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This empirical research examines the effect of family control on firms' cash holding policy. Using a sample of Western European firms, we confirm the precautionary motive for holding cash as family-controlled firms' desire to perpetuate the family legacy for future generations motivates them to accumulate more cash than their non-family counterparts. We also show that, given family-controlled firms' long-term perspective, they focus on cash flow volatility rather than cash flow level. Finally, the relation between financing constraints and cash holdings is not homogeneous: financially constrained family-controlled firms hold higher levels of cash than financially constrained non-family firms. Overall, these results suggest that family firms' cash holding policy is the result not of a specific financial outcome but rather on the strategic objectives of the firm. [ABSTRACT FROM AUTHOR]

Given the predominance of family control in most European corporations, understanding how this type of ownership affects firms’ cash holding policy is important. The literature has yet to address this subject satisfactorily; therefore, we outline a way to model how family firms define their cash policy, specifically, the way in which they adjust their cash holding to an optimal level. We base our analysis on trade-off theory and the precautionary motive for holding cash. Our empirical results show that family firms adjust their cash holding level more aggressively than non-family firms, and, therefore, family firms are capable of achieving optimal cash holding faster and more efficiently than non-family firms. Further, we find that family firms have a heterogeneous cash policy; in particular, young family firms, financially constrained family firms, and family firms that operate in countries with strong investor protection adjust their cash holding more aggressively.

This study analyses the role of ownership as a good corporate governance mechanism. We study cross-national differences between companies with different level of investor protection. In addition, we account for the type of owner (young family vs. non-young family businesses) and the owner’s relationship with a second significant shareholder (monitoring vs. collusion). When the main owner has effective control over the firm (i.e., absolute control or less than absolute control but without the control of a second significant shareholder), the relation between ownership concentration and firm value is U-shaped. Our findings also suggest that the conflicts between majority and minority shareholders are weaker for companies with higher investor protection and young family-owned businesses.