Family Control, Pyramidal Ownership and Investment-Cash Flow Sensitivity: Evidence from an Emerging Economy

ABSTRACT

We investigate the effect of pyramidal ownership and family control on the investment-cash flow sensitivity of Brazilian firms using financial constraint indexes to classify firms. For constrained firms, we find that family control does not directly influence the investment-cash flow sensitivity, while for unconstrained firms, family control has a negative effect on investment decisions. However, the active involvement of the controlling family on the board increases the investment-cash flow of unconstrained firms, possibly aggravating agency problems. Regarding pyramidal ownership, we provide evidence that is consistent with the idea of the internal transfer of funds among firms that possess the arrangement structure.

KEY WORDS:

• family control
• financial constraint
• investment-cash flow sensitivity
• pyramid

JEL:

• G30
• G32

Supplemental Material

Supplemental data for this article can be accessed on the publisher’s website.

Notes

1. See, for example, Shin and Park (1999) for Korean chaebol; George, Kabir, and Qian (2011) and Lensink, van der Molen, and Gangopadhyay (2003) for Indian firms; and Hoshi, Kashyap, and Scharfstein (1991) for Japanese keiretsu groups.

2. See Jensen (1986).

3. Level 1 requires better disclosure and information about insiders’ ownership, among other features. The major requirements for companies on Level 2 are that they have to comply with Level 1 requirements, preferred shareholders must have voting rights, minority common shareholders must receive equal treatment in the case of control transfers, and independent directors must compose at least 20% of the board. Firms listed on the Novo Mercado, the premium corporate governance segment, have to comply with the Level 2 requirements and the rule of “one share-one vote.”

4. See Table 1.

5. Andres (2011) find that the cash flow coefficient for family firms is not statistically different from zero for small firms and low-payout firms (both groups of financially unconstrained firms).

6. See Table 1.

7. Note that the CF*PD*(1-FD) variable is negative and significant.

8. See Tables S2.1-S2.6 in the supplementary material.

9. See Tables S3.1-S3.6 in the supplementary material.

10. See Tables S4.1-S4.4 in the supplementary material.

11. Matched firms are selected without replacement within the distance (caliper) of 0.001.

12. The results of all robustness checks that are commented above are provided in the supplementary material. See Tables S5.1-S5.2 in the supplementary material.

13. Devereux and Schiantarelli (1990), Gilchrist and Himmelberg (1995), and Almeida and Campello (2004) use firm size to distinguish financially constrained (small) firms from unconstrained (large) firms. For Schiantarelli (1996), “size is highly correlated with the fundamental factors that determine the probability of being constrained,” and argues that small firms usually are young and have short collateral and track records, which puts them at disadvantage when accessing external finance.

14. The correlation between the KZ index and firms’ size is negatively significant at 1% (ρ = −0.20). See Table S1 in the supplementary material.

15. Sorting the four groups according to their total asset average, WW_FUC > KZ_FUC > KZ_FC > WW_FC.