Do Family Firms Use Dividend Policy as a Governance Mechanism? Evidence from the Euro zone

• Published date: 01 September 2012
• Author: Julio Pindado,Chabela Torre,Ignacio Requejo
• DOI: http://doi.org/10.1111/j.1467-8683.2012.00921.x
• Date: 01 September 2012

Do Family Firms Use Dividend Policy as

a Governance Mechanism? Evidence from

the Euro zone

Julio Pindado*, Ignacio Requejo, and Chabela de la Torre

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study investigates whether family f‌irms use dividend policy as a corporate governance

mechanism to overcome agency problems between the controlling family and minority investors. We further account for

deviations between ownership and control and consider the presence and identity of other large shareholders in family

companies.

Research Findings/Insights: Based on a sample of f‌irms from nine Eurozone countries and using a panel data method, we

f‌ind that family f‌irms distribute higher and more stable dividends to alleviate expropriation concerns of minority investors.

However, the higher dividend payments are mainly explained by family f‌irms with no separation between the largest

owner’s voting and cash f‌low rights and those with non-family second blockholders.

Theoretical/Academic Implications: We contribute to the literature by shedding light on how the family business model

affects companies’ dividend preferences. Our research also highlights the importance of taking into account the identity of

large shareholders, especially in a context in which concentrated ownership structures are commonplace. The reported

differences in dividend policies between family and non-family f‌irms help to clarify the variant performances of family

businesses found in previous studies.

Practitioner/Policy Implications: Family f‌irms should regard dividend policy as a governance tool that allows them to

attract prospective investors and enlarge their shareholder base. Simultaneously, minority investors can benef‌it from family

f‌irms’ dividend decisions. Our evidence also suggests that European policy makers should laythe necessary foundations to

prevent controlling families from adopting ownership structures that serve their own personal interests.

Keywords: Corporate Governance, Family Control, Dividend Policy, Second Blockholders, Euro zone

INTRODUCTION

The current downturn in the economy has revived the

importance of family f‌irms for society as a whole

because of the peculiarities associated with this type of

corporation, such as owner families’ concerns over the

continuity of the business (see, e.g., Kanekrans, 2009; Miller,

Le Breton-Miller, & Scholnick, 2008; Prencipe, Bar-Yosef,

Mazzola, & Pozza, 2011). Interestingly, some anecdotal evi-

dence suggests that family f‌irms may have a greater commit-

ment to distributing dividends (Hall, 2005). In addition,

prior research widely accepts the view that family control

can lead to agency problems between the controlling family

and minority shareholders under specif‌ic circumstances

(Anderson & Reeb, 2003; Mishra, 2011; Villalonga & Amit,

2006, 2010; Wong, Chang, & Chen, 2010). However, the

literature on whether family-controlled corporations

use dividends as a trust-generating device to alleviate

minority shareholders’ concerns over wealth expropriation

is scarce.

In this context, we address two main research questions:

(1) Do family f‌irms use dividend policy as a corporate gov-

ernance mechanism to overcome agency problems with

minority shareholders and to alleviate expropriation con-

cerns, and (2) do familyf‌irms’ dividend decisions depend on

their specif‌ic ownership structures (i.e., separationsbetween

family’s voting and cash f‌low rights, the presence of second

blockholders)? Therefore, our study covers two issues that

*Address for correspondence: Julio Pindado, Departmentof Business Administration,

Campus Miguel de Unamuno, Universidad de Salamanca, Edif‌icio F.E.S.,Salamanca,

E37007, Spain. Tel:+34 923 294763; Fax: +34 923 294715; E-mail: pindado@usal.es

413

Corporate Governance: An International Review, 2012, 20(5): 413–431

© 2012 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2012.00921.x

are of increasing interest to practitioners and scholars in the

corporate f‌inance and governance f‌ields, namely, the family

business model and dividend decisions. Examining the

effects of family control on specif‌ic corporate dimensions is

a matter of considerable importance because family f‌irms

account for a large percentageof the corporate sector in most

geographical regions around the world (Claessens, Djankov,

& Lang, 2000; Faccio & Lang, 2002; Holderness, 2009; La

Porta, Lopez-de-Silanes, & Shleifer, 1999).

Family f‌irms mainly outside Anglo-Saxon countries, in

which the protection afforded to minority shareholders by

the law is in general weaker, may use dividend payments as

a trust-generating mechanism. In such institutional environ-

ments, family companies can relinquish the private benef‌its

of control by distributing higher and more stable dividends

relative to non-family f‌irms. Indeed, dividends can be

regarded as a costly signal for family f‌irms because of family

owners’ desire to retain control (Croci, Doukas, & Gonenc,

2011; Gomez-Mejia, Makri, & Larraza-Kintana, 2010; King &

Santor, 2008; Miller, Le Breton-Miller, & Lester, 2010). In

addition, paying dividends is a more credible signal of

owners’ commitment not to expropriate minority investors

and to give up the private benef‌its of control compared to

other corporate governance mechanisms at their disposal.

