Dividends and family governance practices in private family firms

Abstract

Intra-familial principal-principal conflicts are a relevant agency problem in privatelyheld family firms. These conflicts of interest commonly occur between active and passive family shareholders, and require remedies different from those that deal with principal-agent
conflicts. This article empirically examines whether or not firms use dividends as instruments to cope with conflicts of interest between active and passive family shareholders and how family governance practices moderate this relationship. The results show that the existence of an intra-familial conflict of interest results in a higher propensity to pay dividends and that the use of family governance practices strengthens this relationship. Additionally, the findings support the suggestion that using family governance practices leads to a more efficient dividend policy.

Full text

Dividends and family governance practices in private family
firms
Anneleen Michiels •Wim Voordeckers •
Nadine Lybaert •Tensie Steijvers
Accepted: 28 May 2014 / Published online: 15 June 2014
Springer Science+Business Media New York 2014
Abstract Intra-familial principal–principal conflict
are a relevant agency problem in privately held family
firms. These conflicts of interest commonly occur
between active and passive family shareholders, and
require remedies different from those that deal with
principal-agent conflicts. This article empirically
examines whether or not firms use dividends as
instruments to cope with conflicts of interest between
active and passive family shareholders and how family
governance practices moderate this relationship. The
results show that the existence of an intra-familial
conflict of interest results in a higher propensity to pay
dividends and that the use of family governance
practices strengthens this relationship. Additionally,
the findings suggest that using family governance
practices leads to a more efficient dividend policy.
Keywords Family firms Dividends Agency costs 
Principal–principal conflict Family governance
JEL classifications L2 L29 G35 L26
1 Introduction
As from the seminal paper of Miller and Modigliani
(1961), a lot of theoretical and empirical research aims
at finding explanations why firms pay dividends. In
this stream of research, the influence of family
ownership on dividend policies attracted the attention
of many researchers (e.g., Chen et al. 2005; Farinha
2003; Gugler 2003; Pindado et al. 2011; Setia Atmaja
et al. 2009; Yoshikawa and Rasheed 2010). Yet,
almost none of these studies focuses on privately held
family firms. According to allegations of traditional
agency theory, dividends are indeed assumed to be
irrelevant in these firms because of the absence of a
principal-agent conflict of interest and a strong natural
alignment of incentives between family shareholders
(Michaely and Roberts 2012).
However, in reality, many privately held family
firms do pay out dividends regularly (Gallo 2004;
Gersick et al. 1997; Hoy and Sharma 2010;Poza2009;
Ward 1997). An explanation for the existence of
dividends, despite their so-called irrelevance, lies in a
specific type of conflict that may occur in the specific
context of private family firms: the intra-familial
principal–principal conflict (Gersick et al. 1997;
A. Michiels
Faculty of Economics and Business, Research Centre for
Entrepreneurship and Family Business, KU Leuven,
Warmoesberg 26, 1000 Brussels, Belgium
e-mail: anneleen.michiels@kuleuven.be
W. Voordeckers (&)N. Lybaert T. Steijvers
KIZOK Research Centre, Hasselt University,
Martelarenlaan 42, 3500 Hasselt, Belgium
e-mail: wim.voordeckers@uhasselt.be
N. Lybaert
e-mail: nadine.lybaert@uhasselt.be
T. Steijvers
e-mail: tensie.steijvers@uhasselt.be
123
Small Bus Econ (2015) 44:299–314
DOI 10.1007/s11187-014-9594-0

