0.0014
	(-2.4175)	(-0.6652)	(0.1510)	(-2.3274)	(-2.4239)	(0.7666)
Firm size	0.1191***	0.1053***	0.0206***	0.1181***	0.1189***	0.0175***
	(22.9964)	(21.5650)	(2.8358)	(22.9488)	(22.9648)	(2.6495)
Restructuring	0.0254	0.0149	0.0132	0.0330*	0.0254	0.0061
	(1.3249)	(0.8478)	(0.5840)	(1.7252)	(1.3257)	(0.2973)
Equity	0.0148***	0.0097***	0.0075*	0.0143***	0.0148***	0.0078*
	(5.7330)	(3.8912)	(1.6848)	(5.5624)	(5.7146)	(1.9145)
Asset liability ratio	0.0002*	0.0001*	0.0001*	0.0002*	0.0002***	0.0001*
	(2.1407)	(2.3290)	(2.2456)	(2.0083)	(2.9494)	(1.6483)
Entertainment expense	−0.0009***	−0.0010***	−0.0039*	−0.0008***	−0.0009***	−0.0013
	(-8.8499)	(-7.4754)	(-1.6988)	(-8.2006)	(-8.9672)	(-0.6747)
Foreign direct investment	0.0006	−0.0001	0.0007	0.0010	0.0006	0.0001
	(0.6432)	(-0.1750)	(0.6874)	(1.1156)	(0.6456)	(0.0622)
Coastal areas	−0.1743***	−0.1012*	−0.1971*	0.0158	−0.1738***	−0.0568
	(-2.6842)	(-1.6692)	(-2.3361)	(0.2398)	(-2.6768)	(-0.7642)
Marketization level	−0.0412***	−0.0354***	−0.0643***	−0.0321*	−0.0410***	−0.0270*
	(-3.2638)	(-3.0023)	(-3.7381)	(-2.5659)	(-3.2494)	(-1.7199)
Region, industry and year	Control	Control	Control	Control	Control	Control
Constant	−0.8190***	−1.1460***	0.0004	−1.0942***	−0.8211***	−0.7350***
	(-8.3802)	(-12.5181)	(0.0030)	(-11.1062)	(-8.4010)	(-6.1414)
N	23571	23571	12570	23571	23571	12570
F	33.6500***	93.8300***	14.4600***	38.1600***	32.9000***	63.2300***
R 2	0.0813	0.1906	0.0676	0.0926	0.0816	0.2373
Dependent variable = formal governance

The results of Model 2 show that corporate system (β = 0.75, p < 0.01) and government/state ownership (β = 0.01, p < 0.01) are significantly and positively associated with formal governance, indicating that equity ratios of registered companies and government/state-owned enterprises impose stricter formal governance requirements, generating coercive institutional legitimacy pressure. Thus, H1 is supported.

In Model 3, professional certification (β = 0.33, p < 0.01) and industry association membership (β = 0.14, p < 0.01) are significantly and positively associated with formal governance, indicating that family businesses with professional certification tend to exhibit higher levels of formal governance. When family business owners join an industry association, they are exposed to the practices of other members; under the institutional pressure of professional networks, the degree of formal governance tends to increase. Thus, H2 is supported.

Model 4 shows that regional average formal governance (β = 0.20, p < 0.01) and industry average formal governance (β = 0.15, p < 0.01) are significantly and positively correlated with formal governance, indicating that within a given region or industry, the level of formal governance is positively related to mimetic pressure on the focal family enterprise, spurring its willingness to promote formal governance. Thus, H3 is supported.

Model 5 shows that performance lower than the industry average (β = 0.00, p > 0.1) is not significantly associated with formal governance. Although poorly performing family businesses face pressure to improve efficiency and may seek to close performance gaps through strategic adjustments (Chrisman & Patel, 2012; Patel & Chrisman, 2014), these gaps do not prompt them to catch up through more formal governance structures. Thus, H4 is not supported. Furthermore, there are no significant differences between the results of Models 5 and 6. These results suggest that efficiency logic is not the primary force driving formal governance in Chinese family businesses; rather, the key driver is institutional legitimacy pressure, shaped by coercive, normative, and mimetic logic.