For example, family f‌irms’ boards of directors are hardly

independent from the controlling family (Chen & Nowland,

2010), and family companies are generally isolated from

external governancemechanisms such as the market for cor-

porate control due to their concentrated ownership struc-

tures (Yoshikawa & Rasheed, 2010).

Since the seminal work by Miller and Modigliani (1961),

few studies have investigated whether family control, given

its own peculiarities, affects companies’ dividend decisions.1

However, whether and, if so, how family f‌irms differ from

non-family f‌irms in their dividend choices is an important

issue. Conf‌licts of interest between the controlling owner

and minority investors affect family f‌irms (Chen &

Nowland, 2010; Villalonga & Amit, 2006, 2010; Wong et al.,

2010), and their use of dividends is likely to ref‌lect such

agency problems. In addition, whether these different gov-

ernance mechanisms (corporate ownership structure and

dividends) complement or substitute for each other to alle-

viate agency conf‌licts remains unclear (Miguel, Pindado, &

de la Torre, 2005; Noronha, Shome, & Morgan, 1996).

Toaddress our two research questions, we f‌irst investigate

whether family f‌irms pursue higher dividend payments and

examine the differences in dividend smoothing behavior

between family and non-family f‌irms using a partial adjust-

ment model of dividends. We f‌ind higher and more stable

dividend distributions in family-controlled corporations;

these results indicate that paying dividends is a corporate

governance mechanism that helps to allay agency problems

between the family and minority shareholders. Our f‌indings

hold even after controlling for the possibility that the higher

dividend payments in family f‌irms may be the result of

fewer stock repurchases in these companies. In contrast to

previous US empirical evidence, we do not f‌ind support for

a substitution effect between dividends and share repur-

chases in the Euro zone.

Second, we differentiate between specif‌ic ownership

structures. We divide the sample between family companies

with separations between voting and cash f‌low rights as a

result of the use of disproportional ownership structures

and family f‌irms in which family ownership and control

totally coincide. Interestingly, the higher dividend payments

of family companies are primarily attributable to those f‌irms

in which cash f‌low rights and votes are not separated. We

also analyze the effects of second blockholders in family

f‌irms’ dividend decisions. The empirical evidence suggests

that second large shareholders signif‌icantly inf‌luence the

dividend choices of family businesses. Family second block-

holders appear to collude with the controlling family and

prefer lower dividend payments, which would allow them

to have more cash at their disposal and enjoy higher private

benef‌its of control. By contrast, non-family second share-

holders act as a force that induces family companies to dis-

gorge cash as dividends.

Therefore, family f‌irms with better corporate governance

structures (i.e., those f‌irms in which the family’s voting

rights do not exceed its cash f‌low rights and those f‌irms in

which the controlling family’s decisions are monitored by

a non-family second blockholder) are the f‌irms that use

dividends as a governance tool to alleviate expropriation

concerns.

This study makes several contributions to the corporate

f‌inance and governanceliterature. First, we show that paying

dividends is a mechanism that can be used to align the

interests between the controlling family and minority share-

holders in the Euro zone. The payment of higher dividends

by family f‌irms serves as a commitment device not to expro-

priate minority investors. Additionally, supporting this

interpretation of the use of dividends in the case of family

f‌irms, family companies prefer more steady dividends.

Therefore, our results provide an explanation for the divi-

dend puzzle in family corporations.

Second, we contribute to the corporate governance litera-

ture by paying special attention to the identity (i.e., family

versus non-family) of the largest and second largest share-

holders in the company instead of analyzing the effect

of ownership concentration on dividends. Moreover, we

advance previous studies by classifying family f‌irms in dif-

ferent categories and showing that the higher dividends of

family f‌irms are mainly attributable to those companies in

which cash f‌low rights and voting rights do not deviate from

one another and those f‌irms with a non-familysecond block-

holder. Thus, our results support an outcome model of divi-

dends within the family business category in that, among

this type of corporation, better governance results in higher

dividend payments.

Third, the evidence that we provide offers an additional

explanation for the performance difference between family

and non-familyf‌irms (Anderson & Reeb, 2003; Andres, 2008;

Klein, Shapiro, & Young, 2005; Maury, 2006; Miller, Le

Breton-Miller, Lester, & Cannella, 2007; Villalonga & Amit,

2006). Specif‌ically, family f‌irms’ higher and more stable divi-

dend payments could explain, to some extent, their higher

valuations. In addition, our f‌inding that family-controlled

corporations with good governance distribute higher divi-

dends is consistent with previous f‌indings that family f‌irms’

better performance relative to non-family f‌irms is mainly

due to family companies with less incentive to expropriate

minority investors.

414 CORPORATE GOVERNANCE

Volume 20 Number 5 September 2012 © 2012 Blackwell Publishing Ltd