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Family control, agency conflicts, Family control

and corporate
corporate cash holdings cash holdings

and firm value

Ruchi Moolchandani and Sujata Kar
Department of Management Studies, Indian Institute of Technology Roorkee,
Roorkee, India Received 22 July 2020
Revised 26 November 2020
18 January 2021
Accepted 24 February 2021
Abstract
Purpose – This paper examines whether family control exerts any influence on corporate cash holdings in
Indian listed firms. It also examines how this accumulated cash of family firms impacts firm value.
Design/methodology/approach – The study uses dynamic panel data regression estimated using two-step
system generalized method of moments (GMM) on S&P BSE 500 firms during 2009–2018 for testing the
repercussions of family control on the cash levels of a firm. Further, fixed effects regression has been employed
for the valuation analysis.
Findings – Estimation results showed that family control negatively impacts cash holdings in Indian firms.
Further, the cash accumulation by family firms adversely affects the market valuation of the firm. These
findings signal a principal–principal (P-P) agency conflict in Indian family firms, i.e. friction between family
owners and minority shareholders’ interests. Minority shareholders fear that a part of the cash reserves will be
used by family members for personal benefits. Thus, they discount cash reserves in family firms.
Originality/value – The study adds to the determinants of corporate cash holdings in emerging markets. To
the best of the authors’ knowledge, this is the first study from India investigating family control as a
determinant of cash policy. It sheds light on the P-P agency conflict in Indian family firms. P-P agency conflict is
less researched in cash holdings literature as opposed to the principal–agent managerial disputes. Also, the
study uses a more comprehensive definition of family control rather than just considering the ownership as
used in prior cash holding research.
Keywords Family firms, Agency conflicts, Firm value, Corporate cash holdings, India
Paper type Research paper

1. Introduction
Cash reserves form a substantial portion of a firm’s assets. Imperfect capital markets make
external finance costly, thereby making corporate cash holdings vital for a firm. A firm
having sufficient cash can save transaction costs and capitalize on profitable projects when
external finance is expensive (Weidemann, 2018; Ozkan and Ozkan, 2004). Nevertheless,
holding cash is associated with an opportunity cost. A firm foregoes the returns which would
have been generated by investing it in profitable projects (Weidemann, 2018; Opler
et al., 1999).
Further, keeping substantial cash reserves may induce agency conflicts between
investors and managers, known as principal–agent (P-A hereafter) conflict. Managers can
stockpile cash for undertaking investments that maximize their personal interests instead of
maximizing shareholder value (Chakraborty et al., 2017; Jensen, 1986). This managerial
inclination toward overinvesting in projects reduces firm value (Dittmar and Mahrt-Smith,
2007; Jensen, 1986). Nevertheless, the presence of family shareholders can serve as a
meaningful governance instrument that can reduce P-A conflicts (Purkayastha et al., 2019;
Anderson and Reeb, 2003). However, it can cause a principal–principal (P-P) conflict if family
members act opportunistically, thus causing a disadvantage to minority shareholders
(Purkayastha et al., 2019; Young et al., 2008). International Journal of Emerging
Markets
In India’s case, P-P agency conflicts are more prominent due to the high presence of family © Emerald Publishing Limited
1746-8809
shareholders and a weak regulatory environment (Singla et al., 2014). P-P conflicts may result DOI 10.1108/IJOEM-07-2020-0828
IJOEM in cash expropriation by Indian family firms for personal benefits. In India, controlling
shareholders are often part of the management and board of directors (Rajverma et al., 2019).
They are responsible for taking the strategic decisions of the firm. Thus, family control may
affect the cash holding decisions of Indian firms. This motivates us to examine this issue in
India. To the best of our knowledge, no prior Indian study has considered family control as a
determinant of cash holdings. The existing literature on cash holdings from India is minimal
which examined financial factors (Maheshwari and Rao, 2017; Arora, 2019), corporate
governance (Narwal and Jindal, 2017), presence of bank directors on board (Chauhan et al.,
2018) and financial constraints (Ranajee and Pathak, 2019) as determinants of cash holdings.
Thus, this paper investigates if family control has any repercussion on the cash stockpiled by
Indian firms. In addition, it also examines how the cash accumulated by family firms is
viewed by minority shareholders, which thereby impacts the firm’s market valuation.
India is ideal for this kind of study as family-controlled firms form a critical pillar of many
Asian economies, including India (Young et al., 2008). A report on the family business in India
by Deloitte in 2013 said that 85% of all Indian companies are family businesses. According to
Credit Suisse Family 1,000, 2018 report, India ranks third in the top 1,000 family firms
worldwide. Further, the benchmark Indian indices Nifty 50 and BSE Sensex include 31 (62%)
and 16 (53%) family firms, respectively (Shinde, 2020). For this study, we define a family firm
if it satisfies any two of the following criteria: (1) family members have at least 20%
ownership in the firm; (2) a family member is also a part of the board of directors and (3) the
chairman of the board belongs to the controlling family (Singla et al., 2014). Based on this
definition, family firms constitute 72% of the sample considered for this study, thus
providing a large sample for statistical analysis. Further, the shareholding patterns remained
stable during the sample period of 2009–2018, which made it possible to categorize firms as
family controlled or nonfamily controlled with clarity. Lastly, the accounting standards are
well developed in India and are at par with the accounting standards followed in most of the
advanced nations that make comparisons easier.
The present paper has several features that make it distinct from prior studies and
outlines its contributions. First, the existing studies examine family control as a determinant
of cash holdings using samples from advanced nations (Dur
an et al., 2016; Liu, 2011; Ozkan
and Ozkan, 2004). This study examines this issue from an emerging market context using a
sample of Indian listed firms for the period 2008–2018. The cash policies of advanced nations
cannot be generalized for developing economies. Unlike advanced nations, most of the
emerging markets suffer from poor existence and enforcement of law and weak shareholder
protection (Khanna and Palepu, 2010). From an emerging market perspective, this issue has
been relatively less explored. We could find only a few studies focusing on family control
from China, which suggested larger cash holdings for Chinese family firms (Jebran et al., 2019;
Liu et al., 2015). However, Chinese family firms face a high risk of being taken over by
government firms (Liu et al., 2015). Further, one-child policy exacerbates the succession
problem in Chinese family firms. In contrast, Indian family firms consider their firm as an
asset to pass on to their heirs. Also, the state does not interfere in their operations. These
differences in Chinese and Indian family firms may result in different cash holding
preferences by family firms from these nations.
Ownership concentration and weak enforcement of investors’ protection norms
exacerbate P-P conflicts in Indian family firms (Singla et al., 2014). This increases the risk
of cash expropriation by controlling shareholders in India. Thus, investigating this issue
using a sample of Indian listed firms adds to the literature on family control as a determinant
of cash holdings.
Second, we do a comprehensive analysis of family firms’ impact on cash policy and firm
value by considering family presence through ownership and board. Thus, our categorization
of family firms is different from prior cash holding studies from other nations. Previous cash
holding studies have used ownership as the sole criterion for categorizing family firms Family control
(Jebran et al., 2019; Dur
an et al., 2016; Ozkan and Ozkan, 2004). Family firms can actively and corporate
control the firm by being part of the management and board or passively exert influence by
way of their ownership. Both types of controls impact the strategic decisions of a firm
cash holdings
(Ashwin et al., 2015). In most Indian family firms, family members hold board and managerial
positions, which gives them direct control over the firm’s decisions. This increases the risk of
cash expropriation in family firms. Thus, considering board presence along with ownership
enriches our definition of family firms in examining the cash holding decision.
Third, the findings of the study make it different from prior studies and thus highlight the
importance of institutional context while examining the determinants of cash holdings. Our
results differ from most previous studies which show higher cash accumulation by family
firms. For instance, high cash reserves in Chinese family firms act as a channel through which
controlling shareholders tunnel resources from listed firms (Jebran et al., 2019; Liu et al., 2015).
Among developed nations, a positive association was found between family control and cash
levels for firms in Europe (Dur
an et al., 2016) and the UK (Ozkan and Ozkan, 2004). These
results are attributed to the flexibility hypothesis and precautionary motive of cash holding.
The flexibility hypothesis posits that managers save cash to invest in the future. However, in
the Indian context, we find that family firms accumulate less cash, supporting the spending
hypothesis. The spending hypothesis posits that managers favor quick cash spending on
projects that benefit them rather than accumulating cash. Our findings are in line with Liu
(2011), who also found lower cash in US family firms and attributed this finding to the
spending hypothesis.
Lastly, the study adds to the agency debate on corporate cash holdings. It contends that in
emerging nations, having weak shareholder protection and dominant family control, family
members may extract private benefits out of the cash reserves of the firm. This indicates P-P
agency conflicts in such firms. As a consequence, minority shareholders value the cash
stockpiled by family firms negatively.
The analysis reveals low cash levels in Indian family firms. They have an average cash
holding of 4% of assets, which is substantially lesser than those of nonfamily firms with 10%
cash. Additional findings advocate that investors apprehend that the cash held by family
firms will be value destructive. These results support the spending hypothesis, positing that
self-interested managers tend to consume the cash quickly, resulting in overinvestment and
low cash reserves in such firms (Liu, 2011; Harford et al., 2008). Investors reflect their fear of
cash expropriation by family shareholders by discounting the value of cash in family firms
(Liu et al., 2015; Kalcheva and Lins, 2007). Overall, these findings support the existence of P-P
conflicts in family firms.
The remaining paper is organized as follows: Section 2 describes the institutional context;
Section 3 lays down the theoretical foundation, followed by literature review and hypothesis
in Section 4. Section 5 contains the research design, followed by results and conclusion in
Sections 6 and 7, respectively.