From the control variables in Model 1, the education level and institutional experience of family business owners are positively associated with the formal governance of the family businesses they lead. Education level is an important dimension of normative institutional pressure (DiMaggio & Powell, 1983). Institutional experience serves as a key reference point for business owners when founding their family businesses and profoundly shapes organizational structure, tending to remain largely unchanged over time despite external changes. The modern enterprise system was initially promoted in China’s state-owned enterprises, so family business owners with system experience are inevitably influenced by the diffusion of this institutional model and subsequently promote formal governance in their own firms. Furthermore, at the firm level, firm size, owner’s equity, and the asset–liability ratio are positively associated with formal governance in family businesses.

Grouping Regression Analysis of Firm Size and Political Connection

Based on our hypothesis analysis, we use grouping regression to examine the differential effects of legitimacy and efficiency logics on formal governance across different contexts, investigating how firm size and political connections influence the relative importance of these behavioral logics. Table 3 reports the grouping regression results; Models 1 and 2 present results for small and medium-sized enterprises and large enterprises, respectively.

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Table 3.

The Grouping Regression Analysis of Formal Governance of Family Business

​	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6
	Small and medium-sized enterprises	Large scale enterprise	No members of the National People’s Congress and the Chinese people’s Political Consultative Conference	Member of the National People’s Congress and the Chinese people’s Political Consultative Conference	No party organization	With party organization
Corporate system	0.8599***	0.5128***	0.8317***	0.6319***	0.8299***	0.0555
	(44.6255)	(12.8236)	(35.6860)	(25.6811)	(43.4684)	(1.3196)
Government/state-owned equity	0.0107***	0.0068	0.0111***	−0.0030	0.0089***	−0.0140***
	(8.8709)	(1.1977)	(8.4662)	(-1.3801)	(4.1574)	(-5.7066)
Professional certification	0.2130***	0.0157	0.2320***	0.0453	0.1744***	−0.0226
	(11.0577)	(0.3628)	(9.9963)	(1.4885)	(7.9981)	(-0.6674)
Members of industry associations	0.1031***	0.0333	0.1141***	−0.1006***	0.0832***	0.0402
	(5.5222)	(0.8377)	(5.0397)	(-3.8317)	(4.3101)	(1.1159)
Formal governance_regional average	0.0832***	0.0383	0.0664***	−0.1545***	0.0905***	−0.0421
	(4.2907)	(0.9300)	(2.7852)	(-5.4485)	(4.4395)	(-1.2629)
Formal governance_industry average	0.0541***	0.0660	0.0381	−0.3700***	0.0417*	−0.1932***
	(2.5777)	(1.3903)	(1.4909)	(-13.1305)	(1.8674)	(-5.4628)
Performance above aspirations	−0.0000	−0.0000	−0.0000	−0.0016***	0.0000	0.0001
	(-0.4295)	(-1.1059)	(-0.5536)	(-13.2576)	(0.1791)	(0.7798)
Performance below aspirations	0.0000	0.0000*	0.0001	0.0005**	0.0000	0.0013**
	(0.5856)	(1.7442)	(1.4541)	(2.5303)	(0.8615)	(2.0743)
Gender	−0.0153	−0.0610	−0.0075	−0.0375	−0.0029	−0.0552
	(-0.6155)	(-0.8238)	(-0.2535)	(-0.9361)	(-0.1044)	(-1.2771)
Entrepreneur age	−0.0017	−0.0035	−0.0004	−0.0059***	−0.0018	−0.0025
