Cash holdings behavior of Canadian family firms

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Cash holdings behavior of Canadian family firms
Imen Latrous, Dr.
University of Quebec at Chicoutimi
LARIGO
The MacroJournals Conference on Business and Social
Science: New York 28-29 december 2015
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Corporate cash holdings has risen acrros the rich world in
recent years.
Japenese and south Korean firms are the world’s biggest
cash- holders ( The economist, 2014)
Non financial firms in the G7 countries in 2003-2004 have
accumulated $1.3 trillion of excess saving ( IMF, 2006).
Companies in industrial countries use their strong increase in
profits to acquire financial assets or to repay debt rather than
to finance new investment opportunities or to increase
dividends distributions to shareholders ( IMF, 2006).
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A recent study by IRIS (2015), reveals that, over 1990-2013,
non financial firms in Canada hold $604 billion of cash and
cash equivalents.
In 2011, the cash holding of Canadian firms was more than
32% of Canadian GDP (IRIS 2015).
The debate about an increased corporate cash holdings has
been almost based on data from large firms.
Little attention has been paid to the family firm’s cash
holdings.
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Many firms around the world are controlled by large family
blockholders (La Porta et al.1999; Faccio and Lang 2002; Claessens
et al. 2000; Anderson and Reeb, 2003)
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Family members are usually involved in firm’s management either as
CEOs or as directors.
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For Canadian firms, 32% are family-owned (King and Santor (2008)
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Studies of Canadian family-owned: Attig (2005) examines the
ownership of 478 firms crosssectionally for 1997, of which 63% are
family-owned firms.
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Family firms play an important role in Canada economies.
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Around half of the Canadian workforce is employed by a family
business, creating nearly 45% of Canadian GDP (Alderson (2011)).
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Undiversified family holdings.
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The desire to pass the firms onto their descendents.
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Family’s reputation (Anderson et al., 2003)).
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Family controlling shareholders may force firms to adopt policies that fit their own
interests at the expense of those of the minority shareholders (Yeh et al., 2001).
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The most important conflict of interests is between the family controlling
shareholders and the minority shareholders.
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In such a framework, corporate cash holdings can be influenced by preferences
and desires of the family controlling shareholders
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Family businesses are complex.
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The role of family ownership and control in corporate governance remains
controversial.
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The effect of family control and management
on corporate cash holdings policy of
Canadian firms.
We also explore the cash holdings behavior of
Canadian family firms before and during the
2008-2009 financial crisis.
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◦ The transactions costs motive
◦ The precautionary motive
◦ Agency motive
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The alignement effect (Anderson and Reeb (2003); Villalonga and Amit
(2006))
◦ The presence of controlling families can reduce agency problems
◦ Family shareholders hold a poorly diversified portfolio (Andersson and
Reeb, 2003)
◦ Significant specific human capital invested in family firm (La Porta et al.,
1999; Faccio and Lang 2002)
◦ Family reputation
◦ Family firm survival : Family firm as an asset to pass to family members or
their descendants
◦ Family shareholders tend to be more risk averse than non family
shareholders
◦ Family controlling shareholders deploy cash for valuable projects that
maximize shareholders value.
◦ Hypothesis 1: If family controlling shareholders reduce agency problems,
then we expect that family firms will hold less cash than non-family
firms
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The ‘ benefits of control’ hypothesis
◦ Family controlling shareholders exert dominant influence on the
firm’s decisions
◦ Wealth expropriation and private benefits of control extraction at
the expense of outside shareholders : (Cronqvist and Nilsson,
2003; Faccio et al., (2001), Bebchuck, 1999)
◦ Family shareholders retain high levels of cash to facilitate the
extraction of private benefits ( Liu et al.(2015)).
Hypothesis 2 : if Family controlling shareholders have strong incentives to
pursue private benefits and expropriate minority shareholders, then we
except that family firms hold more cash than non family firms.
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Cash holdings and financial crisis
◦ The conflict of interests between family and minority shareholders
might be more severe during financial crisis than in normal times.
◦ Due to the financial shock of the crisis, family controlling
shareholders tend to be more risk averse and are more likely to use
firm’s assets to meet a liquidity personal need.
◦ As a result, family controlling shareholders may reject or abandon
valuable projects and expropriate wealth from outside shareholders.
Hypothesis 3: Family controlled firms are likely to hold up more cash
reserves during a financial crisis relative to non family firms.
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Data
◦ We use a sample of 504 firms listed in Toronto Stock
exchange (TSX) over the period 2005–2010.
◦ 3024 firm-year observations
◦ The dependant variable, Cash holdings is the ratio of
cash and cash equivalents to the net assets of cash.
◦ Family firms definition: The largest shareholder is an
individual or member of the same family by either
blood or marriage and holding 20% and more of
voting rights (La Porta et al.(1999))
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Frequency
Percentage
330
10.91
Panel A: Controlling
shareholders’ identity
Dispersed ownership
Family
controlling 696
shareholders
Non family controlling 1998
shareholders
23.02
66.07
Panel B: Family
involvement in
management
FamCEO
582
83.62
OutsideCEO
114
16.38
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Variable
Non family
firms
Family
firms
P-value
Cash to net
assets
0.189
0.145
0.007***
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Variable
Non family firms Family firms
(Mean)
(Mean)
p-value
Cash to net
asset during
crisis (20092010)
0.20
0.005***
0.14
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Variable
Before
financial
crisis
(20052008)
During
financial
crisis
(20092010)
P value
Cash to net
assets
0.142
0.149
0.74
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Variable
FamCEO
OutsideCEO
p-value
Cash to net
assets
0.17
0.14
0.06*
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Family control and management have differential impacts on
corporate cash holdings.
Family firms are associated with a lower level of cash holdings
compared to non family ones: Reduce the agency costs of
cash holdings.
Nevertheless, firms placing family members as CEOs hold
more cash than firms having outside managers: Private of
benefits of control motive
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Family firms hold less cash than non family firms during
2008-2009 financial crisis.
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Family controlled firms tend to have the same level of cash
holdings before and during 2008-2009 financial crisis.
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Questions
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