Family Control, Pyramidal Ownership and Investment-Cash Flow Sensitivity: Evidence from an Emerging Economy

Abstract

We investigate the effect of pyramidal ownership and family control in investment-cash flow sensitivity of Brazilian firms using financial constraint indexes to a priori classify firms. For constrained firms, we find that family control does not directly influence the investment-cash flow sensitivity, while for unconstrained firms, Family control shows a negative effect in investment decisions. However, the active involvement of the controlling family in the board increases investment-cash flow of unconstrained firms, possibly aggravating agency problems. Regarding the pyramidal ownership, we provide evidences consistent with the idea of internal transfer of funds among firms belonged to the arrangement structure.

Family business and local development in Iberoamerica

“…However, when family involvement derives from ownership, the debt tends to be higher. In the context of Brazilian family firms, Pellicani et al (2019) find that family control does not directly influence investment-cash sensitivity. Finally, in Chile, Jara et al (2018) find that listed family firms provide more loans to related companies than their nonfamily counterparts.…”

The user cost of capital and corporate investment in the Latin American economies: a novel approach

“…Demir (2008) compares Mexican firms with Turkish firms and finds that investments are mostly driven by profits and the difference in rates of return between fixed investment and financial investments. Pellicani et al. (2021) find that in Brazil, investment–cash flow sensitivity for the family firm emerges at different levels for financially constrained and unconstrained firms.…”

“…Investments are studied for Turkey (G€ ul and Tas ¸tan, 2020;Demir, 2008;Gezici et al, 2019); for South Korea (Rousseau and Kim, 2008;Ameer, 2014;Shin and Park, 1999;Ro et al, 2017); for Vietnam (see O'Toole and Newman, 2017); for Thailand (see Sitthipongpanich, 2017); for cross-country samples including some emerging markets (see Francis et al, 2011;Hanazaki and Liu, 2007;Ameer, 2014). In addition, some studies examine the investment behavior of Latin American companies (Kandilov and Leblebicio glu, 2012;Jaramillo et al, 1996;Demir, 2008;Pellicani et al, 2021;Crisostomo et al, 2014;Hasan and Sheldon, 2016;Alvarez and Bertin, 2016;Leitner and Stehrer, 2013;Asiedu and Freeman, 2009;Ponticelli and Alencar, 2016;Bonomo et al, 2015). For example, Kandilov and Leblebicio glu (2012) examined the effect of trade liberalization on corporate investment for Mexico and concluded that trade liberalization positively affects investment in Mexico.…”

“…Although there is a large literature on emerging markets and Latin American countries (Xu and Xu, 2019;Chan et al, 2012a, b;Yu et al, 2020;Vijayakumaran, 2021;Fu and Liu, 2015;Lin and Bo, 2012;Ding et al, 2013;Sun and Yamori, 2009;Xu et al, 2013;Wan and Zhu, 2011;Hung and Kuo, 2011;Kuo and Hung, 2012;Tsai et al, 2014;Yeh and Lin, 2021;Hung and Tseng, 2009;Lensink et al, 2003;Ghosh, 2006;Kumar and Ranjani, 2018;Bhaumik et al, 2012;Ganesh-Kumar et al, 2001;George et al, 2011;Gupta and Mahakud, 2019;Saeed and Vincent, 2012;Srinivasan and Thampy, 2017;Gupta et al, 2021;Altaf and Shah, 2018;Ameer, 2014;G€ ul and Tas ¸tan, 2020;Gezici et al, 2019, O'Toole andNewman, 2017;Sitthipongpanich, 2017;Francis et al, 2011;Hanazaki and Liu, 2007;Ameer, 2014; for Latin America, see Alvarez and Bertin, 2016;Kandilov and Leblebicio glu, 2012;Jaramillo et al, 1996;Demir, 2008;Pellicani et al, 2021;Crisostomo et al, 2014;Hasan and Sheldon, 2016;…”

“…, 2013; Wan and Zhu, 2011; Hung and Kuo, 2011; Kuo and Hung, 2012; Tsai et al ., 2014; Yeh and Lin, 2021; Hung and Tseng, 2009; Lensink et al ., 2003; Ghosh, 2006; Kumar and Ranjani, 2018; Bhaumik et al ., 2012; Ganesh-Kumar et al ., 2001; George et al ., 2011; Gupta and Mahakud, 2019; Saeed and Vincent, 2012; Srinivasan and Thampy, 2017; Gupta et al. , 2021; Altaf and Shah, 2018; Ameer, 2014; Gül and Taştan, 2020; Gezici et al ., 2019, O'Toole and Newman, 2017; Sitthipongpanich, 2017; Francis et al ., 2011; Hanazaki and Liu, 2007; Ameer, 2014; for Latin America, see Álvarez and Bertin, 2016; Kandilov and Leblebicioğlu, 2012; Jaramillo et al ., 1996; Demir, 2008; Pellicani et al. , 2021; Crisostomo et al ., 2014; Hasan and Sheldon, 2016; Álvarez and Bertin, 2016; Leitner and Stehrer, 2013; Asiedu and Freeman, 2009; Ponticelli and Alencar, 2016; Bonomo et al ., 2015), to the best of the author's knowledge, no study has investigated the relationship between user cost of capital and corporate investment.…”