2. Institutional framework
Indian financial market comprises two national stock exchanges: Bombay Stock Exchange
and National Stock Exchange. The Companies Act, 2013, regulates the incorporation,
operation and dissolution of companies in India. It also governs the financial reporting and
disclosure practices of Indian listed firms. Additionally, Indian listed firms have to adhere to
securities regulations administered by the Securities and Exchange Board of India (SEBI).
SEBI safeguards shareholders’ interests and regulates the securities market. While India has
an efficient judicial system, it ranks poorly in the Rule of Law (Sarkar and Sarkar, 2012). This
advocates that shareholder protection regulations exist on paper but are poorly enforced
in India.
IJOEM Many of the large listed Indian firms are owned and controlled by the founding family.
Further, family members are often involved in the firm’s management and are part of the
board of directors. Family shareholding comprises individual stakes of the founder and his
family members, privately held firms and cross-holdings in other listed companies.
Intercompany cross-holdings form a major channel of family shareholding, enabling family
shareholders to have less equity ownership while having sufficient control over the
management. This concentrated family ownership along with weak enforcement of investor
protection norms in India exacerbates P-P agency conflicts in Indian family firms (Singla
et al., 2014). Cash has the highest chance of being expropriated by family shareholders for self-
gain due to the discretion in its use. This motivates us to examine the consequences of family
control on cash accumulation in Indian listed firms.

3. Theoretical framework
3.1 Cash holding theories
Cash holding theories can be broadly categorized into capital structure theories and agency
theory. These theories are based on the assumption of imperfect capital markets. Transaction
costs, market imperfections and information asymmetry make cash holding an important
strategic decision. The present study mainly focuses on agency theory to explain the cash
holdings of family firms in India. However, inclusion and results pertaining to the control
variables have been explained using capital structure theories.
3.1.1 Capital structure theories.
(1) Trade-off theory: This theory is based on the works of Modigliani and Miller (1963). It
suggests the existence of an optimal cash level that maximizes firm value. This
optimal cash level results from a trade-off between the perks and drawbacks of
accumulating cash. Any divergence from the optimal cash level reduces firm
valuation. The trade-off theory predicts that cash reserves are positively associated
with market-to-book ratio, R&D expenditure and cash flow volatility. While firm size,
leverage, capital expenditure, cash flow, dividends and net working capital are
negatively related to cash.
(2) Pecking order theory: This theory is based on the works of Myers and Majluf (1984).
According to this theory, a firm raises cash based on investment needs. The firm first
uses the internal sources of financing (cash). It then fulfills its cash needs with
external sources such as debt and equity when internal sources are insufficient. This
theory predicts a positive association of cash with firm size, cash flows and market-to-
book ratio. Further, it advocates a negative relation of cash with leverage, dividends,
capital expenditure and R&D expenditure.
3.1.2 Agency theory. Agency theory posits the existence of a dispute between shareholders
and managers in widely dispersed firms as surveillance on managerial actions is inadequate
(Tran, 2020; Jensen and Meckling, 1976). In such firms, managers can stockpile cash to
increase their discretion and use this cash to maximize their interests (Chakraborty et al.,
2017; Jensen, 1986). This is because cash can be expropriated at a lower cost in comparison to
other corporate assets (Manoel et al., 2018; Dittmar and Mahrt-Smith, 2007). In nations with
poor investor protection, managers find it easier to transform cash balances into
overinvestment in unprofitable projects (Tran, 2020; Akhtar et al., 2018).
Based on prior studies (Harford et al., 2008; Kuan et al., 2011), the agency problems of
holding cash can be explained with the following hypotheses:
(1) Flexibility Hypothesis: This hypothesis posits that future financial flexibility is
preferred by managers rather than overinvestments in the current period. Managers
 tend to stockpile cash to finance good investments when it is costlier to raise external Family control
funds. However, financial flexibility can be disadvantageous to the shareholders and corporate
when they have less effective control over managers because managers may use
excess cash reserves for deriving private benefits (Jensen, 1986). Thus, this
cash holdings
hypothesis implies that weakly controlled and risk-averse managers are expected
to hold higher cash reserves.
(2) Spending Hypothesis: This hypothesis posits that entrenched managers prefer to
invest in the present rather than stockpiling cash to maintain financial flexibility in
the future. Self-interested managers prefer to spend cash quickly in the present,
resulting in overinvestment in value-destroying projects. Managers are likely to
overinvest when they have more cash and are weakly controlled (Jensen and
Meckling, 1976). Thus, this hypothesis suggests a low level of cash in the firm.
(3) Shareholder Power Hypothesis: This hypothesis suggests that shareholders having
effective control over managers support cash stockpiling to avoid underinvestment
due to costly external finance. Thus, it predicts a rise in cash level, which can be
attributed to the alignment of interests and decreased agency conflicts.

