Melco Management Accounting Research
Discussion Paper Series
No.MDP2023-004

Founder Overconfidence and Intergenerational Succession of
Family Firms: A Case Study of Fuyao Glass

December 2023
Xiang Li
Sichuan Henghexin Law Firm

Yang Xu*
Professor, Faculty of Economics, Nagasaki University
4-2-1, Katafuchi, Nagasaki City, Nagasaki 850-8506 Japane-mail: jxuyang@nagasaki-u.ac.jp*Corresponding author

Maki Makoto Foundation
Nagoya, Japan
Discussion Paper Series of the Melco Management Accounting Research, in order to promote
the study of management accounting, has published this unfinished paper onto the Web. Pleaseobtain the permission of the author when citing this paper.

Founder Overconfidence and Intergenerational Successionof Family Firms: A Case Study of Fuyao Glass

Xiang Li
Sichuan Henghexin Law Firm
E-mail: michelle122lx@126.com

Yang Xu
Professor, Faculty of Economics, Nagasaki University, 4-2-1, Katafuchi, Nagasaki 850-8506,
Japan. Tel.: 0958206373. E-mail: jxuyang@nagasaki-u.ac.jp (corresponding author)

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Founder Overconfidence and Intergenerational Successionof Family Firms: A Case Study of Fuyao Glass

Xiang Li1
Yang Xu2*
Abstract
In the succession of family firms, the choice of successor—between family members with bloodties and professional managers—is a key issue. The characteristic of overconfidence commonly
found in entrepreneurs can significantly impact successor decision-making on the intergenerational
succession of family firms. This study examined the choice of successors in family firm succession
from the perspective of founder overconfidence. The specific case of Fuyao Glass was used to study
the relation between founder overconfidence, choice in family firm succession, and succession
performance. This case study utilizes a mixed-method approach, incorporating qualitative andquantitative data from Fuyao Glass's financial records and information on senior managers' changes
and résumés. Although the implementation of Fuyao Glass’s succession plan did not have asignificant impact on the company’s operational performance, the resignation of the founder of thefamily firm and, later, of his successor, led to a sudden drop in the firm’s Tobin’s Q. Thus, market
investors recognized the positive impact of the founder, Dewang Cao, and his eldest son, Hui Cao,on the development potential of the firm. The succession of family successors, as in Fuyao Glass,
may tend to occur during the stable operation of the firm rather than during a major industrial

1

Sichuan Henghexin Law Firm. E-mail: michelle122lx@126.com
Professor, Faculty of Economics, Nagasaki University, 4-2-1, Katafuchi, Nagasaki 850-8506,
Japan. Tel.: 0958206373. E-mail: jxuyang@nagasaki-u.ac.jp (*corresponding author)
2

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adjustment period. Fuyao Glass’s succession plan can be used as reference by other family firms
with similar needs for succession during the establishment of succession plans.

Key words: Family Firms; Intergenerational Succession; Founder; Overconfidence31. Introduction
The private sector is an important achievement in the development of China’s economy. The
numbers “5, 6, 7, 8, 9” are broadly used to describe the prominent position of the private sector: theprivate sector contributes more than 50% of China’s tax revenue, more than 60% of the GDP, morethan 70% of technological innovation achievements, and more than 80% of urban employment.
Moreover, the number of private enterprises accounts for 90% of the total number of enterprises. In
the early stage of entrepreneurship, Chinese private enterprises often face the challenges of capital
restriction and resource insufficiency in terms of management, information, and technology. Familyrun enterprises effectively make up for this deficiency by relying on internal family resources.
Family firms are created when entrepreneurs decide to introduce kinship to the management positionof successor enterprises and pass the control down through kinship (Mehrotra & Morck, 2013). Our
study focused on the Chinese family firm, defined by Zhu (2004) as a business form where theentrepreneurs or successor families jointly hold controlling rights and the family ownership can belegally passed down within the family under normal circumstances.
The intergenerational succession of Chinese family firms needs to be properly examined. Since
China’s reform and opening-up, entrepreneur-led family firms have become the most dynamic
development force in China, greatly contributing to the long-term stable growth of the country’sGDP. At present, the first batch of successful Chinese entrepreneurs are reaching the age of 50–70
years, and this generation of founders who have achieved great success are undergoing a criticalpoint of family wealth succession. In the next ten years, more than 3 million “founding-generation”
entrepreneurs will reach the retirement age in China (Wang et al., 2021). A key issue in the
succession of family firms is in the selection of successors—between family members with bloodties and professional managers. Designing effective succession plans is also a challenge faced by
Chinese family firms. Kellermanns and Eddleston (2006) noted that entrepreneurs are motivated by
the desire to build their personal empire, and the entrepreneurial spirit is crucial for the success offamily firms. The founding-generation entrepreneurs in China have a strong motivation to maintain4

