The Global Financial Crisis, Family Control, and Dividend Policy

• Author: Najah Attig,Sadok El Ghoul,Omrane Guedhami,Narjess Boubakri
• Published date: 01 May 2016
• DOI: http://doi.org/10.1111/fima.12115
• Date: 01 May 2016

The Global Financial Crisis, Family

Control, and Dividend Policy

Najah Attig, Narjess Boubakri, Sadok El Ghoul,

and Omrane Guedhami∗

Using newly collected data on the ultimate ownership structure of publicly traded firms in nine

East Asian economies, we find that family control is negatively related to the dividend payout

ratio.Family firms are less (more) likely to increase (omit) dividends than non-family firms. These

negative associations between family firms and dividend policy are more pronounced during the

recent global financial crisis, suggesting that controlling families have incentives to expropriate

more firm resources during crises than in normal times.

Theory suggests that family owners, as large shareholders, may act as monitors and thus

reduce agency and information asymmetry problems stemming from the atomistic structure of

corporate shareholdings (Shleifer and Vishny, 1986). However, this conclusion may not hold

outside the United States, where institutions provide minority shareholders less protection and

hence expropriation is more likely to take place among family firms (Almeida and Wolfenzon,

2006).

The literature on the link between dividends and family control generally focuses on a single

country with mixed results. For instance, prior work shows that family firms tend to pay lower

dividends than non-family firms in Austria (Gugler, 2003), Germany (Gugler and Yurtoglu,

2003), Hong Kong (Chen et al., 2005), and the United States (Hu, Wang, and Zhang, 2008). In

contrast, Setia-Atmaja, Tanewski, and Skully (2009) and Isakov and Weisskopf (2015) find that

family firms exhibit higher dividend payouts in Australia and Switzerland, respectively. Pindado

and de la Torre (2008) find that family ownership is irrelevant to dividends in Spain. Overall, the

literature has little to say about cross-country variation in the association between dividends and

family ownership.1Given the prevalence of family firms around the globe (Anderson, Duru, and

Reeb, 2009, 2012; Carney and Child, 2013), examining the dividend policy of family firms in

a cross-country setting can improve our understanding of the value relevance of family control,

potentially adding insight into the mixed evidence at the single country level.

We thank an anonymousreviewer, Ruiyuan Chen, Figen Gunes Dogan(MFA discussant), Dusan Isakov, JacobKleinow

(SWFAdiscussant), Mark Mietzner (EFA discussant), Raghavendra Rau (Editor), and participants at the 2015 Eastern

Finance Association meetings (New Orleans), 2015 Southwestern Finance Association conference (Houston), and 2015

Midwest Finance Association Meeting (Chicago)for constructive comments and suggestions. We are gratefulto Richard

Carney for providing the ultimate ownership data. We appreciate generous financial support from Canada’s Social

Sciences and Humanities Research Council and excellent researchassistance from He Wang.

∗Najah Attig is an Associate Professor at Saint Mary’s University in Halifax, Canada. Narjess Boubakri is a Professor

at the American University of Sharjah in Sharjah, United Arab Emirates. Sadok El Ghoul is an Associate Professor at

the University of Alberta in Edmonton, Canada. Omrane Guedhami is an Associate Professorat the University of South

Carolina in Columbia, SC.

1Using data from Faccio, Lang, and Young (2001), Pindado, Requejo, and de la Torre (2012) find that in eurozone

countries, family firms distribute higher and more stable dividends than non-family firms.

Financial Management •Summer 2016 •pages 291 – 313

292 Financial Management rSummer 2016

Accordingly, we investigate the differences in dividend policy between family and non-family

firms in nine East Asian countries around the 2008-2009 global f inancial crisis. To conduct

our analysis, we use Carney and Child’s (2013) newly collected data on the ultimate ownership

structure of publicly traded firms in Asia. Family firms provide an ideal testing ground because

they are particularly vulnerable to unanticipated liquidity shocks (Almeida et al., 2012). Owners

of family firms are subject to signif icant idiosyncratic risk (Anderson and Reeb, 2003; Faccio,

Marchica, and Mura, 2011), mostly because family ownerstend to retain control over management

and hold highly undiversified investments in the firm.2Furthermore, incentives to expropriate

rents and extract private benefits of control are exacerbated during a crisis (Johnson et al., 2000).

Using 4,285 firm-year observations representing 923 unique fir ms from nine countries (Indone-

sia, Japan, Hong Kong, Malaysia, Philippines, Singapore, Thailand, South Korea, and Taiwan)

over 2006-2010, we first investigate the extent to which dividend payouts of family firms differ

from those of non-family firms. We find that across East Asian economies, family firms are as-

sociated with lower dividend payouts than non-family firms. This finding is robust to sensitivity

tests. In particular, our results remain unchanged when we employ propensity score matching

(PSM), use different samples, and consider alternative proxies for dividend payout policy. We

also find that the negative association between family control and dividend payoutholds only for

firms with more pronounced agency problems (proxied by free cash flows).

Next, we examine the impact of family control on changes in dividend policy and find that

family firms are less likely to increase dividends and more likely to decrease and omit dividends,

supporting the view that family firms are associated with more pronounced agency problems.

When we focus on the crisis period (2008-2009), we find that the negative association between

family-controlled firms and dividend payout ratios is more pronounced, complementing the

evidence in Lins et al. (2013) that controlling families tend to cut productive investmentor divert

resources to a greater extent during financial crises than during normal times. This result lends

support to Masulis, Pham, and Zein (2011), who show that family firms use their resources more

efficiently under normal business conditions.

We complete our analysis by examining how family firms employ the resources that are

not distributed to shareholders. The literature suggests that the negative association between

family firms and dividend payouts is due to precautionary motives aimed at preserving corporate

resources. Here firms build their cash reserves to alleviate f inancing frictions (Keynes,1936) and

buffer investmentsfrom temporar y financing shocks (e.g., Opler et al., 1999; Harford, Mansi, and

Maxwell, 2008; Brown and Petersen, 2011). Under this hypothesis, family firms are expected to

have higher cash reserves and investment. Our results show instead that even when profitability

increases, family firms actually reduce cash holdings and cut investment expenditures, suggesting

that the dividend policy of family firms cannot be explained by precautionary motives, but rather

is a manifestation of agency problems and extraction of private benefits.

The findings of this study imply that the corporate governance changes that have taken place

in East Asia since the 1997 financial crisis (Carney and Child, 2013) do not appear to have

constrained the corporate behavior of family firms during the most recent crisis. This conclusion

is consistent with the Faccio, Lang, and Young (2001) observation that “crony capitalism” in

East Asian economies is politically, rather than institutionally, determined. More broadly, our

evidence contributes to the literature on the relation between family control and dividend policy

in a cross-country sample, thereby adding to the debate on the extent to which family control

2Lins, Volpin, and Wagner (2013) argue that the survival of a family empire can be threatened by unexpectedliquidity

shocks. They state that an exogenous financial shock “moves firms out of equilibrium in a way that magnifies both the

benefits and costs of family control” (p. 2584).