Do Independent Directors Monitor Family Firms? Evidence from the Market Value of Cash Holdings

Due to their significant stock ownership and control, founding families are generally immune from the disciplinary forces associated with the market for corporate control. As a result, founding families may spend cash on the pursuit of private benefits. In this paper, I examine whether independent directors protect outside shareholder rights from the risk of expropriation. In particular, I examine how board independence impacts a firm’s efficiency in utilizing cash reserves. I find evidence that the value of an extra dollar of unexpected cash holding is greater in family firms with a greater percentage of independent directors on their boards, suggesting that independent directors prevent the potential risk of value destruction that results from founding families’ pursuit of private benefits.