their wealth through family firm succession based on successor entrepreneurial achievements.
However, family firms would face uncertainties in long-term development, given thatintergenerational succession is highly uncertain. Indeed, few family firms survive beyond the second
generation, let alone the third generation or beyond (Davis & Harveston, 1998). Although hiring
professional managers has its advantages, Chinese family firms tend to choose family members as
successors owing to strong traditional concepts (Lu et al., 2021). In addition, given China’s social
environment, legal environment, and culture, the professionalization of management has been slow
(He et al., 2019). Chinese family firms may or may not effectively make succession choices tosolidify successor development. Thus, research on the succession plans of Chinese family firms isessential, particularly for the development of China’s economy and of Chinese enterprises.
The intergenerational succession of family firms represents an important area in academic
research. De Massis and Foss (2018) pointed out that a micro-foundation approach is not only
necessary but also potentially the most effective for the analysis of the succession plans of family
firms. Intergenerational succession within the family is a continual process, not a simple handoverincident (Chen et al., 2017). The first-generation management plays a crucial role in the long-term
dynamic processes, and the founders’ personal characteristics, including religious beliefs (Shen &Su, 2017), personal cognition (Lu et al., 2021), and age (Hui & Xu, 2016), deeply impact thesuccession plans and subsequent successor implementation. Lu et al. (2021) found that family
members, rather than professional managers, are likely to be chosen as successors in family firms
when CEOs are more conservative.
For Chinese family firms, founders have a prominent influence on intergenerational succession
plans. The essence of traditional Chinese family culture determines the core of family firms asfamily-centered and family authority (Wang, 2005). For founders of Chinese family firms, theconcepts of “one of us” and “outsider” are deeply differentiated and indelibly etched in successor
values. Moreover, the concept of the family may lead founders to prioritize family interests above
enterprise interests, which could shape the choices related to intergenerational succession that could5harm the long-term development of family firms. As emphasized by Li (2003), Chinese family firms
may realize great development only after eliminating their long-standing practice of favoritism.
Founders of family firms play a central role in making important decisions on the selection of
successors (Lu et al., 2021; Hui & Xu, 2016; Zhu, 2004). However, the founders’ specific selection
involves rational and emotional factors and may even be influenced by psychological biases. For
instance, founders often adopt irrational behaviors that harm themselves and the firms owing to
psychological biases, such as overconfidence. The study of founder overconfidence is of importanceto intergenerational succession and succession performance. However, the literature is limited on
the impact of personal characteristics of founders, especially overconfidence commonly seen in
entrepreneurs (Moskowitz & Vissing-Jørgensen, 2002), on the choice of intergenerational successor
in family firms and succession performance. We intended to fill this gap.
We analyzed founder overconfidence, successor choice in family firm succession, andsuccession performance with a case study of Fuyao Glass. The founder, Dewang Cao, being deeply
influenced by traditional family values, believes that his eldest son, Hui Cao, should take over thefamily business. Dewang Cao holds a high recognition of his own abilities and high confidence inthe abilities of his family members. Notably, Fuyao Glass is not subject to state-owned shareholding.
Therefore, the succession plan adopted by Fuyao Glass is representative of the practical succession
plan of a traditional Chinese family enterprise that focuses on the cultivation of the eldest son as thecore management to be supported by non-family member senior management personnel. In thepresent composition of the management of Fuyao Glass after succession, Dewang Cao continues toserve as the chairman, whereas Hui Cao serves as the vice chairman and executive director. A
manager who has been internally cultivated serves as the general manager. This setup not only
satisfies the motivation of achieving the long-term development of the family firm but also fulfills
the individual motivation of realizing personal achievements.
The implementation of this succession plan by Fuyao Glass had no significant impact on its
operating performance. However, its Tobin’s Q recorded a sudden drop with the resignation of

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Dewang Cao and, later, Hui Cao, indicating that stock investors recognized the positive impact ofboth the founder and successor on the future prospects of the firm. With respect to the firm’s
development path, the needs for innovation did not change significantly from 2000 to 2021.
Regarding the needs for industrial expansion, the corporate policies of Fuyao Glass changed andcapital investment was made before the takeover of Hui Cao. We demonstrated that succession
within the family typically occurs during the stable operation of a firm rather than during a majorindustrial adjustment period. Our findings coincide with previous empirical results, thereby
enriching the current literature on succession in family firms.

