Cash holdings of small private family firms: evidence on the effect of generational evolution

Abstract

We present empirical evidence on the cash holdings determinants in the under-researched context of private family firms. Results suggest that family firms diverging from the single-owner-managed firm hold higher cash levels which originates in higher shareholder-manager agency costs e.g. free riding of family insiders on the controlling owner’s equity using the firm’s free cash flows. Moreover, descendant-managed firms hold higher cash levels compared to founder-managed firms due to higher debt agency costs. The descendant’s potentially limited capacities and opportunistic behaviour may negatively affect the firm’s ability to repay bank loans, decreasing loan availability and increasing the need for cash holdings.