3.2 Family control, agency conflicts and cash holdings

Controlling shareholders can reduce managerial discretion as well as P-A conflicts (Singla et al.,
2014; Jensen and Meckling, 1976). Agency disputes disappear in family firms as family owners
are often part of management or are closely related to the management (Rajverma et al., 2019).
This enables them to directly monitor the managers and mitigate managerial expropriation
(Ashwin et al., 2015). However, family control might create a conflict between family investors
and minority investors, referred to as P-P conflict (Jebran et al., 2019; Young et al., 2008). Access
to the firm’s private information and large shareholding position provides family owners an
incentive to expropriate minority investors (Liu et al., 2015; Shleifer and Vishny, 1997). Weak
enforcement of shareholder rights and high family ownership makes P-P conflicts more
problematic than P-A conflicts in Indian firms (Rajverma et al., 2019; Singla et al., 2014).
In total, two contrasting hypotheses can be used to explain the cash holdings of family
firms. The flexibility hypothesis advocates a positive relation between cash holdings and
family control. In case of family-controlled firms, managers have an incentive to hoard cash
as minority shareholders monitor them less. In contrast, the spending hypothesis advocates a
negative association between family control and cash holdings. Family managers tend to
consume the cash possessions to overinvest in projects that might not be fruitful for the firm.
Therefore, such firms hold less cash (Tran, 2020). Family managers prefer to use firm
resources for empire building by increasing firm size above the optimal level and engaging in
acquisitions for personal benefits (Jensen, 1986).

3.3 Family control, cash holdings and market valuation of the firm
Market imperfections make it important to keep optimal cash reserves which maximize firm
value (Azmat, 2014; Mart
ınez-Sola et al., 2013). A positive association between firm value and
cash indicates that cash will act as a buffer to invest in profitable projects when external
finance is costly (Drobetz et al., 2010). This supports the precautionary purpose of cash
accumulation. Contrastingly, a negative estimate of cash supports Jensen’s (1986) free cash
flow hypothesis, positing that managers tend to waste free cash flows. Managerial incentives
of wasting cash reserves on personally beneficial projects should eventually be reflected in
lower returns (Lin et al., 2016; Dittmar and Mahrt-Smith, 2007).
In the presence of agency conflicts, controlling shareholders spend a portion of cash reserves
for increasing personal welfare as opposed to creating firm value (Rajverma et al., 2019;
IJOEM Pinkowitz et al., 2006). Thus, minority shareholders are likely to value family firm’s cash at a
markdown as they do not derive the full benefits of cash held by the firm, thereby reducing firm
value (Liu et al., 2015; Pinkowitz et al., 2006). Further, the spending hypothesis suggests that
family members will consume the cash quickly by pursuing projects which benefit the family
(Liu, 2011; Harford et al., 2008). This will adversely impact the cash valuation, thereby leading to
a decline in the firm’s market valuation.

4. Literature review and hypothesis development

4.1 Family control, agency conflicts and cash holdings
The literature shows mixed evidence pertaining to the repercussion of family control on cash
accumulation. Liu (2011) found low cash hoarding in US family firms and attributed it to the
spending hypothesis. However, Ozkan and Ozkan (2004) found higher cash accumulation by
family firms in the UK. Caprio et al. (2020) and Dur
an et al. (2016) found similar results for
European firms. This was attributed to the precautionary motive of cash accumulation.
Jebran et al. (2019) found high cash in family firms in China. Kusnadi (2011) found a higher
cash hoarding behavior by family firms in Malaysia and Singapore. They attributed it to
higher agency conflicts in such firms. This higher cash accumulation supports the flexibility
hypothesis which suggests that managers accumulate cash to derive private benefits in the
future.
As discussed in the previous section, concentrated shareholding along with weak
enforcement of shareholder rights exacerbate P-P agency conflicts in Indian firms. In India,
family members tend to think that the firm belongs to them, and it is their right to take
decisions for the firm. Thus, they may spend the cash resources to take up projects which
benefit them personally. Liquid assets such as cash are more flexible and can be invested
easily into projects that benefit the controlling shareholders (Kalcheva and Lins, 2007;
Dittmar et al., 2003). Thus, basing our arguments on the existence of P-P agency conflicts in
Indian family firms and the spending hypothesis, we hypothesize that
H1. Family control has a negative repercussion on corporate cash holdings.

4.2 Family control, cash holdings and market valuation of the firm
The empirical literature suggests that weak protection of shareholders and agency conflicts
lower the market valuation of cash reserves (Pinkowitz et al., 2006; Kalcheva and Lins, 2007).
Harford et al. (2008) and Dittmar and Mahrt-Smith (2007) also found lower firm value in
weakly governed firms results from managerial decision of spending the cash flow on low
return projects. In the context of family firms, Liu (2011) found lower firm value in US family
firms and attributed it to the quick spending of cash by family members on personally
beneficial projects. Caprio et al. (2020) showed that shareholders discount the cash held by
family firms in European countries and attributed it to agency conflicts. Lin et al. (2016) and
Liu et al. (2015) found lower firm valuation in Chinese family firms. Kusnadi (2011) found
similar results for family firms listed in Malaysia and Singapore. These findings are
attributed to agency conflicts and low investor protection in these countries.
Investor protection is a key aspect to determine the amount of self-gain which can be
derived by controlling shareholders (Pinkowitz et al., 2006). Strong investor protection
reduces agency conflicts and enhances firm value (Gupta and Pathak, 2020). In contrast,
managers may find it easier to use cash reserves for overinvesting in low-return projects in
nations with weak investor protection (Tran, 2020; Akhtar et al., 2018). This managerial
inclination toward overinvesting in projects reduces firm value (Dittmar and Mahrt-Smith,
2007; Jensen, 1986). The investor protection norms are weakly enforced in India. Further,
Indian family firms suffer from P-P agency conflicts (Singla et al., 2014). This increases the
propensity of family firms to spend a part of their cash reserves for deriving private benefits. Family control
Thus, we hypothesize that minority investors doubt that the cash will be misused by Indian and corporate
family firms. Hence, they will assign less value to the cash accumulated by family firms,
which results in lower firm valuation.
cash holdings
H2. Cash holdings of family firms exert a negative impact on the market valuation of
the firm.

