Cash holdings in family firms: CEO identity and implications for firm value

• Author: Andrea Signori,Alfonso Del Giudice,Lorenzo Caprio
• Date: 01 March 2020
• DOI: http://doi.org/10.1111/eufm.12233
• Published date: 01 March 2020

Eur Financ Manag. 2020;26:386–415.wileyonlinelibrary.com/journal/eufm386

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© 2019 John Wiley & Sons Ltd.

DOI: 10.1111/eufm.12233

ORIGINAL ARTICLE

Cash holdings in family firms: CEO identity

and implications for firm value

Lorenzo Caprio

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Alfonso Del Giudice

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Andrea Signori

Dipartimento di Scienze dell’Economia e

della Gestione Aziendale, Università

Cattolica del Sacro Cuore, via Necchi 7,

20123, Milan, Italy

Correspondence

Alfonso Del Giudice, Università Cattolica

del Sacro Cuore, Dipartimento di Scienze

dell’Economia e della Gestione

Aziendale, via Necchi 7, 20123 Milan,

Italy.

Email: alfonso.delgiudice@unicatt.it

Funding information

Università Cattolica del Sacro Cuore

Abstract

We investigate the cash holdings policy of family firms

and examine potential value implications. Family firms

hold more cash than other firms, with an average

difference of 2.3% of total assets. This result is driven by

firms managed by heir CEOs. While the cash holdings

policy of first‐generation family firms is more sensitive

to firm risk, consistent with founders’increased risk

aversion, that of later‐generation firms is more sensitive

to information asymmetry and agency conflicts. Heir

CEOs’cash policies destroy value, as the marginal value

of an additional Euro suffers from a 38.3‐cent discount,

on average, relative to non‐family firms.

KEYWORDS

cash holdings, family firms, family generation, value of cash

JEL CLASSIFICATION

G30; G32; G35

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INTRODUCTION

The literature on cash holdings highlights several motivations for firms to hold cash, most

notably the agency (Jensen, 1986), precautionary (Opler, Pinkowitz, Stulz, & Williamson, 1999),

transaction (Miller & Orr, 1966), and tax (Foley, Hartzell, Titman, & Twite, 2007) motives. An

important factor that is likely to shape the relevance of each of these motivations is the firm’s

ownership structure. For instance, publicly traded firms hold significantly more cash than

private firms due to more severe agency conflicts (Gao, Harford, & Li, 2013). Among various

EUROPEAN

FINANCIAL MANAGEMENT

We thank John Doukas (Editor) and an anonymous referee for helping us to improve the quality of the paper. We also

thank Ettore Croci, Amedeo De Cesari, Halit Gonenc, and Sam Kolahgar for helpful comments and suggestions.

Università Cattolica del Sacro Cuore contributed to the funding of this research project and its publication.

types of shareholders, families have received considerable attention not only due to their

pervasiveness (Villalonga & Amit, 2010) but also because of their peculiarities as firm owners

(Burkart, Panunzi, & Shleifer, 2003), generating interesting implications in terms of cash

management. Still, the influence of family control over a firm’s cash holdings policy remains

relatively unexplored.

We identify three main theoretical arguments that justify our interest in how families handle

corporate cash holdings. First, families are more risk averse than other types of shareholders,

given their large and often undiversified investment in the firm (Faccio, Marchica, & Mura,

2011). This should lower their opportunity cost of holding cash for precautionary reasons.

Second, family firms tend to face higher costs of external financing due to the higher level of

information asymmetry perceived by the market, primarily caused by the self‐dealing tendency

and autonomous decision making of family members (Chrisman, Chua, & Litz, 2003) and

reluctance to voluntarily disclose corporate information (Chen, Chen, & Cheng, 2008). Third,

family firms are particularly vulnerable to agency conflicts between controlling and minority

shareholders due to the emphasis on noneconomic goals typically established by family owners

(Gómez‐Mejía, Haynes, Núñez‐Nickel, Jacobson, & Moyano‐Fuentes, 2007). Croci, Doukas, and

Gonenc (2011) show that these conflicts reflect in the financing decisions of family firms. This

creates the incentive to hold cash, over which family owners could have complete control and

discretion, rather than pay it out to shareholders (Faccio, Lang, & Young, 2001). This paper’s

first objective, therefore, is to investigate whether families manage cash differently from other

types of owners. All the above considerations lead to the prediction that family firms hold more

cash than non‐family firms.

While family firms are often referred to as a homogeneous category, complex dynamics are

at work within them. First, corporate decisions undertaken by family CEOs can sensibly differ

from those pursued by outside CEOs, even within the same family firm context (Amore,

Minichilli, & Corbetta, 2011). Outside CEOs are likely to be less risk averse due to their greater

exposure to market dynamics and they are less concerned with achieving noneconomic goals

typically sought by family members. Therefore, risk aversion and agency conflicts can be

decreased, leading to the prediction that family firms managed by an outside CEO hold less

cash than those managed by a family CEO.

Second, when family members serve as CEOs, generation plays a pivotal role (e.g., Miller, Le

Breton‐Miller, Lester, & Cannella, 2007). Although founders are typically characterized by

strong attachment to the firm, inheritance of control can be perceived as a birthright by heirs,

with the risk of leaving firm assets in the hands of inadequate managers. Such a situation would

exacerbate both information asymmetry and agency concerns, leading to the prediction that,

among family CEOs, heirs hold more cash than founders. These various incentives in managing

cash are likely to generate different implications for firm value. The literature on family firms

has extensively documented that heir‐managed firms tend to perform worse than founder‐

managed ones (Villalonga & Amit, 2006). However, the channels through which heir CEOs

destroy value are not clear. One of these channels could be a suboptimal use of cash. A second

objective of this paper is, therefore, to shed light on how cash holdings policies vary based on

whether the CEO is an outside professional or a family member (and, if so, of which generation)

and to investigate their consequences on firm value.

Using data from the Worldscope on the population of non‐financial firms listed in

continental Europe from 1997 to 2016 with at least $250 million in total assets at the beginning

of the sample period, we provide empirical answers to the following three research questions:

First, does the cash holdings policy of family firms differ from that of non‐family firms and, if

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