2. Literature Review
Research has examined the factors to the successful completion of intergenerational succession
and building of competitive advantages (Chen et al., 2017). Intergenerational succession in family
firms is not a simple power transition within the management of the family firms but a majordecision that relates to the future development and even survival of the firm (Dou & Jia, 2008).
Based on relevant theories of organizational behavior and sociology, Song et al. (2008) concluded
that the intergenerational succession of family firms is rich in content with a profound impact andencompasses comprehensive succession in terms of capability, capital, power, and culture.
2.1 Intergenerational Succession of Family Firms and Determining Factors
The current literature focuses on the determining factors for the choice of successor in theintergenerational succession of family firms as well as its dynamic realization. The core issue lies inthe selection of successors between family members with blood ties and professional managers. The
choice of family members with blood ties has rational economic motivations. Chao (2002) asserted
that the motivation for succession within the family mainly comes from the emotional cohesion,
non-separation of ownership and control, absolute authority and leadership of the founder, as wellas other unique operational advantages of family firms. Bjuggren and Sund (2002), based on

7

transaction costs theory, argued that the knowledge acquired by successors through observation andimitation could reduce the transaction costs during the internal transfer of family firms, and thespecial competitive advantages of family firms would disappear when the firms go bankrupt or are
sold to a third party. Gomez-Mejia et al. (2007) developed the socioemotional wealth theory: family
firms, unlike other firms, prioritize non-economic objectives over economic ones; the non-economic
utilities include the ability to exercise power, sense of belonging, and satisfaction of emotional andintimacy needs. The reason family firms do not absorb external professional managers is that they
are more willing to maintain the control of and succession in the firm. Non-economic motivations
are also involved in the completion of intergenerational succession, such as emotional motivation.
Xu and Hui (2013) suggested that the business objectives of family firms include the maximizationof shareholders’ value and pursuit for emotional value, such as the sense of belonging to the family,family’s common values, social identity, and the realization of family authority. Emotional
motivations also promote the increase of economic interests, and the maintenance and continuity offamily emotional values can effectively secure the long-term operation of family firms.
The choice of professional managers over family-member successors also has rational
economic motivations. Competent professional managers can facilitate the smooth transition ofcontrol from the founders of family firms (Chu, 2002). Based on research on family firms andprofessional managers, Hiebl and Li (2020) concluded that the professional knowledge andexperience of professional managers could improve the management efficiency of family firms andenable the latter to better cope with industrial competition and operational challenges. However,
Chinese family firms face high risks when making managers as successors owing to the inadequate
efficiency of the managers’ labor market and absence of relevant regulations. Chu (2002) reported
that the development bottleneck of Chinese family firms is not the availability of financial capitalbut the failure to effectively absorb and internalize new management as stable human capital
resources with the potential to become successors. On the one hand, China lacks a qualified
professional manager labor market; on the other hand, China’s institutional regulation is inefficient.

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The information asymmetry between family firms and managers also negatively affects theperformance of professional managers. Moreover, the introduction of professional managers tofamily firms is likely to fail with the absence of trust between family firms and professional
managers (Li, 2003). Particularly, when the cost for the conversion of managers to entrepreneurs isextremely high, the professional manager market will become tremendously unstable, which willbring risks to the decision-making of family firms on external managers. An acceptable alternative
is a compromised governance, in which firm control is shared by the external managers and thefamily to reduce the agency problem between external managers and family firms. Zhang (2001,
2003) discussed the absence and establishment of trust between founder entrepreneurs and externalmanagers, drawing insights from the concepts of the feudal and county systems in ancient China.
He et al. (2014) explored the feasibility of integrating external professional managers into the family
by means of pan-familism, establishing a certain foundation of trust, and then realizing the sufficientarrangements of succession of professional managers through managers’ shareholding.
Thus, succession within the family and succession by professional managers each have theirown advantages, and the founders of family firms play a central role in deciding on the choice of
successors. Gagne et al. (2021) explored the motivations for intergenerational succession through a
12-year longitudinal study of 89 Canadian family firms. Their successor research indicated that the
choice of successor is closely related to the founders’ trust in the successors’ ability and intentions,and such trust enables the successors to gain more opportunities to work autonomously. Traditional
concepts and religious beliefs make founders more inclined to complete intergenerational succession
within the family. Lu et al. (2021) stated that traditional concepts of the management of family firms
significantly impact the choice of successor, based on upper echelons theory. In other words, founderCEOs with stronger traditional concepts are more inclined to choose family members as successors.
Shen and Su (2017) provided empirical evidence that religious beliefs significantly impact thefounders’ choice of successors. When founders have Eastern religious beliefs, such as Buddhism,
family firms tend to adopt succession within the family. Meanwhile, founders’ personal cognition

