Imen Latrous, Dr. University of Quebec at Chicoutimi LARIGO 1 The MacroJournals Conference on Business and Social Science: New York december 2015

 Corporate cash holdings has risen acrros the rich world in recent years.  Japenese and south Korean firms are the world’s biggest cash- holders ( The economist, 2014)  Non financial firms in the G7 countries in have accumulated $1.3 trillion of excess saving ( IMF, 2006).  Companies in industrial countries use their strong increase in profits to acquire financial assets or to repay debt rather than to finance new investment opportunities or to increase dividends distributions to shareholders ( IMF, 2006). 2

 A recent study by IRIS (2015), reveals that, over , non financial firms in Canada hold $604 billion of cash and cash equivalents.  In 2011, the cash holding of Canadian firms was more than 32% of Canadian GDP (IRIS 2015).  The debate about an increased corporate cash holdings has been almost based on data from large firms.  Little attention has been paid to the family firm’s cash holdings. 3

 Many firms around the world are controlled by large family blockholders (La Porta et al.1999; Faccio and Lang 2002; Claessens et al. 2000; Anderson and Reeb, 2003)  Family members are usually involved in firm’s management either as CEOs or as directors.  For Canadian firms, 32% are family-owned (King and Santor (2008)  Studies of Canadian family-owned: Attig (2005) examines the ownership of 478 firms crosssectionally for 1997, of which 63% are family-owned firms.  Family firms play an important role in Canada economies.  Around half of the Canadian workforce is employed by a family business, creating nearly 45% of Canadian GDP (Alderson (2011)). 4

 Undiversified family holdings.  The desire to pass the firms onto their descendents.  Family’s reputation ( Anderson et al., 2003)).  Family controlling shareholders may force firms to adopt policies that fit their own interests at the expense of those of the minority shareholders (Yeh et al., 2001).  The most important conflict of interests is between the family controlling shareholders and the minority shareholders.  In such a framework, corporate cash holdings can be influenced by preferences and desires of the family controlling shareholders  Family businesses are complex.  The role of family ownership and control in corporate governance remains controversial. 5

 The effect of family control and management on corporate cash holdings policy of Canadian firms.  We also explore the cash holdings behavior of Canadian family firms before and during the financial crisis. 6

◦ The transactions costs motive ◦ The precautionary motive ◦ Agency motive 7

The alignement effect ( Anderson and Reeb (2003); Villalonga and Amit (2006)) ◦ The presence of controlling families can reduce agency problems ◦ Family shareholders hold a poorly diversified portfolio (Andersson and Reeb, 2003) ◦ Significant specific human capital invested in family firm (La Porta et al., 1999; Faccio and Lang 2002) ◦ Family reputation ◦ Family firm survival : Family firm as an asset to pass to family members or their descendants ◦ Family shareholders tend to be more risk averse than non family shareholders ◦ Family controlling shareholders deploy cash for valuable projects that maximize shareholders value. ◦ Hypothesis 1: If family controlling shareholders reduce agency problems, then we expect that family firms will hold less cash than non-family firms 8

The ‘ benefits of control’ hypothesis ◦ Family controlling shareholders exert dominant influence on the firm’s decisions ◦ Wealth expropriation and private benefits of control extraction at the expense of outside shareholders : (Cronqvist and Nilsson, 2003; Faccio et al., (2001), Bebchuck, 1999) ◦ Family shareholders retain high levels of cash to facilitate the extraction of private benefits ( Liu et al.(2015)). Hypothesis 2 : if Family controlling shareholders have strong incentives to pursue private benefits and expropriate minority shareholders, then we except that family firms hold more cash than non family firms. 9

 Cash holdings and financial crisis ◦ The conflict of interests between family and minority shareholders might be more severe during financial crisis than in normal times. ◦ Due to the financial shock of the crisis, family controlling shareholders tend to be more risk averse and are more likely to use firm’s assets to meet a liquidity personal need. ◦ As a result, family controlling shareholders may reject or abandon valuable projects and expropriate wealth from outside shareholders. Hypothesis 3: Family controlled firms are likely to hold up more cash reserves during a financial crisis relative to non family firms. 10

 Data ◦ We use a sample of 504 firms listed in Toronto Stock exchange (TSX) over the period 2005–2010. ◦ 3024 firm-year observations ◦ The dependant variable, Cash holdings is the ratio of cash and cash equivalents to the net assets of cash. ◦ Family firms definition: The largest shareholder is an individual or member of the same family by either blood or marriage and holding 20% and more of voting rights (La Porta et al.(1999)) 11

FrequencyPercentage Panel A: Controlling shareholders’ identity Dispersed ownership Family controlling shareholders Non family controlling shareholders Panel B: Family involvement in management FamCEO OutsideCEO

13 VariableNon family firms Family firms P-value Cash to net assets ***

VariableNon family firms (Mean) Family firms (Mean) p-value Cash to net asset during crisis ( ) *** 14

15 VariableBefore financial crisis ( ) During financial crisis ( ) P value Cash to net assets

VariableFamCEOOutsideCEOp-value Cash to net assets * 16

 Family control and management have differential impacts on corporate cash holdings.  Family firms are associated with a lower level of cash holdings compared to non family ones: Reduce the agency costs of cash holdings.  Nevertheless, firms placing family members as CEOs hold more cash than firms having outside managers: Private of benefits of control motive  Family firms hold less cash than non family firms during financial crisis.  Family controlled firms tend to have the same level of cash holdings before and during financial crisis. 17

Questions 18