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Family ownership and free cash flow

Thitima Sitthipongpanich (Dhurakij Pundit University, Bangkok, Thailand)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 3 April 2017

1867

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.

Keywords

Citation

Sitthipongpanich, T. (2017), "Family ownership and free cash flow", International Journal of Managerial Finance, Vol. 13 No. 2, pp. 133-148. https://doi.org/10.1108/IJMF-06-2014-0088

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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