9and experience may lead to abandonment of succession within the family. He et al. (2014) foundthat a considerable proportion of family firms do not want to sustain family control, and they actively
give up family succession. This transformation arises from founders’ pessimistic perception of theexternal institutional environment, which can be reduced by founders’ political status. Cao et al.
(2015) accounted for China’s unique one-child policy in their analysis and concluded that this policy
has led to a serious shortage of human capital in family firms. When making succession decisions,founders of family firms have few options, which affects the stability of family succession.
In summary, the literature suggests that the founder of a family firm plays a central role inmaking important decisions on the choice of successors. The founder’s decision is influenced by not
only judgment based on economic motivations but also behavioral biases, which are in turn informedby the founder’s concepts and cognition, and macro factors, including the external institutional
environment. Meanwhile, no study has examined the impact of founder overconfidence on thedecision-making regarding the intergenerational succession of family firms. We aimed to fill thisliterature gap and review the impacts of the psychological factor of founder overconfidence on thedecision-making related to the intergenerational succession of family firms.
2.2 Intergenerational Succession of Family Firms and Corporate Performance
Corporate performance is the most direct manifestation of the success or failure of theintergenerational succession of family firms. Research suggests that succession within the family is
not inherently superior compared with other succession types. In other words, intergenerational
succession in the family does not necessarily have a positive impact on the performance of family
firms after succession. Based on samples of Italian firms, Cucculelli and Micucci (2008) exploredthe impact of succession to the current CEOs on the corporate operation of family firms. They
concluded that the family firm structure does not have inherent superiority, noting that succession
within the family had a negative impact on corporate performance.

10Nonetheless, family firms can be successfully passed down and realize long-term sustainable
and stable development, as seen in cases of founders of family firms choosing family members withfamily-specific assets as successors. A prerequisite is that the succession of family authority iseffectively implemented. Wang et al. (2021) built a theoretical model of the generation and iterationof entrepreneurial schemata for family firm successors based on imprinting theory. This model helps
elucidate the entrepreneurial thinking and actions of family successors. Chen and Ying (2003)
highlighted the many factors that complicate the succession of management in intergenerational
succession. Family firms are reliant on not only the superiority of the enterprise system but also therecognition of excellent entrepreneurial qualities and abilities, which are irreplaceable. Yu et al.
(2013) indicated that the transfer of entrepreneurs’ tacit knowledge is crucial for the success ofintergenerational succession. This tacit knowledge encompasses management abilities represented
by excellent qualities, such as integrity and studiousness, entrepreneurial spirit, and individual social
networks. Bennedsen et al. (2015), employing a novel research method called family firm map,
studied 217 Chinese family firms and successor decision-making regarding intergenerational
succession. According to the family firm map, and confirmed by empirical results, a family firm hasdevelopment potential and competitiveness if the family can invest unique family assets in the firm.
The establishment and development paths of family firms center on the use of unique family assets
by family firms to address successor development restraints. After the completion of succession,
Chinese family firms tend to suffer a loss of 60% of firm value, and these changes mainly occur
with the changes in unique family assets. Thus, the core of the successful completion ofintergenerational succession lies in the proper maintenance and use of unique family assets.
Regarding the significant impact of founders’ personal characteristics, such as cultural
background, on succession performance, Chen et al. (2021) revealed that founders who are deeply
influenced by Confucian culture are more inclined to choose family members or non-family
members with whom they have a close relationship as successors. They also reported that the impact
of successor selection within the family or closely related members on corporate performance is11more significant compared with successor selection outside the family or relationship circle. The
reason is that, as influenced by Confucian culture, only successors in the former scenario can acquire
the founders’ proprietary assets through internal management experience before succession,
enabling them to outperform other successors in terms of corporate performance.
Succession performance is also influenced by the cultivation model adopted for family
successors and successor ability to establish authority in firms. Zhu and Lyu (2019) used listed
family firms from 2003 to 2016 as samples to study the impact of successor cultivation models on
succession performance and found that the market and financial performance tended to be worse
after succession. Family firms passed down to the second generation who have accumulated
overseas training fare even worse in terms of market and financial performance. The main impact
path of successor cultivation models is that overseas training is less conducive to the succession of
the founders’ special assets and core values of family firms. Li et al. (2015) utilized the theory of
portfolio entrepreneurship to address the issue of succession within the family resulting in the
successors having difficulty gaining acceptance owing to lack of authority, despite the completionof factual succession. They found that the second founding generation who chose to start businessin industries other than the successor’s father’s industry could establish personal authority more
effectively when taking over the business. Based on the intergenerational succession case of Shanxi
Tianxi No. 1 Noodles Catering Co., Ltd., Li et al. (2021) analyzed the impact of the institutional jobin the intergenerational succession of family firms on the transformation of authority. Theyemphasized that the key to a successful transformation lies in the succession of consistent values,
mission, and vision. He and Lian (2009) stated that family authority is not linearly related to thefamily firms’ market value; moderate family authority may promote value creation in family firms.
The choice of successor in the intergenerational succession of family firms significantly
influences the investment decision-making of these firms. According to Cao et al. (2015), China’s
one-child policy has lowered the expectations of founders of family firms for young successors, aswell as for firm listing, rate of reinvestment, and R&D investment. Hui and Xu (2016) reported that12

