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Abstract
Family owners differ from other types of owners due to the presence of socioemotional wealth (SEW) concerns. We take a closer look at this distinctive aspect by examining the impact of family control and influence dimension of SEW on the cash management choices of family firms, conceptualizing it as a mixed gamble choice. Our empirical analysis of 195 Italian firms listed on the Milan Stock Exchange between 2003 and 2015 shows that family firms derive more value and incur lower costs than nonfamily firms when they increase their cash holdings. We then delve deeper into family firms’ cash management choices by exploring how different levels of family control and influence as well as types of board governance arrangements moderate this relationship. The empirical results indicate that the positive effects of family ownership are more pronounced under a high level of family control and influence and with separation of the board chair and CEO positions.
Highlights
In recent years, corporate cash holdings have become a subject of extensive scrutiny by researchers (Deb, David, & O’Brien, 2017; Kim & Bettis, 2014; Li & Luo, 2020) as well as by practitioners, and corporate governance activists (Burgess, 2020; Powell, 2019)
In addition to verifying that both coefficients (ß1 and ß2) are statistically significant and reflect the expected sign (ß1 must be positive, and ß2 must be negative), we tested the joint significance of the cash holdings and cash holdings squared terms, using Sasabuchi (1980) test, and we estimated the turning point, which needs to be located within the data range, computed based on both the Fieller method and the Delta method (Haans, Pieters, & He, 2016; Lind & Mehlum, 2010)
Consistent with empirical evidence of difficulties associated with intergenerational succession (Miller, Steier, & Le Breton-Miller, 2003), our data show that older family companies are related to lower firm value, suggesting greater preferences toward restricted socioemotional wealth (SEW) in older vs. founder-led firms
Summary
Corporate cash holdings have become a subject of extensive scrutiny by researchers (Deb, David, & O’Brien, 2017; Kim & Bettis, 2014; Li & Luo, 2020) as well as by practitioners, and corporate governance activists (Burgess, 2020; Powell, 2019). Despite the large body of research on the performance effects of cash holdings, the extant literature dominated by the free cash flow hy pothesis (Jensen, 1986) is largely silent about the role of shareholder identity in shaping the optimal level of cash holdings. In this vein, it is implicitly assumed that the sole priority of shareholders is the maxi mization of financial returns.
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