Schulze et al. 2001; Stewart and Hitt 2012). We will
focus in this paper on a specific type of an intra-
familial principal–principal conflict of interest that is
particularly interesting when studying dividends,
namely the one between active (employed by the
family business) and passive family shareholders (not
employed by the family business), who may have
diverging interests due to their different role in the
firm. Passive family shareholders often prefer to
receive dividends, for example in order to reduce the
free cash flow available for the active family share-
holders, whereas the active shareholders generally
prefer to reinvest cash in the firm (Gersick et al. 1997).
This incongruity of interests between active and
passive family shareholders can have detrimental
effects for the family firm and is thus a potentially
important agency problem (Eddleston and Keller-
manns 2007) and, consequently, an important but
unexplored determinant of the incidence of a dividend
policy in private family firms.
In addition, the mechanisms for making dividends a
solution to potential principal–principal problems are
clearly different in privately held vis-a
`-vis publicly
held firms. Controlling shareholders in publicly held
firms face a trade-off between, on the one hand, their
preference to maintain control of corporate resources
and, on the other hand, a significant decline in the
market valuation of the firm when this preference is
mirrored in a no or low dividend policy (Faccio et al.
2001). Hence, the stock market will play a disciplining
role by forcing controlling managers to abstain from
expropriation behavior and to pay out (high) dividends
when they want to avoid such a decline in stock price.
However, privately held family firms lack the disci-
plining role of the stock market, which raises the
intriguing question which governance forces could
take over this role. We will argue in this paper that
family governance mechanisms in private family firms
can take over the disciplining role of the stock market
in persuading the active family shareholders to adopt a
dividend policy when a potential intra-familial prin-
cipal–principal conflict of interest may occur.
Whereas the disciplining stock market may be
considered as a formal governance mechanism, family
governance mechanisms, such as for example family
councils or family charters, could be labeled as
relational governance mechanisms, which are based
on the creation of social controls for the promotion of
social interaction, the creation of a shared vision, and
the preservation of trust and mutual commitment
(Mustakalio et al. 2002; Poppo and Zenger 2002;
Uhlaner et al. 2007).
Indeed, strong trusting relationships among family
stakeholders are considered as one of the main sources
of competitive advantage for family firms (Steier
2001; Sundaramurthy 2008). However, maintaining
high mutual trust among family members is particu-
larly challenging when family firms evolve across
generations and family ownership disperses (Bam-
mens et al. 2008). Therefore, high levels of open
communication among family members are essential
in sustaining trust and a shared vision within later
generational family firms (Sundaramurthy 2008).
From this perspective, family governance mechanisms
are ‘‘systematic communication forums that are crit-
ical to positive family culture and also enable family
firms to reinvest in interpersonal trust as the firm’s
family and business grows’’ (Sundaramurthy 2008,
p.97), thereby preventing or reducing harmful con-
flicts among family stakeholders such as potential
conflicts about dividend policy.
Despite the fact that intra-familial principal–prin-
cipal conflicts may exist within private family firms
(e.g., He et al. 2012; Hoy and Sharma 2010; Poza
2009; Ward 1997), this type of conflict has long been
excluded from the corporate governance discussion
(Li and Srinivasan 2011) and empirical studies on the
topic are rare (Siebels and Knyphausen-Aufseß 2012).
Given these observations, the purpose of this paper is
to study the relationship between active versus passive
family shareholders in private family firms and the
incidence of a dividend policy. In addition, this study
takes into account whether and how family gover-
nance practices (namely the family charter and family
forum) moderate the relationship between these
agency conflicts and the propensity to pay dividends.
Using a sample of 244 Belgian privately held family
firms, this study indeed shows that the presence of
passive family shareholders results in a higher
propensity to pay dividends
1
and that family
1
In this paper, we investigate the propensity to pay dividends,
and we thus do not examine the amount of dividends that are
being paid out, for two reasons. First, the rather limited sample
size and the rather small percentage of firms that are paying out
dividends does not allow for detailed analyses of the dividend
payout rate. Second, the objective of this paper is to investigate
the presence of a dividend policy, which can be measured via the
propensity to pay dividends.
300 A. Michiels et al.
123

