Does family ownership structure affect investment-cash flow sensitivity? Evidence from Italian SMEs

The aim of this paper is to investigate whether the conclusion reached by previous studies (Andres, 2011; Pindado et al., 2011) about the benecial effect of family control on investment-cash flow sensitivity may be extended to the category of small and medium-sized enterprises. Small unlisted firms are more likely to face financing constraints than their listed counterparts: they face more asymmetric information problems and strictly adhere to the pecking order theory, therefore strongly preferring internal capital to external debt and equity issues. Family control, in this context, may further exacerbate the relevance of internal generated cash flow for investment purposes by amplifying agency conflicts between (i) controlling and minority shareholders, and (ii) owners and external investors. Moreover, due to families' desire to pass a financially stable company onto future generations, family businesses may be less willing to rely on too much external debt and capital. Both this facts may be further exacerbated by highly concentrated ownership structure and family management. Hence, I test the following hypotheses: (H1) Family ownership increases investment-cash flow sensitivity in SMEs; (H2) The higher investment-cash flow sensitivity of family businesses, as compared to non-family ones, is mainly due to the presence of family CEOs and concentrated ownership; (H3) Investment-cash flow sensitivity is a good proxy for SMEs financing constraints. By employing panel data methodology and estimating the empirical model through the Generalized Method of Moments (GMM), I strongly confirm all these hypotheses.