	(-1.4871)	(-1.3028)	(-0.3300)	(-3.4786)	(-1.5152)	(-1.2953)
Education level	0.0012	−0.0036	−0.0083	0.0188*	−0.0026	0.0116
	(0.1410)	(-0.2066)	(-0.8216)	(1.7503)	(-0.3070)	(0.8097)
Party member	−0.0092	0.0845**	−0.0308	0.0344	−0.0007	−0.0221
	(-0.4662)	(2.0400)	(-1.2672)	(1.3056)	(-0.0357)	(-0.6635)
Political identity	0.0292	0.0282	​	​	0.0120	0.0314
	(1.5459)	(0.6634)	​	​	(0.5869)	(0.9451)
Institutional experience	0.0758***	0.0742*	0.0750***	0.0871***	0.0631***	0.0765**
	(4.1956)	(1.8700)	(3.4404)	(3.5317)	(3.3462)	(2.3540)
Enterprise age	0.0003	0.0090**	0.0002	0.0026	0.0016	−0.0018
	(0.1266)	(2.0765)	(0.0820)	(0.9368)	(0.7358)	(-0.4855)
Firm size	​	​	0.0210**	0.0224**	0.0148*	0.0172
	​	​	(2.2929)	(2.2626)	(1.8830)	(1.3900)
Restructuring	0.0112	0.0405	−0.0341	0.0424	0.0044	0.0183
	(0.4744)	(0.9306)	(-1.1556)	(1.4410)	(0.1810)	(0.4763)
Equity	0.0116**	0.0108	0.0078	0.0058	0.0100**	−0.0036
	(2.4243)	(1.3088)	(1.3148)	(0.9983)	(2.0669)	(-0.4712)
Asset liability ratio	0.0002**	−0.0003	0.0001**	0.0001**	0.0000	0.0002**
	(2.0037)	(-1.0457)	(2.0005)	(2.5501)	(0.4477)	(2.0962)
Entertainment expense	−0.0011	0.1435	−0.0011	−0.0051	−0.0002	−0.0043
	(-0.5822)	(1.2364)	(-0.4608)	(-0.9379)	(-0.0789)	(-1.0716)
Foreign direct investment	−0.0003	−0.0007	−0.0003	0.0005	−0.0000	−0.0007
	(-0.3193)	(-0.4829)	(-0.2746)	(0.4175)	(-0.0287)	(-0.4046)
Coastal areas	−0.0385	−0.3014*	−0.0956	−0.3140***	−0.0987	0.1168
	(-0.4783)	(-1.6798)	(-1.0069)	(-2.6552)	(-1.1238)	(0.8205)
Marketization level	−0.0365**	−0.0119	−0.0606***	−0.0828***	−0.0347*	−0.0317
	(-2.1047)	(-0.3016)	(-2.8326)	(-3.2060)	(-1.9042)	(-0.9700)
Region, industry and year	Control	Control	Control	Control	Control	Control
Constant	−0.7754***	0.1352	−0.6570***	0.5254***	−0.7560***	0.4736**
	(-5.8453)	(0.4636)	(-4.0095)	(2.7025)	(-5.4148)	(1.9908)
N	10060	2513	6896	5674	9234	3336
F	65.0900***	5.1900***	36.5200***	28.9600***	41.5200***	2.7300
R 2	0.2469	0.1100	0.2389	0.2123	0.2225	0.0633
Dependent variable = formal governance	​	​	​	​	​	​

The results show that in small and medium-sized enterprises, corporate system, government/state-owned holding, professional certification, industry association membership, and regional and industry average formal governance are significantly and positively correlated with formal governance, whereas performance lower than the industry average is not significantly correlated. This suggests that the governance formalization process in small and medium-sized family businesses primarily follows legitimacy logic. In large enterprises, government/state-owned holding, professional certification, industry association membership, and regional average formal governance are not significantly correlated with formal governance, whereas performance lower than the industry average is significantly and positively correlated. Hence, the governance formalization process in large family businesses aims to improve efficiency rather than obtain legitimacy. The Chow test further reveals significant differences between the coefficients of legitimacy logic variables in the two subsamples, as well as significant differences in the coefficients of variables related to performance lower than the industry average. Thus, H5 and H6 are supported.