intergenerational succession in family firms is regarded as a source of operating risk, and these firms
are inclined to reduce investment expenditure during the process of intergenerational succession. In
addition, the age of founders reinforces the negative relation between intergenerational succession
and long-term investment—the older the founders, the greater the range of reduction in long-term
investment during the process of intergenerational succession. Focusing on the impact of successionof family firms by the second founding generation on firm innovation activities, Huang et al. (2018)
revealed that the second founding generation may restrict related party transactions and improve thequality of accounting information of the firms to mitigate corporate entrustment and agency
problems after succession, thereby increasing firm innovation.
Generally, positive succession performance hinges on the succession of the family-specificassets and the establishment of the successors’ authority in family firms, with significant influence
from the personal characteristics of the founders and successors. Investment decisions of family
firms are affected by the decision regarding intergenerational succession. Currently, no study has
examined the effect of founder overconfidence with regard to post-succession performance andinvestment decisions in family firms. We thus analyzed whether founder overconfidence leads tobehavioral biases and the failure of family firm succession. We intended to empirically reveal theactual effects of intergenerational succession decisions under the influence of founderoverconfidence, thus making an incremental contribution to the research on family firm succession.

3. Case Study of Fuyao Glass
We used Fuyao Glass as a representative case to analyze the relation of the personability of thefounders of family firms with the choice of family firm succession and firm performance after
succession. We collected financial data and information regarding the changes and résumés of senior
managers from the WIND database, website of Fuyao Glass, and Chinese Research Data Services
Platform (CNRDS).

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3.1 Firm BackgroundFuyao Glass Industry Group Co., Ltd. (Fuyao Glass) was registered and incorporated in Fuqing,
Fuzhou, Fujian Province, China, in 1987. Mainly engaged in the production of automotive glass
products, Fuyao Glass supplies products for well-known Chinese and international automobile
makers. It is the leading automotive glass production and supply enterprise in China with industrial
classification as non-metallic mineral products. Fuyao Glass was listed in the Shanghai Stock
Exchange and Hong Kong Stock Exchange in 1993 and 2015, respectively. By the end of 2022, it
had 28,982 employees, an operating revenue of approximately RMB 28 billion, and a net profit of
RMB 4 billion. As of June 8, 2023, the total market value of Fuyao Glass reached RMB 82 billion
and its Price-to-earnings ratio (PE TTM3) was 17.85. According to information released on thecompany’s website, Fuyao Glass has established factories and commercial agencies in 16 provinces
and cities in China and 11 countries. It holds a domestic market share of as high as 30%. In 2020,
Fuyao Glass ranked 482nd in the list of top 500 Chinese private enterprises released by the AllChina Federation of Industry and Commerce4.
Fuyao Glass began as a small township water-meter glass factory where founder Dewang Cao
served as purchasing officer. Based on the original glass factory, Dewang Cao incorporated morethan ten shareholders, including local enterprise, overseas Chinese, and township government
representatives, to form a small joint venture with the main business of automotive windshield glass.
From its incorporation, Fuyao Glass had 2.47% of state-owned shares in the year 2006. At present,
shares are mainly held by investors in Hong Kong, making Fuyao Glass an international enterprise.
As of June 8, 2023, Dewang Cao held 14.97% of the shares of Fuyao Glass through Sanyi
Development Limited, remaining as the largest controlling shareholder with absolute control overFuyao Glass. In sum, Fuyao Glass is a private family firm in the Chinese market faced with the3

Trailing twelve months.

4

https://www.acfic.org.cn/ztzlhz/2022my5bq/2022my5bq_4/202208/t20220830_111966.html

14

problem of intergeneration succession that is typical among Chinese family firms. Therefore, we
selected the intergenerational succession of Fuyao Glass as a case study.
3.2 Founder’s Personality
Dewang Cao, now a citizen of Hong Kong, was born in Fujian Province in 1946. As the founderof Fuyao Glass and an outstanding founding-generation entrepreneur in China, Dewang Cao, now
77 years old, serves as the chairman of Fuyao Glass Industry Group Co., Ltd. He also holds social
positions, including as member of the Consulting Committee of the All-China Federation of Industry
and Commerce, honorable president of the China Federation of Overseas Chinese Entrepreneurs,
and honorable president of the Fujian Charity Federation. Dewang Cao holds a bachelor’s degree as
his highest educational qualification, without overseas study and work experience.
Dewang Cao is the soul of Fuyao Glass, and since its incorporation, he has had a significant
impact on almost all major decisions made toward the development and growth of the firm. The
company website5 emphasizes his unwavering core position in Fuyao Glass, as well as his personalabilities, internal “leading” role, and external contributions to public social welfare, the Chinese
market, and China’s participation in international cooperations. In particular, the website proclaims
Dewang Cao’s remarkable contributions to charitable institutions, totaling up to RMB 16 billion.
Given our focus on founder overconfidence, we measured this indicator in Fuyao Glass from2000 to 2021 (Table 1). Founder overconfidence with respect to the favorable operating status of
Fuyao Glass (Over) was only justifiable in 2007—the only year when the profit forecast of Fuyao
Glass exceeded its actual profitability. As for the ratio of the remuneration of the top three managers
at the regulatory level to the total remuneration of Fuyao Glass (Over1/Over2), it was higher than
the industry median in 2005–2009, 2014–2016, 2020, and 2021, whereas the ratio of the
remuneration of the top three senior management personnel to the total remuneration of Fuyao Glass5

