Family control, agency conflicts, corporate cash holdings and firm value

Abstract

PurposeThis paper examines whether family control exerts any influence on corporate cash holdings in Indian listed firms. It also examines how this accumulated cash of family firms impacts firm value.Design/methodology/approachThe study uses dynamic panel data regression estimated using two-step system generalized method of moments (GMM) on S&P BSE 500 firms during 2009–2018 for testing the repercussions of family control on the cash levels of a firm. Further, fixed effects regression has been employed for the valuation analysis.FindingsEstimation results showed that family control negatively impacts cash holdings in Indian firms. Further, the cash accumulation by family firms adversely affects the market valuation of the firm. These findings signal a principal–principal (P-P) agency conflict in Indian family firms, i.e. friction between family owners and minority shareholders' interests. Minority shareholders fear that a part of the cash reserves will be used by family members for personal benefits. Thus, they discount cash reserves in family firms.Originality/valueThe study adds to the determinants of corporate cash holdings in emerging markets. To the best of the authors’ knowledge, this is the first study from India investigating family control as a determinant of cash policy. It sheds light on the P-P agency conflict in Indian family firms. P-P agency conflict is less researched in cash holdings literature as opposed to the principal–agent managerial disputes. Also, the study uses a more comprehensive definition of family control rather than just considering the ownership as used in prior cash holding research.

The underlying mechanisms of the relationships between corporate financial policies and firm value: flexibility and agency theory perspectives

“…In the same vein, Luo and Hachiya (2005), Asante-Darko et al. (2018) and Moolchandani and Kar (2021) documented a negative association between corporate cash holdings and firm value.…”

“…(2018) and Moolchandani and Kar (2021) documented a negative association between corporate cash holdings and firm value. Several lines of evidence (e.g.…”

The COVID-19 pandemic and family business performance

“…On the other hand, nonfamily firms are more flexible in adjusting employment levels and socially friendly initiatives up and down as they see fit. Nonfamily firms have higher cash holdings than family firms (Moolchandani & Kar, 2022 ). This allows them to view the firm’s personnel and socially friendly initiatives as variable expenses that can be ratcheted up or down as economic conditions warrant.…”

Superiority of non‐family firms in a developing market: Moderating role of international diversification

“…Despite the dominance of family firms across the world, it is interesting that the empirical evidence on the impact of the organizational form of family firms on firm performance is inconclusive, even indecisive whether family firms are more or less valuable than non‐family firms. Theoretically, prior research using the agency model of governance suggests that ownership concentration positively affects firm's value because it alleviates the conflicts of interest between owners and managers (Berle & Means, 1932; Burkart et al, 2003; Jensen & Meckling, 1976; Moolchandani & Kar, 2021). Demsetz & Lehn (1985) and Zellweger et al (2012) document that the managerial opportunism gets mitigated when ownership and management are combined.…”