Abstract
In this study we examine the relation between firmâs financial structure and family ownership. We develop a theoretical model of the precautionary cash holdings. Our empirical results show that the fraction of a companyâs shares that are held by the founding family members or their descendants influences the use of cash and equivalents, dividend policy and debt structure of a firm. Our results are robust to different estimation methods and alternative model specifications. We find that family firms tend to rely less on long-term debt financing, pay fewer dividends and carry higher precautionary cash balances.
Highlights
Firms present an interesting platform for academic research
Extant literature has found evidence consistent with family firms creating value when the founder serves as CEO or Chairman, that family firms perform better than their non-family counterparts as measured by both accounting and market measures, enjoy a lower cost of debt, have better earnings quality and lower abnormal earnings, among other traits
There are two competing theories within the agency structure on the effect of founding family ownership on the demand and supply of earnings quality that have been the basis of academic research into the family firm structure: The entrenchment effect and the alignment effect
Summary
Firms present an interesting platform for academic research. Prior research has, in large part, provided evidence suggesting that the presence of founding family members as stakeholders and in management is an efficient and profitable ownership structure. The empirical investigation of the theoretical model shows that family firms do keep higher precautionary cash balances, pay lower dividends and rely less on long-term debt for their financing needs than non-family firms.
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