5. Research design
5.1 Data
The study uses a sample of listed firms included in the S&P BSE 500 index from 2009 to 2018
[1]. The data for this study have been obtained from Centre for Monitoring Indian Economy
(CMIE) Prowess database. Prowess provides the names of the individual and corporate
shareholders along with their ownership stake in the firm. However, family owners in India
have mostly indirect ownership stakes through intercompany cross-holdings. Thus, we had
to inspect the shareholding patterns of the companies having equity stakes in family firms to
ascertain whether family members also hold shares in that company. Further, we had to
manually identify family members on the board of directors from the information available
with Prowess. This complexity in the availability and collection of data on family ownership
and control leads us to limit our sample to a 10-year period starting from 2009. We exclude
financial companies and banks from the initial sample as they are administered by the
Reserve Bank of India (RBI) Act, 1934, and the Banking Regulation Act, 1949, respectively.
This leads to a reduction in firm size from 500 to 403. Further, firm years with missing data on
ownership and other financial variables were removed, leading to an unbalanced panel data
set. These criteria resulted in a final sample size of 361 firms with 3,322 firm-year
observations. The data for all the variables have been winsorized at 1% level to mitigate the
impact of outliers.

5.2 Variables
5.2.1 Dependent variable. The dependent variable for the investigation is defined as the sum
of cash and cash equivalents scaled by total assets (Ozkan and Ozkan, 2004; Bates et al., 2009);
it is denoted by CASH.
5.2.2 Independent variable. Prior studies examining the impact of family control on cash
holdings have considered just ownership to define family firms. Liu et al. (2015) considered
family firm as a dummy variable for Chinese listed firms, which equals 1 if family ownership
exceeds 20%. Kusnadi (2011) used a similar definition for firms listed in Malaysia and
Singapore. Ozkan and Ozkan (2004) defined family firms if family ownership exceeds 10% for
UK listed firms. Jebran et al. (2019) used family ownership percentage to categorize family
firms in China. However, according to Anderson and Reeb (2003), “differences in ownership
levels may not represent the influence that family members exert on the firm.” Shleifer and
Vishny (1997) suggested that the potential to obtain private benefits is greater in firms having
family members on board even if family ownership is less. Thus, following Singla et al. (2014),
the study defines a firm to be family firm if it satisfies any two of the following three criteria:
(1) the family members have a minimum ownership stake of 20% in the firm; (2) minimum one
family member is part of the board of directors; (3) a family member also happens to chair the
board. Based on these criteria, family firm is a dummy variable that takes the value 1 if it is a
family firm and 0 for nonfamily firms.
The family ownership stake includes direct stakes of individual family members and
indirect stakes through intercompany cross-holdings. To identify family members on board,
we first identify the family owner. Family owner has been identified as the person having the
IJOEM largest equity stake who is listed as the promoter of the company. Next, we identify family
members on board. For this, we obtained details of board members along with their promoter/
nonpromoter status from Prowess. All promoter directors having the same last name as that
of the family owner have been considered as family members.
5.2.3 Control variables. Following previous studies, the study includes the following firm-
specific control variables:

(1) Firm size (SIZE): Trade-off theory suggests that large firms may find it easier to raise
external finance at a lower cost due to economies of scale. Thus, they are expected to
hold less cash. Contrarily, pecking order theory suggests that large firms can
accumulate more cash as they may generate larger cash flows.
(2) Leverage (LEV): Both trade-off and pecking order theories suggest a negative
relationship between LEV and CASH. According to trade-off theory, highly leveraged
firms tend to keep large cash reserves to decrease the likelihood of financial distress.
Pecking order theory suggests that firms prefer to hold cash to finance investments
and raise debt when internal funds are not sufficient.
(3) Net working capital (NWC): According to trade-off theory, firms having more liquid
assets are likely to accumulate less cash reserves. Firms can use their noncash liquid
assets as a substitute for cash holding.
(4) R&D expenditure (R&D): Trade-off theory argues that firms having high R&D
expenditure may prefer to hold more cash to reduce their risk against possible losses.
In contrast, pecking order theory considers R&D costs as investments undertaken
using cash resources, thus suggesting a negative relationship with cash holding.
(5) Dividend (DIV): Trade-off theory argues that a dividend paying firm can cut back
dividends to raise the required funds. Pecking order theory suggests that firms that
pay more dividends should have less cash.
(6) Capital expenditure (CAPEX): Pecking order theory suggests that CAPEX reduces
cash holdings. Trade-off theory suggests that capital expenditures generate new
assets that improve the earning and borrowing capacity of the firms. Thus, it reduces
the cash requirements by increasing the cash flows of the firms. Thus, both theories
suggest a negative relation between CASH and CAPEX.
(7) CF volatility (VOL): Trade-off theory suggests that firms pile up cash balances due to
increased riskiness in cash flows.
(8) Market-to-book ratio (M2B): Consistent with the trade-off theory, firms having more
growth opportunities keep more cash to avoid foregoing profitable investment
opportunities because of cash shortage. Pecking order theory also suggests that good
investment opportunities raise the demand for stockpiling cash.
The definition of all the variables is given in Table 1.

