The cash flow sensitivity of cash in family firms: does the board of directors matter?

Abstract

Purpose The purpose of this paper is to shed light on the effect of French family control on the cash flow sensitivity of cash (CFSC). It also investigates the moderating effect of board of directors’ features on this relation. Design/methodology/approach Based on a sample of French-listed companies from 2012 to 2014, the authors use GLS regression models on panel data estimated with robust standard errors, clustered at the firm level. Findings The results show that family control is positively associated with the CFSC. This finding suggests that families are likely to hold more cash out of their cash flows for entrenchment and expropriation purposes. A further analysis shows that board size, independence and the two-tier board structure negatively affect the CFSC in family firms. Board efficiency is then a guarantee of minority shareholders’ interests against family expropriation risks in France. Research limitations/implications These findings suggest that French family firms are likely to expropriate minority interests by extracting rents through their cash holding behavior. However, in the presence of high-quality board features, the relation turns negative, suggesting that the quality of the board is an efficient corporate governance device that is likely to monitor family corporate decisions. Originality/value This paper extends previous research by investigating the moderating effect of board features on the relation between family control and the CFSC. The research provides a metric for agency problems that is the sensitivity of cash to cash flows and offers theoretical support for the agency argument of hoarding cash.

Managerial ability in founding-family firms: evidence from Indonesia

“…Moreover, founding-family shareholders are more likely to prevent managerial self-dealing to maintain reputation (Denis and Denis, 1994). Previous studies also argue that founding-family firms have a strong position of market share (Frank et al, 2012), cash flow (Guizani et al, 2018) and lower business complexity (Schmid et al, 2015). Demerjian et al (2012) suggest that firms with a strong position of market share, cash flow and lower business complexity are firm-specific factors that promote higher efficiency and less likely to need managers with higher ability.…”

“…Demerjian et al (2012) explain the ability of a firm to achieve higher performance comes from the efficiency of firm-specific factors (such as market share, free cash flow and business complexity) and manager-specific factors. Previous studies find that founding-family firms have a strong position of market share (Frank et al , 2012) and cash flow (Guizani et al , 2018) as well as lower business complexity (Schmid et al , 2015). When founding-family firms already have strong characteristics, it can increase higher efficiency; such as the strong position of market share and cash flow and lower business complexity; they do not need any managers with a higher ability to achieve great performance.…”

The Indirect Impact of Busy Directors on the Relationship of Family Structure and Cash Flow Sensitivity of Cash (Empirical Research in Indonesia’s Manufacturing Sector 2013-2017)

“…It is an expectation that the characteristics of the board of commissionaires (busy directors) can indirectly impact the relationship of family ownership structure and CFSC. So that the board's tool or oversight function of busy directors can help protect external investors and help in reducing the problem of expropriation on external shareholders and entrenchment of management, especially on behalf of minority shareholders (Guizani et al, 2018 7,6% 7,3% 7,5% 8,9% 9,6% 9,6% 9,7% 11,3% 11,1% 11,1% 11,8% 11,8% 6% 11% 0,0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017…”

“…Therefore, corporate cash is a crucial consideration for the company. If the company has excess cash, the company's policy that can be adopted is first to pay dividend obligations to shareholders, secondly to invest in profitable projects, and finally to pay interest on the debt and the principal of the end of period debt to third parties (Guizani, Lakhal, & Lakhal, 2018). Furthermore, if the company has too little corporate cash reserves, the company will tend to face financial distress to meet its short-term needs so that it will cause doubts from various relevant parties (stakeholders).…”