Models 3 and 4 present the grouping regression results for enterprises without and with NPC or CPPCC affiliation, respectively. The results indicate that among firms without NPC or CPPCC affiliation, corporate system, government/state-owned holding, professional certification, industry association membership, and regional average formal governance are all significantly and positively correlated with formal governance, whereas performance lower than the industry average is not significantly correlated. This shows that the governance formalization process for family business owners without political identity primarily follows legitimacy logic. In firms with NPC or CPPCC affiliation, government/state-owned holding and professional certification are not significantly correlated with formal governance; Industry association membership, and regional and industry average formal governance are significantly and negatively correlated with formal governance, whereas performance lower than the industry average is significantly and positively correlated. Thus, the formalization process for family business owners with political identity primarily follows efficiency logic rather than legitimacy logic. The Chow test further shows significant differences between the coefficients of legitimacy logic variables in the two subsamples, as well as significant differences in the coefficients of variables related to performance lower than the industry average. Models 5 and 6 present the subgroup regression results for enterprises without and with party organization, respectively, and the results are not substantially different from those in Models 3 and 4. Thus, H7 and H8 are supported.

In sum, for small and medium-sized family businesses and those without political connections (including entrepreneurs’ political identity and the presence of party organizations within enterprises), the governance formalization process tends to follow legitimacy logic. For larger and politically connected family businesses, formal governance tends to be driven by efficiency considerations rather than legitimacy.

Robustness Checks

Further Analysis

We conduct a further analysis to examine the potential outcomes of formal governance structures for family firms, focusing on two productive activities: R&D activities and outward foreign direct investment (FDI). Both are key strategies driving technological advancement (Chrisman & Patel, 2012) and international expansion (Arregle et al., 2021). R&D is measured by R&D expenditures/sales (Chrisman & Patel, 2012), and FDI is measured by FDI expenditures/assets (Liu et al., 2011). Appendix K reports the regression results, showing that formal governance in Model 1 (β = 0.0505, p < 0.01) and Model 2 (β = 0.0445, p < 0.01) is significantly and positively correlated with R&D and FDI, indicating that formal governance could drive technological advancement and internationalization expansion for family businesses.

Main Findings

The introduction of formal governance in Chinese family businesses has become a central driver of their modern transformation, with legitimacy logic playing a dominant role. Legitimacy logic encompasses coercive, normative, and mimetic dimensions. Coercive logic arises when family businesses register as limited liability or joint-stock companies, which is positively associated with government ownership and state-owned or collective enterprises, and promotes formal governance. Normative logic indicates that family enterprises with professional certification or membership in industry associations exhibit higher levels of formal governance, due to the pressures of certification requirements and the influence of professional networks. Mimetic logic suggests a positive association between a focal family business and the average level of formal governance in its industry or region—meaning the firm is more inclined to pursue formal governance transformation. Crucially, these transformations are not primarily driven by efficiency logic. Even in family businesses with performance significantly below the industry average, the momentum for transformation remains rooted in legitimacy logic rather than efficiency gains. In sum, our findings support neo-institutionalism theory, suggesting that the diffusion of modern corporate governance in China is driven more by external institutional pressures than by internal efficiency incentives.

Notably, while legitimacy rather than efficiency logic propels the overall formal governance process in Chinese family businesses, different organizational contexts present distinct sources of logic (Luo & Chung, 2013; Miller et al., 2013; Peng & Jiang, 2010). The relative significance of the two main effects varies across heterogeneous contexts. We find that the adoption of formal governance in small and medium-sized family businesses—or in those without political connections—is driven mainly by legitimacy considerations rather than performance improvement. Without the buffer of size or political connections, many family businesses face acute resource shortages and legitimacy deficits. Adopting formal governance can confer a degree of legitimacy, or at least signal positive attributes to the public, thereby aligning with institutional pressures and stakeholder expectations. By contrast, large family businesses or those with political connections tend to be influential economic actors with stronger resource endowments and legitimacy. For these firms, the adoption of formal governance mechanisms is more likely driven by the goal of improving internal efficiency rather than enhancing external legitimacy. Influential family businesses also face larger social “audiences”—government agencies, media, consumers, suppliers, and community members (Gamble et al., 2021)—under which external legitimacy pressures serve as an important supervisory force (Miller et al., 2013). From a dynamic perspective, our research suggests that as family firms grow in scale or transition from lacking political connections to establishing them, the underlying behavioral logic of their governance processes may require dynamic adjustment, shifting from a legitimacy-based logic toward an efficiency-oriented one.