5.3 Empirical models

5.3.1 Family control, agency conflicts and cash holdings. The investigation adopts Opler et al.’s
(1999) model for estimating the cash reserves of a firm. Their model predicts the target level of
cash based on firm-specific factors identified from cash holding theories. The explanatory
variables used in this model serve as the base for existing cash holding studies. The model
assumes that a firm’s cash levels adjust to the target level immediately. However, Ozkan and
Ozkan (2004) argued that transaction and other costs possibly delay the adjustment of cash to
Variable Symbol Definition Source
Family control
and corporate
Cash CASH Cash and cash equivalents scaled Ozkan and Ozkan (2004); Bates et al. cash holdings
by total assets (2009); Liu et al. (2015); Maheshwari and
Rao (2017)
Family firm FAMILY Dummy variable 5 1 for family Singla et al. (2014)
firms, 0 for nonfamily firms
Firm size SIZE Natural logarithm of total assets Opler et al. (1999); Ozkan and Ozkan
(2004); Bates et al. (2009); Kuan et al.
(2011); Liu et al. (2015); Maheshwari and
Rao (2017); Ranajee and Pathak (2019)
Leverage LEV Total debt divided by total assets Opler et al. (1999); Ozkan and Ozkan
(2004); Bates et al. (2009); Kuan et al.
(2011); Liu et al. (2015); Maheshwari and
Rao (2017); Ranajee and Pathak (2019)
Net working NWC Current assets – current liabilities Ozkan and Ozkan (2004); Bates et al.
capital – cash and cash equivalents (2009); Maheshwari and Rao (2017);
divided by total assets Ranajee and Pathak (2019)
Research and R&D Ratio of research and Opler et al. (1999); Bates et al. (2009);
development development expenditure to sales. Kuan et al. (2011); Maheshwari and Rao
expenditure If the research and development (2017)
expenditure is not given for a year,
it has been assumed to be 0
Dividend DIV Dummy variable 5 1 in years Opler et al. (1999); Kalcheva and Lins
when a firm pays dividend, else 0 (2007); Bates et al. (2009); Kuan et al.
(2011); Maheshwari and Rao (2017);
Ranajee and Pathak (2019)
Capital CAPEX Difference in net fixed assets Bates et al. (2009); Liu et al. (2015);
expenditure compared to previous Maheshwari and Rao (2017)
year þ depreciation divided by
total assets
Cash flow CF Earnings after interest, dividend Ozkan and Ozkan (2004); Bates et al.
and tax but before depreciation (2009); Liu et al. (2015); Maheshwari and
scaled by total assets Rao (2017)
Cash flow VOL SD of a firm’s cash flow for the Ranajee and Pathak (2019)
volatility past five years
Market-to-book M2B Book value of assets – book value Ozkan and Ozkan (2004); Bates et al.
ratio of equity þ market value of equity (2009); Kuan et al. (2011); Liu et al. Table 1.
divided by book value of assets (2015); Maheshwari and Rao (2017) Definition of variables

the desired level. Therefore, following his study, we incorporate lagged cash holdings as a
regressor for testing the dynamic nature of cash adjustment to the target level. This forms our
baseline regression equation called model 1, shown in equation (1).
CASHit ¼ α þ β1 CASHit−1 þ β2 SIZEit þ β3 LEVit þ β4 NWCit þ β5 R&Dit
(1)
þ β6 DIVit þ β7 CAPEXit þ β8 CFit þ β9 VOLit þ β10 M2Bit þ β11 t þ εit

To test if family ownership and control influence cash levels, we include the family dummy in
equation (1) and call it model 2, as shown in equation (2).
CASHit ¼ α þ β1 CASHit−1 þ γFAMILYit þ β2 SIZEit þ β3 LEVit þ β4 NWCit þ β5 R&Dit
þ β6 DIVit þ β7 CAPEXit þ β8 CFit þ β9 VOLit þ β10 M2Bit þ β11 t þ εit
(2)

Lastly, as a robustness check, the study considers an alternate static model of cash holdings
and applies fixed effect and random effect models to verify the findings. The static model
IJOEM assumes that cash adjusts to the target level immediately. Thus, lagged cash is excluded from
equation (2), which leads to model 3 in the following equation (3).
CASHit ¼ α þ γFAMILYit þ β2 SIZEit þ β3 LEVit þ β4 NWCit þ β5 R&Dit
(3)
þβ6 DIVit þ β7 CAPEXit þ β8 CFit þ β9 VOLit þ β10 M2Bit þ β11 t þ εit

In the above equations, CASHit indicates cash reserves of firm i in year t; t is the time trend
and εit is the error term. Applying ordinary least squares (OLS) for estimating equations (1)
and (2) will not be appropriate as the lagged dependent variable is endogenous and will be
correlated with the fixed effects in the error term. Thus, model 1 and model 2 are estimated
using the two-step system generalized method of moments (GMM) estimators. These
estimators are well suited for dynamic panel data and provide consistent estimates even
when fixed individual effect, heteroscedasticity and first-order autocorrelation are present
(Roodman, 2009). These estimators have been widely utilized in cash holding studies (Manoel
et al., 2018; Dur
an et al., 2016; Ozkan and Ozkan, 2004).
The investigation treats all variables as endogenous. The estimation makes use of lagged
values of the regressors starting from lag t-1 to t-3 as instruments. The study reports AR (2)
test for testing second-order serial correlation in the error term. Lack of second-order serial
correlation is necessary to generate consistent estimates. Hansen J statistic has also been
reported, which indicates whether the instruments used are valid or not (Roodman, 2009). The
null hypothesis states that the instruments are jointly uncorrelated with the disturbance.
5.3.2 Family control, cash holdings and firm valuation. To confirm the presence of P-P
agency conflicts in Indian family firm, the study examines how the cash accumulated by
family firms impacts firm value. The study employs Fama and French’s (1998) valuation
regression to investigate the impact of cash holdings of family-controlled firms on market
valuation. This model links firm value with firm characteristics and has been widely used by
many authors for estimating firm value (Kusnadi, 2011; Bates et al., 2009; Pinkowitz et al.,
2006). To understand how cash alters the market value of a firm, assets are broken into cash
and noncash parts. Further, we add the family variable and its interaction with cash in the
valuation model. We call it as model 1, which is stated below:
MVit ¼ α þ β1 dCashit þ β2 Familyit þ β3 Familyit 3dCashit þ β4 dCashitþ1 þ β5 Eit
þ β6 dEit þ β7 dEitþ1 þ β8 dNAit þ β9 dNAitþ1 þ β10 RDit þ β11 dRDit
(4)
þ β12 dRDitþ1 þ β13 Iit þ β14 dIit þ β15 dIitþ1 þ β16 Dit þ β17 dDit
þ β18 dDitþ1 þ β19 dMVit þ β20 t þ εit

Alternately, we replace the lead and lag variable of cash with the level of cash following
Pinkowitz et al. (2006). With this modification, the cash coefficient computes firm value’s
sensitivity in proportion to a one rupee rise in cash. This forms our model 2, which is
expressed as
MVit ¼ α þ β1 Cashit þ β2 Familyit þ β3 Familyit 3Cashit þ β4 Eit þ β5 dEit
þ β6 dEitþ1 þ β7 dNAit þ β8 dNAitþ1 þ β9 RDit þ β10 dRDit
(5)
þ β11 dRDitþ1 þ β12 Iit þ β13 dIit þ β14 dIitþ1 þ β15 Dit þ β16 dDit
þ β17 dDitþ1 þ β18 dMVit þ β19 t þ εit

