Family ownership and free cash flow

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

Purpose: The purpose of this paper is to investigate the effect of family ownership on investment-cash flow sensitivity and on firm performance. Design/methodology/approach: The author uses panel data to examine the relationship between investment and cash flow and between family ownership and the firm performance of Thai listed firms from 2001 to 2008. To account for the endogeneity of the lagged dependent variable, the investment equation is estimated by the generalized method of moments, following Arellano and Bond (1991). Findings: The presence of family owners reduces the sensitivity of investment and cash flow. At low and high levels of family ownership, an increase in family shareholding leads to lower investment-cash flow sensitivity. In contrast, firms with medium family ownership levels have higher investment-cash flow sensitivity. Only at high levels of family ownership is firm performance positively related to family shareholding. Originality/value: The ownership levels of family shareholders affect the investment-cash flow sensitivity in an S-shaped relation, supporting the interest alignment and entrenchment effects. When family shareholders have high ownership incentives, their interest alignment reduces the agency costs of free cash flow problems and leads to higher firm performance.
Original languageEnglish
Pages (from-to)133-148
Number of pages16
JournalInternational Journal of Managerial Finance
Volume13
Issue number2
DOIs
Publication statusPublished - 2017
Externally publishedYes

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Free cash flow
Family ownership
Investment-cash flow sensitivity
Firm performance
Ownership
Cash flow
Shareholders
Alignment
Shareholding
Entrenchment
Design methodology
Owners
Generalized method of moments
Endogeneity
Incentives
Panel data
Agency costs

Cite this

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title = "Family ownership and free cash flow",
abstract = "Purpose: The purpose of this paper is to investigate the effect of family ownership on investment-cash flow sensitivity and on firm performance. Design/methodology/approach: The author uses panel data to examine the relationship between investment and cash flow and between family ownership and the firm performance of Thai listed firms from 2001 to 2008. To account for the endogeneity of the lagged dependent variable, the investment equation is estimated by the generalized method of moments, following Arellano and Bond (1991). Findings: The presence of family owners reduces the sensitivity of investment and cash flow. At low and high levels of family ownership, an increase in family shareholding leads to lower investment-cash flow sensitivity. In contrast, firms with medium family ownership levels have higher investment-cash flow sensitivity. Only at high levels of family ownership is firm performance positively related to family shareholding. Originality/value: The ownership levels of family shareholders affect the investment-cash flow sensitivity in an S-shaped relation, supporting the interest alignment and entrenchment effects. When family shareholders have high ownership incentives, their interest alignment reduces the agency costs of free cash flow problems and leads to higher firm performance.",
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Family ownership and free cash flow. / Sitthipongpanich, Thitima.

In: International Journal of Managerial Finance, Vol. 13, No. 2, 2017, p. 133-148.

Research output: Contribution to journalArticle

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AB - Purpose: The purpose of this paper is to investigate the effect of family ownership on investment-cash flow sensitivity and on firm performance. Design/methodology/approach: The author uses panel data to examine the relationship between investment and cash flow and between family ownership and the firm performance of Thai listed firms from 2001 to 2008. To account for the endogeneity of the lagged dependent variable, the investment equation is estimated by the generalized method of moments, following Arellano and Bond (1991). Findings: The presence of family owners reduces the sensitivity of investment and cash flow. At low and high levels of family ownership, an increase in family shareholding leads to lower investment-cash flow sensitivity. In contrast, firms with medium family ownership levels have higher investment-cash flow sensitivity. Only at high levels of family ownership is firm performance positively related to family shareholding. Originality/value: The ownership levels of family shareholders affect the investment-cash flow sensitivity in an S-shaped relation, supporting the interest alignment and entrenchment effects. When family shareholders have high ownership incentives, their interest alignment reduces the agency costs of free cash flow problems and leads to higher firm performance.

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KW - Family ownership

KW - Free cash flow

KW - Investment-cash flow sensitivity

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