Cash-Holdings of Single Family Office-Owned Firms

Abstract

Abstract Single-Family Offices (SFOs) have become crucial for transgenerational wealth management of business families. Many SFOs directly invest in firms, yet their role as firm owners remains understudied. This study explores how SFO ownership impacts the cash holdings of their portfolio firms, with a comparative analysis against firms directly owned by business families. Cash holdings are critical for firms as they offer the flexibility to seize entrepreneurial opportunities and increase resilience in times of crisis. However, when cash is held in excess, it can also signal managerial opportunism. Using agency theory as our theoretical framework, we propose that SFOs are less effective as monitors compared to families that have a direct ownership stake in their firm. This reduced oversight shall lead SFO-owned firms to maintain higher cash reserves than family-owned firms. We test our predictions by comparing the cash holdings of a hand-collected sample of 173 SFO-owned firms in the DACH (Germany, Austria, Switzerland) region with the cash holdings of matched family-owned firms. Our study has three main findings. First, it reveals that firms owned SFOs maintain higher cash reserves compared to those owned directly by business families. Second, we show that this effect is more pronounced when the SFO has divested from its original family business. Finally, a post-hoc analysis indicates that the impact of cash holdings on future firm performance is more ambiguous and tends to be more negative in SFO-owned firms than in family-owned firms. Overall, these results suggest potential inefficiencies in cash utilization under SFO ownership. Our study contributes to the small but growing literature on (single) family offices. It also extends the family firm cash holdings literature. Practical implications exist for business-owning families with a family office or seeking to set up one.