https://www.fuyaogroup.com/. https://www.fygi.com/about?lang=jp_JP15was higher than the industry median in 2005, 2007–2010, and 2016. Over1/Over2, an indicator offounder overconfidence, supported the overconfidence of Dewang Cao to a certain extent.

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Table 1: Succession of Fuyao Glass and Founder OverconfidenceThis table shows the annual distribution of the succession choice of Fuyao Glass and founder overconfidence
indicators (Over and Over1/Over2) from 2000 to 2021. Among them, “Succession” represents whether Hui Cao,son of Dewang Cao, holds the position of general manager of Fuyao Glass in the current year, with 1 = yes and 0= no. “Over” is an indicator of founder overconfidence based on the difference between profit forecast and actual
profitability. When the profit forecast is better than the firm’s actual profitability, Over = 1, and 0 otherwise. Over1
and Over2 represent the ratio of the remuneration of the top three managers at the management level and the ratioof the total remuneration of the top three senior management personnel to the total remuneration of the firm,
respectively. When the relative ratios are higher than the medians in the industry, Over1/Over2 = 1, and 0 otherwise.
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021

Succession
0
0
0
0
0
0
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1

Over
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0

Over1
0
0
0
0
0
1
1
1
1
1
0
0
0
0
1
1
1
0
0
0
1
1

Over2
0
0
0
0
0
1
0
1
1
1
1
0
0
0
0
0
1
0
0
0
0
0

3.3 Succession Plan of the Firm
Dewang Cao has had absolute influence in Fuyao Glass. He concurrently served as chairman
and general manager, two key positions in Fuyao Glass, until 2003. Since 2004, Dewang Cao has
served as chairman, whereas the position of general manager has been filled by different people.

17

Dewang Cao served as general manager shortly in 2015 and 2017, marking the arrangement of thesuccession plan of Fuyao Glass.
The succession plan adopted by Fuyao Glass is not a simple father-to-son handover. In
September 2003, Toyohashi Shigeo was appointed as the general manager of Fuyao Glass. Shigeo,a Japanese citizen and only two years younger than Dewang Cao, was a senior executive at Sekisui
Chemical Co., Ltd. before assuming the position of general manager at Fuyao Glass in June 2003.
He thus had plentiful of executive experience in the same industry as Fuyao Glass. His tenure as thegeneral manager lasted only one year and seven months. Hui Cao, son of Dewang Cao, took overthe position, which symbolized the completion of the intergenerational succession of Fuyao Glassby a direct relative of the founder. Hui Cao, born in 1970 and a citizen of Hong Kong, holds a
master’s degree with occupation as a senior economist. Hui Cao has overseas working experiencebut no academic research background. From 2005 to 2015, Hui Cao served as the general manager,
while Dewang Cao served as the chairman.
After 2015, Fuyao Glass had a new general manager. Hui Cao stepped down in July 2015 andsubsequently appointed as the vice chairman of Fuyao Glass in the succeeding month. Zuo Min took
over as the general manager, holding the role for 20 months. Zuo Min, born in 1966, is a Chinese
national with a PhD in accounting from Fudan University. He joined Fuyao Glass in 1989 as aninternally cultivated executive talent, and had previously served as CFO of Fuyao Glass before
becoming the general manager. Ye Shu subsequently took this position. Ye Shu, born in 1972 andan Australian citizen, joined the firm in 2003 and had previously served as the general manager of
Fujian Yaohua Industrial Village Development Co., Ltd., an affiliate of Fuyao Glass. Ye Shu wasalso an internally cultivated executive talent at Fuyao Glass.
Regarding the composition of the management of Fuyao Glass after succession, Dewang Cao
continues to serve as the chairman, and Hui Cao, as the vice chairman and executive director. Theinternally cultivated manager serves as the general manager. This is a typical structure of family
firms after completion of intergenerational succession within the family.

