Agency problems and dividend policy in private family firms

Abstract

In this paper, we build on the theoretical literature to develop a framework that yields predictions on the payout policy of private family firms. We argue that two forces primarily drive dividend policy in private family firms: (1) non-value-maximizing behavior as described by Chen et al. (2005) and (2) a private family firm variant of the managerial entrenchment hypothesis. Our empirical analysis supports the predictions. Based on a subsample of 1180 Belgian private family firms for which ownership data are available, we find a significant positive relation between the payout and controlling shareholder ownership above 50%. This finding illustrates that large controlling shareholders are extracting a relatively high amount of resources out of the firm in the form of dividends. We also find that the payout is negatively related to the CEO power balance in the board of directors, measured as the combined effect of CEO duality and the number of board directors. The latter finding is consistent with more powerful CEOs enjoying more discretion over the use of the assets remaining within the firm compared to less powerful CEOs.