The cash flow sensitivity of cash in family firms : does the board of directors matter?

Purpose: The purpose of this paper is to shed light on the effect of French family control on the cash flow sensitivity of cash (CFSC). It also investigates the moderating effect of board of directors’ features on this relation. Design/methodology/approach: Based on a sample of French-listed companies from 2012 to 2014, the authors use GLS regression models on panel data estimated with robust standard errors, clustered at the firm level. Findings: The results show that family control is positively associated with the CFSC. This finding suggests that families are likely to hold more cash out of their cash flows for entrenchment and expropriation purposes. A further analysis shows that board size, independence and the two-tier board structure negatively affect the CFSC in family firms. Board efficiency is then a guarantee of minority shareholders’ interests against family expropriation risks in France. Research limitations/implications: These findings suggest that French family firms are likely to expropriate minority interests by extracting rents through their cash holding behavior. However, in the presence of high-quality board features, the relation turns negative, suggesting that the quality of the board is an efficient corporate governance device that is likely to monitor family corporate decisions. Originality/value: This paper extends previous research by investigating the moderating effect of board features on the relation between family control and the CFSC. The research provides a metric for agency problems that is the sensitivity of cash to cash flows and offers theoretical support for the agency argument of hoarding cash.