To further confirm our results, we follow Dittmar and Mahrt-Smith (2007) by using the level
of excess cash in place of the actual cash as an independent variable. Excess cash refers to the
cash stockpiled over and above the optimal cash necessary for operations and investments.
We use Opler et al.’s (1999) model for predicting optimal cash. The analysis uses a subsample
of firm years having positive excess cash, which is calculated by subtracting optimal cash
from the total cash of a firm. Managers are less inclined to squander cash required for
operational purposes. Thus, excess cash has a higher chance of being wasted as suggested by Family control
Jensen (1986). This gives our model 3, which takes the form: and corporate
MVit ¼ α þ β1 ExCashit þ β2 Familyit þ β3 Familyit 3ExCashit þ β4 Eit þ β5 dEit cash holdings
þ β6 dEitþ1 þ β7 dNAit þ β8 dNAitþ1 þ β9 RDit þ β10 dRDit þ β11 dRDitþ1
þ β12 Iit þ β13 dIit þ β14 dIitþ1 þ β15 Dit þ β16 dDit þ β17 dDitþ1 þ β18 dMVit þ β19 t þ εit
(6)

The variables in the above equations are scaled by total assets; d indicates change in a
variable’s value between two consecutive periods, e.g. dEit 5 Eit – Eit–1 and dEi,tþ1 5 Eitþ1 –
Eit; MV is the market value of the firm which is the sum of the book value of debt and the
market value of equity; Cash is the amount of cash and cash equivalents; E is earnings before
interest, tax and dividend; NA is noncash assets; RD is research and development
expenditure; I is interest expense; D is dividends paid; t is time trend and ε is the error term.

6. Results
This section provides descriptive statistics, correlation analysis and regression results.
Regression results are presented in two subparts. The first subsection shows how family
control affects the cash reserves of Indian firms. The next subsection presents how the cash
held by family firms affects the market valuation of the firm.

6.1 Descriptive statistics and correlation analysis

Table 2 displays descriptive statistics for the entire sample, along with two subsamples of
family- and nonfamily-controlled firms. Indian firms, on average, hold 5.7% of their assets as
cash reserves. Ranajee and Pathak (2019) found an average cash holding of 8.2% for Indian
listed firms. This difference in the level of cash is due to the difference in the measurement of
the variable. They measured cash as a ratio of noncash assets, while we consider cash
holdings as a percentage of total assets. The cash holdings of Indian firms are substantially

All firms Family firms Nonfamily firms

N 5 3,322 N 5 2,376 N 5 946
Mean Median Std. dev. Mean Median Std. dev. Mean Median Std. dev.

Dependent
variables
CASH 0.057 0.020 0.096 0.040 0.016 0.71 0.102 0.048 0.131
Independent
variable
FAMILY 0.715 1.00 0.451
Control
variables
SIZE 10.405 10.266 1.451 10.208 10.104 1.392 10.900 10.631 1.478
LEV 0.272 0.253 0.234 0.306 0.310 0.226 0.185 0.050 0.233
NWC 0.048 0.036 0.167 0.043 0.034 0.164 0.061 0.043 0.173
R&D 0.015 0.001 0.122 0.018 0.001 0.144 0.006 0.001 0.015
DIV 0.896 1.00 0.306 0.895 1.00 0.307 0.897 1.00 0.304
CAPEX 0.054 0.036 0.072 0.058 0.041 0.076 0.046 0.029 0.057
CF 0.108 0.100 0.086 0.107 0.099 0.088 0.112 0.101 0.081
VOL 0.039 0.026 0.071 0.041 0.026 0.081 0.035 0.026 0.038 Table 2.
M2B 2.715 1.868 2.878 2.615 1.811 2.865 2.966 1.993 2.896 Descriptive statistics
IJOEM lower than Taiwanese firms (13%) and Chinese firms (18%), as reported by Kuan et al. (2011)
and Jebran et al. (2019), respectively.
Family firms constitute about 72% of our sample. A considerable variation exists in the
mean cash levels of Indian family and nonfamily firms. The average cash holding of family
firms is 4%. This is remarkably lower than the cash balances of nonfamily firms at 10% of
assets. This remarkable difference in the cash holdings of family firms and nonfamily firms
indicates that family control might influence the cash holdings of Indian firms.
Table 3 presents the correlation matrix and variance inflation factors (VIFs) for all the
variables. Dividend, cash flow, cash flow volatility and market-to-book ratio are positively
correlated with cash. While family control, firm size, leverage, net working capital, R&D
expenditure and capital expenditure have an inverse association with cash. The associations
are mostly similar to previous Indian studies (Arora, 2019; Maheshwari and Rao, 2017). The
VIF statistic is below 2 for all the variables. Thus, there seems to be no issue of
multicollinearity (Kutner et al., 2004, p. 409).

6.2 Regression results

6.2.1 Family control, agency conflicts and cash holdings. Table 4 reports the estimation results.
In model 1, a significant positive coefficient of lagged cash provides evidence that cash
holdings pursue a dynamic target adjustment model (Manoel et al., 2018; Dur
an et al., 2016;
Ozkan and Ozkan, 2004). This implies that transaction and other possible costs delay the
adjustment of cash to the target level. This confirms that firms have an optimum level of cash
which supports the trade-off theory.
Model 2 incorporates our primary variable of interest, i.e. FAMILY which is significant
and inversely related to cash. This implies that family firms accumulate less cash. This
confirms our H1. Thus, family control is a crucial determinant of cash holdings for Indian
firms. Further, model 3 which is estimated using fixed effects also confirms that family
control negatively affects a firm’s cash holdings in India. Concentrated shareholding of
family members in Indian firms and weak enforcement of shareholder protection norms
makes it easier for family members to expropriate minority shareholders. We contend that
family firms in India have an inclination to consume the cash resources by overinvesting in
projects which serve their personal interests, thus leading to lower cash levels in Indian
family firms. This finding is commensurate with the arguments of the spending hypothesis
and indicates P-P problems in Indian family firms.
The findings are in line with Liu (2011) who found smaller cash reserves in US family firms
and attributed it to the spending hypothesis. However, our results are in contrast with Chinese
family firms. Jebran et al. (2019) and Liu et al. (2015) found higher cash accumulation in Chinese
family firms. They suggest that family managers accumulate cash for deriving private benefits
in the future. Thus, these findings are more in line with the flexibility hypothesis. In contrast,
our findings support the spending hypothesis. These differences in findings indicate the
importance of institutional context and governance structure in the cash holding research.
For models 1 and 2, AR (2) results show no second-order serial correlation in the error term.
The Hansen test statistic suggests that the instruments used are valid. For robustness, we
also report the results of the panel data model: models 3 and 4 report the results of the fixed
effects and random effects models, respectively. However, the Hausman test result supports
the application of the fixed effects model. Thus, we discuss the results of the fixed effects
model only. The adjusted R2 of the fixed effects model is 0.65, which shows that the model has
reasonable explanatory power.
Regarding control variables, we find that LEV, NWC, CAPEX and CF are consistently
significant in all three models. The negative coefficient of LEV is consistent with both trade-
off and pecking order theories. Firms may use borrowings in place of stockpiling cash to
 CASH FAMILY SIZE LEV NWC R&D DIV CAPEX CF VOL M2B VIF