Theoretical Implications

This study makes three theoretical contributions to the family business governance literature. First, it advances the integration of legitimacy and efficiency logics as dual drivers of formal governance transformation in family firms. Prior research has typically examined these motivations separately—either as a response to external legitimacy pressures (Chung & Luo, 2008; Claessens et al., 2002; Parada et al., 2010) or as an instrument for enhancing internal efficiency (Mustakallio et al., 2002; Schulze et al., 2003; Songini, 2006). By combining both logics within a unified analytical framework, this study demonstrates their joint influence on the adoption and evolution of formal governance structures. This dual-logic approach explains the heterogeneous motivations underlying governance transformation and clarifies why some family firms prioritize institutional conformity while others emphasize operational effectiveness. It reconciles seemingly conflicting findings in the literature and provides a holistic lens for analyzing governance decisions that accounts for both external and internal imperatives (Miller et al., 2013; Parada et al., 2020), capturing the complexity and diversity of family business governance and illuminating the interplay between institutional context and organizational strategy (Chrisman et al., 2012; Daspit et al., 2018).

Second, this study elucidates how the effects of legitimacy and efficiency logic on formal governance are contingent on firm size and political connections. By examining these moderating roles, the research reveals that the relative salience of legitimacy versus efficiency logic shifts across different organizational and institutional contexts. Specifically, smaller or politically unconnected family firms are more likely to be driven by legitimacy concerns, whereas larger or politically connected firms tend to emphasize efficiency (Luo & Chung, 2013; Nordqvist et al., 2014; Peng, 2004). This contingency perspective underscores the importance of organizational heterogeneity in governance research and demonstrates that governance strategies are not universally applicable but must be tailored to firm-specific characteristics and institutional embeddedness (Chua et al., 2012; Jaskiewicz & Dyer, 2017), thereby enriching the theoretical toolkit for understanding diverse governance patterns across varying sizes and political environments (Li & Zhang, 2007; Zhang et al., 2016).

Third, this research extends the study of family business governance to emerging economies, particularly the East Asian context (Dinh & Calabrò, 2019; Fang et al., 2022). China’s distinctive institutional environment provides an ideal setting for examining competing behavioral logics. Our findings illuminate how family firms navigate institutional complexity by strategically balancing legitimacy and efficiency considerations, enriching the understanding of family business governance beyond developed Western economies and underscoring the need for institution-sensitive theorizing (Marquis & Qiao, 2020; Nee & Opper, 2012; Peng, 2003).

Practical Implications

This study offers significant insights for family business owners, regulators, and policymakers, though caution is warranted when applying these findings across different institutional contexts. Although our results are derived primarily from the Chinese context, they suggest that legitimacy and efficiency logic influencing formal governance in family businesses may have broader implications for practice in other settings. More importantly, by integrating both logics rather than treating them in isolation, our work clarifies the theoretical and practical considerations surrounding governance choices and, crucially, guides family businesses of varying sizes and political connections in selecting appropriate governance transformation strategies.

