The role of agency costs and shareholder protection in family firms’ cash-holding decisions

Abstract

Purpose – This study analyzes the effects of country-level shareholder protection and agency costs on the cash-holding policies of family firms. Design/methodology/approach – Data were collected for 2, 159 European firms for the period 2010–2019. The authors estimate the model using the generalized method of moments. Findings – Agency costs are found to have a stronger effect than low country-level shareholder protection on decision-making related to cash-holding policies. In line with previous literature, the results show that the absence of agency costs between ownership and control results in holding more cash for the firms. In addition, family firms with a dominant shareholder and young firms hold more cash than family firms without a dominant shareholder and old firms, respectively. The study also finds that firms in countries with a low level of shareholder protection hold more cash than firms in countries with a high level of shareholder protection, in turn. However, the effect of agency costs outweighs the effects of low country-level shareholder protection. Originality/value – This study advances the literature on family firms by examining the interplay between ownership, governance and agency costs in shaping cash-holding decisions, particularly in the context of European firms with varying levels of shareholder protection. Additionally, it provides a valuable perspective by analyzing how different types of agency costs influence cash holdings in family firms, demonstrating that these costs have a stronger impact than country-level shareholder protection in determining corporate liquidity policies.