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The succession plan adopted by Dewang Cao involved long-term arrangement and cultivation.
Deeply influenced by traditional Chinese family values, Dewang Cao hoped that Hui Cao, his eldest
son, could inherit Fuyao Glass. Therefore, Dewang Cao had early on arranged for Hui Cao toparticipate in corporate management. Hui Cao began to work at the production line of Fuyao Glass
after graduation from the high school. In 1992, at only 22 years old, Hui Cao began to serve as thegeneral manager of Sanyi Development Limited, an affiliate of Fuyao Glass. He later served as thegeneral manager of Fuyao (Hong Kong) Limited from March 1994 to June 1996. In August 1998,
Hui Cao served as a director of Fuyao Glass and acquired a master’s degree in the US. After
graduation, he served as the general manager of Fuyao North America Incorporated and then, in
2005, the general manager of Fuyao Glass. After stepping down in 2015, Hui Cao was promoted to
the vice chairman position of Fuyao Glass. He also began a business on his own beyond Fuyao Glass,successfully establishing the “Triplex Series” industrial companies, including Fujian Triplex
Machinery Technology Co., Ltd. and Fujian Triplex Auto Service Co., Ltd. These pioneering
enterprises were later acquired by Fuyao Glass, and Hui Cao helped Fuyao Glass break new groundin the automotive field.
Sui (2021) previously analyzed the succession of authority of family firms based on the caseof Fuyao Glass, outlining the path taken by Hui Cao to establish his authority in Fuyao Glass. The
legitimate authority of Hui Cao as successor comes from the meticulous arrangements made by
Dewang Cao, including the continuity and adjustment of corporate internal governance andarrangement of controlling interests. Dewang Cao has fully supported Hui Cao in handling corporate
management issues, thus laying a foundation for the personal authority of Hui Cao in Fuyao Glass
based on his qualifications. As mentioned, Hui Cao resigned as the general manager to start his own
business in 2015. This path of entrepreneurial combination is consistent with the path through which
the second generation establish successor authority (Li et al., 2015). This experience played adecisive role in establishing Hui Cao’s absolute authority, especially personal leadership authority,
within Fuyao Glass.

19For Dewang Cao, the succession plan of Fuyao Glass was a balanced choice made inconsideration of multiple objectives, including traditional concepts, personal preferences, and thefirm’s long-term development. First, cultivating the eldest son as the successor accorded with thetraditional family concept that succession by the eldest son in the family could better ensure thelong-term succession of a family firm. Second, the outstanding abilities of Dewang Cao wereemphasized in the external publicity of Fuyao Glass. This, along with our indicators of founderoverconfidence (Over1/Over2) based on the relative ratio of senior managers’ remuneration,
indicated that Dewang Cao was indeed overconfident to a certain extent. Dewang Cao was inclined
to believe that Hui Cao possessed better personal abilities compared with others, including theinternally cultivated professional managers, and was more capable of serving as the successor of
Fuyao Glass. Hui Cao was always the first choice as the successor of Dewang Cao. Third, Dewang
Cao did not simply hand over the firm to Hui Cao. Instead, he arranged for Hui Cao to participate
in the operation of the family firm in a very early stage. When Fuyao Glass was facing the antidumping investigations in North America, Hui Cao was appointed as the general manager of Fuyao
North America Incorporated, which enabled him to gain practical experience and complete hisnatural transition in the family firm through his growth. Finally, Dewang Cao also considered theeldest son’s personal choices and development aspirations and did not simply restrict Hui Cao’s
personal development within Fuyao Glass. Dewang Cao cultivated senior management personnel
outside the family and then selected some of them to hold important executive positions in Fuyao
Glass when Hui Cao was starting his own business.
For Hui Cao, Fuyao Glass is not only a family business founded by his father but also an
important place for his professional development. During his cultivation and training as successor,
Hui Cao acquired not only wealth from his family firm but also valuable practical experience formanagement, which became a vital cornerstone for his personal development. The excellent
personal background of Hui Cao as well as his performance inside and outside Fuyao Glass also
contributed to the market image of Fuyao Glass.

20

The succession plan of Fuyao Glass not only satisfies the common motivation of achieving
long-term development of the family firm but also fulfills the individual motivation of realizing
personal achievements. This succession plan can be used as reference by other family firms withsimilar needs for succession during the establishment of succession plans.
3.4 Status of Corporate Management
Figures 1 and 2 show the operation status of Fuyao Glass from 2000 to 2021, highlighting thefirm’s industrial development path. Figure 1 shows the firm’s operating and market performance,and Figure 2, the capital and R&D expenditure.

Financial and Market Performance of Fuyao
Glass
0.8
0.6
0.4
0.2

OROS

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

0

TobinQ

Figure 1: Annual Operating and Market Performance of Fuyao Glass from 2000 to 2021
(OROS represents the annual operating margin of the firm; TobinQ refers to the Tobin’s Q of the firm in thecurrent year.)

