Chabela de la Torre

Do Family Firms Use Dividend Policy as a Governance Mechanism? Evidence from the Euro Zone

Manuscript Type. Empirical. Research Question/Issue. This study investigates whether family firms use dividend policy as a corporate governance mechanism to overcome agency problems between the controlling family and minority investors. We further account for deviations between ownership and control and consider the presence and identity of other large shareholders in family companies. Research Findings/Insights. Based on a sample of firms from nine Eurozone countries and using a panel data method, we find that family firms distribute higher and more stable dividends to alleviate expropriation concerns of minority investors. However, the higher dividend payments are mainly explained by family firms with no separation between the largest owners voting and cash flow rights and those with non‐family second blockholders. Theoretical/Academic Implications. We contribute to the literature by shedding light on how the family business model affects companies’ dividend preferences. Our research also highlights the importance of taking into account the identity of large shareholders, especially in a context in which concentrated ownership structures are commonplace. The reported differences in dividend policies between family and non‐family firms help to clarify the variant performances of family businesses found in previous studies. Practitioner/Policy Implications. Family firms should regard dividend policy as a governance tool that allows them to attract prospective investors and enlarge their shareholder base. Simultaneously, minority investors can benefit from family firms’ dividend decisions. Our evidence also suggests that European policy makers should lay the necessary foundations to prevent controlling families from adopting ownership structures that serve their own personal interests.

Effect of ownership structure on underinvestment and overinvestment: empirical evidence from Spain

This paper investigates how ownership affects the investment-cash flow sensitivity by taking into account the non-linearities of ownership with respect to firm value, and using a free cash flow index and a criterion for financial constraints to disentangle underinvestment and overinvestment. Interesting results are provided by estimating using the Generalized Method of Moments to eliminate the endogeneity problem. The alignment of interests between owners and managers and the monitoring by concentrated ownership both alleviate the sensitivity of investment to cash flow both in underinvestor and overinvestor firms. However, in the presence of controlling owners, underinvestment and overinvestment are exacerbated.

Capital Structure: New Evidence from the Ownership Structure

This paper provides theory and empirical evidence supporting a complementary perspective on capital structure based on corporate ownership structure. According to our ownership view, capital structure is partly determined by the incentives and the goals of those who are in control of the firm. Our results strongly support this view. As a consequence of managerial entrenchment and rent expropriation phenomena, self‐interested agents (entrenched managers and controlling owners) chose the capital structure most appropriate for their own best interest. Additionally, we find evidence of an interaction effect between managerial ownership and ownership concentration, in particular, the larger debt increments promoted by outside owners when managers are entrenched.

Why is Ownership Endogenous

A recently published paper by Gugler and Weigand (2003) addresses the problem of the endogeneity of ownership, but an unresolved question remains. Where does this endogeneity come from? It is shown that the main source of endogeneity is the simultaneity between ownership and value.

Does Family Control Shape Corporate Capital Structure? An Empirical Analysis of Eurozone Firms

This study investigates the relationship between family control and corporate capital structure considering the dynamic nature of the debt policy and the ownership structure of family firms. Our results show that the sensitivity of debt to fluctuations in cash flow is less pronounced in family firms and highlight that family control increases the speed of adjustment toward target debt. Four dimensions of the family business model explain these results: deviations of voting from cash flow rights, the presence of a second blockholder in the company, involvement of family members in management, and the generation in charge of the business. The weaker negative impact of cash flow on debt is driven by family firms with no control-enhancing mechanisms, companies with active family participation in management and family businesses that are still controlled by the first generation. By contrast, the more severe agency conflicts between owners and creditors in family firms with a second blockholder lead to more pronounced pecking order behaviour. Furthermore, the higher flexibility in corporate decision-making of family firms managed by the family and under the influence of the first generation explains why family companies are able to rebalance their capital structure faster.

Financial decisions as determinants of ownership structure: Evidence from Spanish family controlled firms

Purpose - The aim of this paper is to analyse how financial decisions influence corporate ownership structure of Spanish family and non-family controlled firms. Design/methodology/approach - The authors derived two models in line with financial theory, which have then been estimated by using a sample of Spanish companies. Panel data methodology and estimation by the generalized method of moments allow the unobservable heterogeneity to be eliminated and the endogeneity problem controlled. Findings - The main findings are as follows. First, increases in debt lead outside owners and managers to limit the risk they bear by reducing their holdings. Such reductions are also found in family controlled firms. Second, both outside owners and managers are encouraged to increase their stakes in the firm in view of higher dividends. This reaction is also observed in family controlled firms, and it is even stronger in the managers of family controlled firms. Third, outside owners in non-family firms increase their holdings when a new investment project is undertaken, whereas the reaction of family controlled firms is the opposite. The expected positive effect of investment on insider ownership is only observed in family controlled firms. Practical implications - When analysing the determinants of corporate ownership structure, the analysis should be controlled for family ownership. Originality/value - Overall, this paper contributes to the strand of literature on the determinants of corporate ownership structure in two ways: first, by focusing on the role played by financial decisions; and second, by accounting for family control.

Diversification: A Value-Creating or Value-Destroying Strategy? Evidence from the Eurozone Countries

In this paper, we provide evidence on how diversification strategy impacts on excess value in a sample of Eurozone firms by using the data panel methodology. Specifically, we study the effect of the levels and types of the product diversification on the premium or discount that diversified firms trade at. Preliminary results are consistent with the value-destroying expectations and show that diversified companies trade at a discount in the Eurozone countries. However, a more accurate analysis reveals that the relation between diversification and excess value is non-linear; that is, diversification strategy first creates value and then, after a certain breakpoint, destroys it, giving rise to an optimal level of diversification, pointing out to both benefits and costs of this strategy. Moreover, our results show that related diversification is more value-creating than non-related diversification, and that non-related diversification is likely to turn into a value-destroying strategy at lower levels than related diversification.

How do Managerial Entrenchment and Expropriation Affect Control Mechanisms

This paper proposes a new empirical approach that allows us to appropriately control for the non-linearities of ownership with respect to firm value when analysing how managerial entrenchment and expropriation affect the relations among control mechanisms. Unlike findings in previous US-based studies, which in general point to substitutability among mechanisms, our results show that control mechanisms (especially insider ownership, debt and dividends) are used in a complementary way by Spanish firms. In addition, this complementarity is only observed when the interests of managers and owners converge, but not when there are controlling owners - insiders or outsiders - whose interests need not coincide with those of minority shareholders. Therefore, managerial entrenchment and expropriation effects do influence the relationship among agency-cost control mechanisms.