Corporate governance and cash holdings: Family versus non-family controlled firms

Abstract

We examine the impact of corporate governance on cash holdings and the interplay of family ownership on this relationship through static and dynamic panel estimation models. Composite indicator for the corporate governance based on several proxies related to corporate board structure and ownership is constructed using principal component analysis (PCA). Our evidence is based on a sample of 120 publicly listed non-financial firms from Pakistan Stock Exchange (PSX) over the period 2013–2017. The selected sample is further divided into family and non-family firms based on 10% or more ownership. We document the negative impact of corporate governance on cash holdings. The findings reveal that family ownership as a moderator weakens the impact of corporate governance mechanism on cash holdings. The analysis of individual proxies of corporate governance and cash holdings in the whole sample, as well as sub-sample, provides some new insights that family firms with more board size, board independence, and institutional shareholdings hold more cash as compared to non-family firms. The study theoretically supports the agency theory. The study suggests that individual market participants may make investment decisions thereby keeping in view the role of family ownership. The study also provides better insights to regulatory authorities to design policies in such a way that ensure the protection of minority shareholders as corporate cash holdings decisions are different in family and non-family firms.

Keywords

• cash holdings
• corporate governance
• family and non-family firms
• pakistan stock exchange