Figure 1 indicates the stable operating performance of Fuyao Glass, with its operating margin
maintained at approximately 0.2. The operating margin peaked at approximately 0.26 in 2009, 2010,
and 2018. During Hui Cao’s tenure as general manager of Fuyao Glass from 2005 to 2015, the firm’s
operating margin hit the lowest point (lower than 0.1 in 2008) and then experienced a subsequent
increase (2009–2010). The operating profit in 2015, when Hui Cao resigned as general manager,
was slightly higher than 0.2. From 2019 to 2021, the operating margin was lower than 0.2, which21

may be attributed to the COVID-19 pandemic. The operating performance of the family firm wasaffected by industry cycles and macroeconomic conditions. Therefore, the data could not confirm
whether the succession of Hui Cao had a significant impact on the firms’ financial performance.
As for the market performance of Fuyao Glass, it declined from 2000 to 2021. Tobin’s Q
slightly increased to reach a peak of 0.7 from 2000 to 2003. After Dewang Cao stepped down as
general manager in 2003 and Toyohashi Shigeo took over, Tobin’s Q dropped to below 0.5 in 2009.
In 2015, this ratio further dropped to below 0.4 after Hui Cao resigned as general manager. Tobin’s
Q later began to increase, albeit insignificantly, maintaining a value between 0.4 and above 0.5. The
resignation of the founder and the successor within the family firm may have been a negative pieceof information for investors.

Capital and R&D Expenditure of Fuyao Glass
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1

TobinQ

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

0

Capex

Figure 2: Annual Capital Expenditure and R&D Expenditure of Fuyao Glass from 2000 to 2021
(R&D represents the ratio of R&D expenditure of the firm in the current year to the total assets of the firm;
Capex represents the ratio of capital expenditure of the firm in the current year to the total assets of the firm.)

Figure 2 shows the development path of Fuyao Glass from 2000 to 2021 based on capital and
R&D expenditure. Fuyao Glass began disclosing its R&D expenditure from 2009. The firm’s
expenditure was stable and accounted for less than 0.05 of the total assets. The capital expenditure
peaked from 2003 to 2004, and the ratio of the capital expenditure to the total assets was as high as
0.35. This figure then declined to below 0.2 owing to the reduction in the firm’s operating profit;

22

capital expenditure reached the lowest point in 2009, at 0.05 of the total assets. It then rebounded
and peaked again in 2014, when it accounted for 0.16 of the total assets. The capital expenditure of
Fuyao Glass has continued to shrink since the resignation of Hui Cao from the post of generalmanager in 2015. As of 2021, it was at around 0.05 of the total assets. Regarding the needs forindustrial expansion, the corporate policies of Fuyao Glass had been changed, and capital investment
was made before Hui Cao took over. The succession within the family occurred during the stable
operation of the firm rather than during a major industrial adjustment period.

4. Conclusion
We studied the case of Fuyao Glass case to elucidate the relation among founderoverconfidence, choice in family firm succession, and succession performance. Consistent with thefindings of Lu et al. (2021), traditional values increased the willingness of Dewang Cao to pick hiseldest son as his successor. Moreover, owing to his own high recognition of his abilities and his
confidence in the abilities of his eldest son, Dewang Cao believed that Hui Cao was the best choice
to be his successor. The practical succession plan adopted by Fuyao Glass is representative of thesuccession plans of traditional Chinese family enterprises, characterized by a focus on the cultivationof the eldest son as the core decision-maker, assisted by non-family member senior management
personnel. The current composition of the management of Fuyao Glass after succession—with
Dewang Cao still serving as the chairman, Hui Cao serving as vice chairman and executive director,
and an internally cultivated manager serving as the general manager—satisfies the common
motivation of achieving the long-term development of the family firm and the individual motivationof realizing personal achievements.
The implementation of Dewang Cao’s succession plan for Fuyao Glass showed no significant
impact on the firm’s operating performance. However, its Tobin’s Q dropped after the resignationof Dewang Cao in 2003 and Hui Cao in 2015, indicating that the firm’s investors recognized the23positive impacts of the founder and his successor on the development of the firm. Moreover, Fuyao
Glass’s innovations showed no significant changes from 2000 to 2021. Fuyao Glass only madechanges to its corporate policies regarding the needs for industrial expansion. It also made capital
investments before Hui Cao took over. Our findings suggest that succession within the family
typically occurs during a stable macroeconomic stage rather than during a major industrial
adjustment period.

Acknowledgments: This study was supported by the Maki Makoto Foundation (research no.
2018014). We would also like to acknowledge Editage for providing us with their English language
editing services.

24

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