CASH 1.000
FAMILY 0.292*** 1.000 1.15
SIZE 0.014 0.215*** 1.000 1.19
LEV 0.238*** 0.234*** 0.139*** 1.000 1.67
NWC 0.156*** 0.051*** 0.190*** 0.358*** 1.000 1.26
R&D 0.020 0.044** 0.093*** 0.031* 0.144*** 1.000 1.47
DIV 0.032* 0.004 0.081*** 0.135*** 0.150*** 0.131*** 1.000 1.47
CAPEX 0.081*** 0.074*** 0.021 0.128*** 0.115*** 0.001 0.026 1.000 1.07
CF 0.166*** 0.027 0.164*** 0.469*** 0.244*** 0.247*** 0.195*** 0.098*** 1.000 1.70
VOL 0.036** 0.037** 0.147*** 0.082*** 0.027 0.107*** 0.088*** 0.005 0.093*** 1.000 1.06
M2B 0.107*** 0.055*** 0.169*** 0.337*** 0.012 0.393*** 0.047*** 0.000 0.285*** 0.136*** 1.000 1.54
Note(s): t-statistics are reported in parenthesis. *, **, *** show significance at 10, 5 and 1%, respectively
cash holdings
and corporate
Family control

Correlation matrix and

Table 3.

VIF statistics
IJOEM Variables Model 1 Model 2 Model 3 Model 4

INTERCEPT 0.0168 (0.46) 0.0317 (0.87) 0.0714 (0.9) 0.1417 (4.26)***

CASHt–1 0.4864 (12.06)*** 0.4803 (11.62)***
FAMILY 0.0196 (2.09)** 0.0445 (3.22)*** 0.0490 (5.97)***
SIZE 0.0025 (0.86) 0.0017 (0.58) 0.0177 (2.11)** 0.0013 (0.46)
LEV 0.0931 (5.17)*** 0.0811 (4.37)*** 0.0730 (3.53)*** 0.0815 (4.8)***
NWC 0.1743 (7.61)*** 0.1709 (7.7)*** 0.2641 (8.82)*** 0.2347 (9.28)***
R&D 0.1169 (1.58) 0.0883 (1.15) 0.2445 (1.77)* 0.1761 (1.95)*
DIV 0.0028 (0.58) 0.0031 (0.69) 0.0014 (0.25) 0.0005 (0.11)
CAPEX 0.0618 (3.75)*** 0.0574 (3.49)*** 0.1008 (4.9)*** 0.1051 (5.46)***
CF 0.0750 (1.79)* 0.0919 (2.25)** 0.1630 (3.77)*** 0.1422 (3.93)***
VOL 0.0237 (0.44) 0.0274 (0.52) 0.1006 (1.58) 0.0751 (1.4)
M2B 0.0002 (0.15) 0.0003 (0.21) 0.0042 (2.03)** 0.0038 (2.02)**
Time Yes Yes Yes Yes
AR(1) 6.61 (0.000) 6.57 (0.000)
AR(2) 1.86 (0.063) 1.86 (0.063)
Hansen 262.79 (0.277) 263.25 (0.256)
R-square 0.6920 0.6140
Table 4. Adjusted R- 0.6525 0.5670
Impact of family square
control on the level Note(s): t-statistics are reported in parenthesis. *, **, *** show significance at 10, 5 and 1%, respectively. For
of cash AR (1), AR (2) and Hansen test p-values are reported in parenthesis

undertake investments (Ranajee and Pathak, 2019; Maheshwari and Rao, 2017). NWC also
influences cash negatively, which supports the trade-off theory. NWC acts as a cash
substitute, thereby decreasing the requirement to accumulate cash (Ranajee and Pathak,
2019; Arora, 2019). CAPEX is significant and inversely related to cash and provides support
to both trade-off and pecking order theories. CAPEX creates more assets which increase the
borrowing capacity of firms and thus reduces the cash requirement (Arora, 2019; Bates et al.,
2009). CF positively impacts the cash levels, indicating that firms generating large cash flow
stockpile more cash. This can be attributed to the pecking order theory, positing that
managers prefer internal finance to fund valuable investment opportunities (Arora, 2019;
Maheshwari and Rao, 2017). Among other variables, SIZE, R&D and M2B are significant in
model 3. SIZE is positive, which supports pecking order theory, positing that big firms
stockpile more cash as they generate large cash flows (Ozkan and Ozkan, 2004). Consistent
with pecking order theory, R&D impacts cash holdings negatively because these costs are
often incurred from accumulated cash (Arora, 2019; Maheshwari and Rao, 2017). M2B is
positively associated with cash. Firms with high growth opportunities stockpile cash to avoid
foregoing good projects due to a deficit of funds (Arora, 2019; Maheshwari and Rao, 2017).
This is in line with both trade-off and pecking order theories. Dividend and cash flow
volatility are statistically insignificant for our sample.
6.2.2 Family control, agency conflicts and firm valuation. Table 5 presents the estimates of
the valuation models obtained using fixed effects regression. The standard errors reported
are heteroskedasticity adjusted. The coefficient of change in cash, cash and excess cash in
models 1, 2 and 3, respectively, is significantly positive. These results suggest that cash
retained by a firm is highly valuable. This is because holding cash helps to prevent
underinvestment when external finance is costly and also helps to avoid transaction costs
(Mart
ınez-Sola et al., 2013; Drobetz et al., 2010).
Our key interest lies in the variables measuring the cash holdings of family firms. All three
models show a significant negative coefficient for the cash reserves of family firms. This
suggests that cash stockpiled by family firms lowers the market valuation of the firm.
However, the coefficient of Familyit 3 ExCashit in model 3 is larger than the coefficients
Variable Model 1 Model 2 Model 3
Family control
and corporate
Intercept 0.6456 (2.24)** 0.6120 (1.96)** 0.5652 (1.13) cash holdings
dCashit 2.0660 (3.01)***
Cashit 2.7883 (1.82)*
ExCashit 3.7832 (1.58)*
Family 3.7094 (6.00)*** 3.4246 (5.51)*** 2.4842 (2.42)**
Family 3 dCashit 1.5592 (2.09)**
Family 3 Cashit 3.7590 (2.32)**
Family 3 ExCashit 4.4843 (1.90)**
dCashitþ1 1.4412 (2.86)***
Eit 8.9451 (6.23)*** 8.9869 (6.24)*** 9.3260 (4.45)***
dEit 2.5093 (3.71)*** 2.3279 (3.43)*** 2.8126 (2.46)**
dEitþ1 2.8337 (4.41)*** 3.1370 (4.71)*** 3.7449 (4.31)***
dNAit 0.3270 (1.36) 0.3247 (1.15) 0.6550 (1.69)*
dNAitþ1 0.7738 (3.56)*** 0.6060 (2.80)*** 0.5030 (1.87)*
RDit 15.0993 (1.62)* 15.6670 (1.75)* 28.6171 (1.56)
dRDit 7.2896 (0.96) 5.9993 (0.79) 6.5829 (0.63)
dRDitþ1 13.7448 (2.11)** 14.2172 (2.15)** 15.9965 (1.61)
Iit 20.7991 (3.00)*** 20.5410 (2.92)*** 13.3691 (1.08)
dIi,t 12.2700 (3.34)*** 11.8956 (3.14)*** 12.5375 (2.17)**
dIitþ1 12.4621 (3.43)*** 11.2442 (3.04)*** 3.3864 (0.58)
Dit 16.6929 (2.88)*** 16.6640 (2.92)*** 3.9541 (0.85)
dDit 7.3311 (2.32)** 7.6854 (2.47)** 4.8055 (1.61)
dDitþ1 6.0595 (3.07)*** 5.5505 (2.86)*** 0.3070 (0.18)
dMVitþ1 0.2255 (8.38)*** 0.2158 (7.77)*** 0.2037 (6.93)***
Time Yes Yes Yes Table 5.
R-square 0.4504 0.4550 0.4339 Family control, cash
Adjusted R-square 0.4452 0.4500 0.4205 holdings and firm
Note(s): t-statistics are reported in parenthesis. *, **, *** show significance at 10, 5 and 1%, respectively valuation

