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Liquidity and corporate governance: evidence from family firms

Author

Listed:
  • Yin Yu-Thompson
  • Ran Lu-Andrews
  • Liang Fu

Abstract

Purpose - This paper aims to perform empirical analysis to test whether less severe agency conflict between managers and controlling shareholders may improve family firms’ corporate and stock liquidity, compared to non-family firms. Design/methodology/approach - The authors use the ordinary least square and two-stage generalized method of moments regression analyses. They also use match-paired design for robustness check. Findings - Focusing on Standard & Poor’s 500 firms, the authors find that family firms are more conservative by hoarding more corporate liquid assets (as measured by accounting balance sheet liquidity ratios) than their peer non-family firms to prevent underinvestment from external costly finance. These family firms also exhibit higher level of stock liquidity and lower liquidity risk as measured by effective bid–ask spread than non-family firms. The results are consistent with the motivation that organizations (i.e. family firms in this study) whose shareholders can efficiently monitor that their managers are associated with higher level of corporate liquidity and stock liquidity, and lower level of liquidity risk. Originality/value - This study contributes to the literature on liquidity (both corporate liquidity and stock liquidity) and ownership structure, more broadly corporate governance. It provides insights into corporate and stock liquidity within a unique ownership context: family firms versus non-family firms. Family firms in the USA are subject to both Type I (agency problems arising from the separation of ownership and control) and Type II agency problems (agency conflict arising between majority and minority shareholders). It is an ongoing debate whether family firms suffer more or less agency problems from one type versus the other than non-family firms. The finding that family firms have higher corporate and stock liquidity is consistent with that family firms being subject to less severe agency conflict due to separation of ownership from control.

Suggested Citation

  • Yin Yu-Thompson & Ran Lu-Andrews & Liang Fu, 2016. "Liquidity and corporate governance: evidence from family firms," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 15(2), pages 144-173, May.
    • Handle: RePEc:eme:rafpps:v:15:y:2016:i:2:p:144-173
    DOI: 10.1108/RAF-03-2015-0039
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    Citations

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    Cited by:

    1. Tahir Akhtar & Mohammad Ali Tareq & Kashif Rashid, 2021. "Chief Executive Officers’ monitoring, board effectiveness, managerial ownership, and cash holdings: evidence from ASEAN," Review of Managerial Science, Springer, vol. 15(8), pages 2193-2238, November.
    2. Chakrabarti, Amit & Krishnan, Kaveri, 2021. "Change in Illiquidity of Family Firms with Institutional Pressure: Evidence from India," American Business Review, Pompea College of Business, University of New Haven, vol. 24(2), pages 173-197, November.

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