Do financial constraints in an unstable emerging economy mitigate the opportunistic behavior of entrenched family owners?

Luiz Ricardo Kabbach-de-Castro, Aquiles Elie Guimarães Kalatzis and Aline Damasceno Pellicani

Emerging Markets Review, 2022, vol. 50, issue C

Abstract: Prior research is not conclusive whether information asymmetries or managerial discretion are the cause of observed investment-cash flow sensitivity. This paper examines the effect of family firms' governance heterogeneity on firm's investment-cash flow sensitivity in Brazil. The Brazilian economic and corporate governance context present several idiosyncratic features, including weak minority shareholder protection, an underdeveloped capital market, macro-economic uncertainties, the presence of controlling shareholders (especially families), and the excessive use of control-enhancing mechanisms, allowing us to explore in greater detail the drivers of investment-cash flow sensitivity. We find that investment is more sensitive to cash flow for firms with a highly entrenched family presence (divergence between corporate control and voting rights coupled with family management) than in less entrenched family firms. This result emerges primarily due to financial constraints from asymmetric information, rather than agency problems of free cash flow from abuse of managerial discretion. Our findings shed new light on the role of excessive control rights in investment decisions, allowing family managers to reallocate capital to cope with financial constraints in times of economic uncertainties.

Keywords: Corporate investment; Corporate governance; Agency theory; Emerging economy; Family firms; Control-enhancing mechanisms (search for similar items in EconPapers)
JEL-codes: C23 E22 G30 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:50:y:2022:i:c:s1566014121000467

DOI: 10.1016/j.ememar.2021.100838

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