Family Control and Investment-Cash Flow Sensitivity: Moderating Effects of Excess Control Rights and Board Independence

Manuscript Type: Empirical Research Question/Issue: We explore the effect of family control on investment-cash flow sensitivity and disentangle the effects of agency problems of free cash flow and asymmetric information. Excess control rights and board independence may moderate the relationship between family control and investment-cash flow sensitivity by changing agency costs. Research Findings/Insights: Family control lessens investment-cash flow sensitivity by mitigating the problem of asymmetric information. Investment-cash flow sensitivity will be higher in family-controlled firms with excess control rights because Type II agency problems predominate. Family control may affect investment-cash flow sensitivity when firms lack independent directors. Having another blockholder in addition to the controlling family reduces the agency problem and improves the independent monitoring function of the board for family-controlled firms. Theoretical/Academic Implications: This study provides a better understanding of the relationship between family control and investment-cash flow sensitivity. It delineates the separate effects of agency problems stemming from free cash flow and asymmetric information and demonstrates that excess control rights and board independence can moderate the effect of family control on investment-cash flow sensitivity. We show the significant role another blockholder plays in internal governance mechanisms. Practitioner/Policy Implications: Investors can better gauge firm value by examining the type of company control and linkages between investment distortion and firm value. Policy makers can better understand how excess control and board independence act as mechanisms to worsen or mitigate the effects of family control. Managers can understand the effects of control type and board independence on the firm's financial constraints.