showing family firms’ cash holdings in models 1 and 2. This supports Jensen’s (1986) free
cash flow hypothesis, which proposes a higher likelihood of wastage of free cash flows. Large
controlling positions of family members and weak governance structures in India may
incentivize family members to expropriate wealth. Minority investors in India are not in a
position to monitor the firm and their interests are not adequately protected. Consequently,
minority shareholders view the cash held by Indian family firms negatively. They believe
that some of the cash can be misused by family members for personal benefits reflecting P-P
agency issues in such firms. Thus, it confirms H2 that cash accumulated by family firms
adversely impacts the market value of the firm. Coefficients of the remaining control
variables have signs similar to the ones reported in previous studies.
In Chinese family firms, Liu et al. (2015) found a negative marginal value of excess cash
holdings of family firms. A similar association was found by Kusnadi (2011) for firms listed in
Malaysia and Singapore. Thus, our valuation findings complement the prior studies from
emerging nations. However, the magnitude of discounting of firm value by minority investors
is relatively higher in Indian family firms than in the abovementioned studies. This huge
markdown in firm value in India is expected due to the weak protection of minority investors
in India and the massive shareholding of family.
Overall, the findings reveal unique cash holding patterns for Indian listed firms. We find a
lower cash accumulation by family firms vis-a-vis nonfamily firms, which contrasts to prior
studies (Dur
an et al., 2016; Kusnadi, 2011; Ozkan and Ozkan, 2004), showing a higher cash
accumulation by family firms. These prior outcomes are consonant with the flexibility
hypothesis suggesting managerial preference toward future financial flexibility over current
IJOEM spending. However, our findings are in accordance with the spending hypothesis which
posits that selfish managers prefer current spending and accumulate less cash. We contend
that Indian family firms spend cash reserves by engaging in inefficient investments for
personal benefits. Further, the cash reserves of Indian family firms adversely impact the
market value of the firm. Emerging countries, like India, having weak shareholder protection
and dominant family control are more prone to P-P agency conflict. Consequently, investors
reflect their fear of expropriation by discounting the cash value of family firms as confirmed
by our study. Thus, this study confirms that cash holding policies are not homogenous across
countries and institutional context needs to be kept in mind while ascertaining cash holding
determinants. The paper adds to the agency debate on corporate cash holdings.

7. Conclusion
This paper explores the repercussions of family control on the cash levels of Indian firms.
Further, it also examines how these cash levels impact firm value in family-controlled firms. By
analyzing listed firms in India, this study gives empirical proof that family firms in India keep
substantially less cash than nonfamily firms. These results complement the findings of Liu
(2011). Further, the valuation analysis reveals that cash accumulated by family firms is
discounted by the investors, which reduces the market valuation of the firm. These findings can
be attributed to the spending hypothesis which postulates that family firms use cash rapidly on
value-destructive projects and shareholders markdown cash value to reflect their fear of cash
expropriation. Thus, the results indicate the presence of P-P conflicts in Indian family firms.
Overall, the findings suggest that ownership concentration can be a significant factor affecting
cash holdings specifically in India and other emerging countries dominated by family firms.
The study provides meaningful implications for family firms and policymakers. The
negative valuation of cash held by family firms suggests that family firms should keep an
optimal level of cash and take minority investors’ interests into consideration. Minority
investors will value the cash of family firms positively if they feel that the cash resources are
well utilized. An optimal cash holding policy would enable firms to maximize shareholders’
wealth. As family members are the major shareholders in many Indian listed firms, holding
optimal cash levels will increase their wealth. Further, family shareholders in India consider
their firms as a legacy to pass on to future generations. Thus, for long-term survival, it is in
their best interest to improve firm valuation rather than expropriating cash resources of the
firm for short-term benefits.
The study also highlights the need for improvement in corporate governance in family
firms. Appointment of more independent directors may improve the monitoring of family
firms. Thus, it may reduce cash expropriation and increase minority investors’ trust.
Effective enforcement of rules and regulations for minority shareholder protection can also
help in reducing the expropriation of cash by family firms. Studying the factors affecting cash
holdings would enable the managers to formulate and implement an optimal cash holding
policy for a firm considering the perks and disadvantages of stockpiling cash and their
consequent impact on firm valuation.
The study adds to the corporate cash holding literature in an emerging market context. The
study has the limitation that the sample comprises large listed firms only; the results could be
different for smaller firms. Further, the study does not consider the heterogeneity within family-
controlled firms. This study only takes into account family control but does not consider
whether it is family managed or professionally managed. So, future studies can further divide
family firms based on their management to gain a better understanding of how these factors
might influence cash holdings. Lastly, this article indicates the presence of P-P conflict in family
firm’s cash holding decisions. Thus, future study is warranted on the spending decisions of
family-controlled firms to empirically confirm that these firms consume cash by overinvesting.
ORCID iDs Family control
Ruchi Moolchandani http://orcid.org/0000-0003-4580-9068 and corporate
Sujata Kar http://orcid.org/0000-0002-2074-4707 cash holdings
Note
1. The cash holding regression and valuation model include lagged cash as one of the independent
variables using 2008 data.

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Corresponding author
Sujata Kar can be contacted at: sujata.kar@gmail.com

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