For family business owners, our research offers tailored governance recommendations based on institutional context and firm characteristics. Owners should identify the specific institutional pressures most relevant to their environment—whether regulatory requirements, professional standards, or successful peer practices—to inform governance priorities. They should also assess how formal governance can enhance operational efficiency through structured decision-making processes and professional management practices that enable effective engagement of external talent. The governance approach should be calibrated to firm-specific factors: small and medium-sized family businesses benefit from prioritizing legitimacy-signaling mechanisms to overcome resource constraints, whereas large firms can more effectively implement efficiency-enhancing formal structures. Similarly, firms without political connections should emphasize institutionally endorsed practices to establish credibility with external stakeholders, whereas those with political connections may exercise greater strategic flexibility. Rather than adopting standardized governance packages, family businesses should strategically differentiate their governance components, foregrounding legitimacy or efficiency dimensions based on their specific institutional contexts and organizational characteristics. This tailored approach enables family firms to address critical institutional demands while preserving their distinctive advantages.

For regulators and policymakers, our research highlights the need for a differentiated approach to promoting corporate governance reforms. Rather than imposing uniform governance standards across all family businesses, regulators should develop policies that account for firm-specific factors, enabling a more effective reconciliation of legitimacy requirements and efficiency needs across different enterprise contexts.

In conclusion, our study advocates for a context-sensitive approach to family business governance that considers both legitimacy and efficiency considerations. This approach calls for integrating formal governance practices with the unique behavioral logic of family businesses—their legitimacy and efficiency concerns—according to specific conditions such as firm size and political identity. By doing so, a tailored governance approach can support the sustainable development of family businesses—including technological advancement and internationalization expansion—while contributing to broader economic growth and stability across diverse institutional contexts.

Limitations and Future Research

This study offers valuable insights into the formal governance of family businesses, but it is not without limitations. Acknowledging these constraints provides avenues for future research. Since our work focuses primarily on formal governance in China, caution is warranted when directly applying our findings to other countries due to differences in institutional environments and cultural traditions (Marquis & Qiao, 2020; Nee & Opper, 2012; Peng, 2003). Future research should examine how varying institutional contexts—particularly those with different levels of institutional development, cultural orientations toward family, and regulatory frameworks—might alter the relationship between behavioral logic and governance choices. In particular, scholars should investigate whether the moderating effects of firm size and political connections operate similarly across institutional environments with varying degrees of market maturity, rule of law, and collectivistic versus individualistic orientations. Such comparative studies would significantly deepen understanding of the boundary conditions of our theoretical framework and contribute to a more nuanced, context-sensitive theory of family business governance.

Notably, legitimacy logic helps family businesses build reputation and secure resources, which can support long-term efficiency, while efficiency logic contributes to strengthening legitimacy over time. Family businesses should consistently address both sets of needs rather than pursuing one aspect unilaterally (Cobben et al., 2023). While our study does not extensively explore the potential interrelationships between these two logics, these perspectives are thought-provoking, and future research could incorporate them into the analytical framework by examining how cross-logic dynamics influence formal governance outcomes within family businesses.

Furthermore, in our study, coercive and normative logics were measured through specific actions of the focal firm—whether the firm adopts a modern corporate system for coercive logic, and whether the firm has obtained professional certification or holds industry association membership for normative logic. Although we sought direct indicators for measuring the mimetic behavior of focal firms, we were unable to locate suitable measures within the available dataset. Accordingly, we adopted a second-best approach, operationalizing mimetic pressure as a binary classification: whether the formal governance level of the focal firm is higher (assigned as 0) or lower (assigned as 1) than the average formal governance level of firms in the same industry and region, supplemented by an absolute gap methodology analogous to that used for efficiency logic as an alternative measure for robustness analysis. Future research may pursue more direct indicators for assessing mimetic behavior to further extend the implications of our study.

Finally, while our study provides firm-level insights into formal governance mechanisms, a key limitation lies in our relatively limited exploration of industry-level heterogeneity. Although we controlled for industry types, a more granular analysis of industry-specific characteristics and their influence on governance choices would enhance understanding. Industries vary substantially in technological intensity, market concentration, regulatory oversight, and institutional pressures, which may systematically affect how family firms respond to legitimacy and efficiency demands (Banalieva et al., 2015; Berrone et al., 2010). Future research could advance our theoretical framework by explicitly modeling these industry-level contingencies.