governance practices appear to be an important
facilitating mechanism to avoid or mitigate conflicts
among family shareholders by paying out dividends.
Additionally, post hoc findings suggest that using
family governance practices results in a more efficient
dividend policy.
This paper makes contributions to the finance,
governance as well as general family business literature.
First, analyzing dividend policy in the context of private
instead of public firms allows for a cleaner measurement
of the effects of (family) ownership structure on
dividend policy because there is no external factor
(such as, for example, the stock market) that is
influencing the dividend policy. This paper thus builds
further on the findings of Michaely and Roberts (2012),
who found that private firms with dispersed ownership
have a different dividend policy than public firms with
the same characteristics, suggesting that ownership
structure and incentive conflict are important when
studying dividend policy. Next, given that prior research
on the intra-familial conflict of interest, as well as on
family governance practices and dividend policy in
private family firms, is mainly anecdotal and case based,
this article goes a step further by empirically testing the
moderating impact of family governance practices on
the relationbetween agencyconflicts and the propensity
to pay dividends. As such, the article responds to recent
calls for empirical research on these topics (Siebels and
Knyphausen-Aufseß 2012).
The remainder of this article is organized as
follows. Section 2reviews relevant previous literature
and formulates hypotheses. Subsequently, Sects. 3and
4cover the methodology and the results. Section 5
discusses the results and concludes.
2 Theory and hypotheses development
2.1 Dividends and intra-familial principal–
principal conflicts
While businesses find dividends obvious, economists
seem to find the existence of dividends mysterious
(Easterbrook 1984). Modigliani and Miller (1961,
1958) declare dividends to be a trivial issue that one
can easily ignore, because shareholder wealth will be
unaffected by management’s decision concerning
dividend payouts. Regardless of whether management
retains earnings as capital gains or distributes them in
the form of dividends, the return to the shareholder
will be the same. However, in the real world, most
firms pay out dividends regularly (DeAngelo and
DeAngelo 2007), even despite the fact that dividends
are less favorable than capital gains because of taxes.
This occurrence of dividends, despite their costs, has
led academics to a search for explanations.
The finance literature offers several explanations
for the existence of dividends, such as signaling,
clientele, agency conflicts, catering, and investment
opportunities (Baker and Wurgler 2004; Bhattachar-
yya 2007; Easterbrook 1984; Ross 1973; Rozeff
1982). Although none of these theories are entirely
satisfactory in explaining why firms pay dividends,
recent empirical studies are mainly supportive for the
agency cost explanation of dividends (Denis and
Osobov 2008; La Porta et al. 2000; Mancinelli and
Ozkan 2006). On the one hand, dividends may
mitigate the owner–manager agency conflict because
they reduce the firm’s free cash flow. Thus, paying out
dividends will reduce the plausibility that managers
will waste the firm’s excess cash flow by making low
return investments that provide private benefits for
managers at the expense of the shareholders (Easter-
brook 1984; Jensen 1986; Rozeff 1982). On the other
hand, dividends can also mitigate intra-shareholder
conflicts because they reduce the possibility of expro-
priation of corporate wealth by insiders (Faccio et al.
2001; La Porta et al. 2000). In other words, dividends
can be a self-imposed disciplining mechanism because
they transfer wealth from the discretion of the (owner-)
manager to all shareholders on a pro-rata basis (Brav
et al. 2003; Faccio et al. 2001).
Additionally, several authors investigate the impact
of ownership structure (Hu and Kumar 2004; La Porta
et al. 2000; Michaely and Roberts 2012; Rommens
et al. 2012; Short et al. 2002). Concerning the impact
of family ownership, most studies seem to agree that
family firms are more inclined to pay dividends and
have higher payout ratios because they use them to
alleviate minority investors’ concerns over wealth
expropriation (Chen et al. 2005; Gugler 2003; Pindado
et al. 2011; Setia Atmaja et al. 2009; Yoshikawa and
Rasheed 2010). These last mentioned studies all focus
on publicly held (family) firms and the challenge of
mitigating the owner–manager as well as the control-
ling-minority shareholder conflict of interest, while
overlooking privately held family firms and the
challenge of within-group alignment. After all,
Private family firms 301
123

according to classical agency theory, family involve-
ment in both ownership and management should align
the interests of owners and managers and thus will lead
to minimized, or even zero, agency costs in private
family firms (Ang et al. 2000; Fama and Jensen 1983;
Jensen and Meckling 1976). Therefore, assuming the
absence of agency conflicts in private family firms,
dividends will be irrelevant because they are more
costly to the firm than retaining capital (in terms of
taxes) and thus will be useless.
However, in the lastdecennium, several authors (e.g.,
Chrisman et al. 2007;Lubatkinetal.2005; Schulze et al.
2003a,b; Schulze et al. 2001) introduced new insights
into the agency problems of private family firms as the
‘‘combined influence of private ownership and family
management results in a web of incentives that under-
mine a family firm’s governance and raise the agency
cost of fractional ownership’’ (Schulze et al. 2003a,
p. 182). Furthermore, in contrast to what is assumed in
classical agency theory, family shareholders are a
heterogeneous group, whose members have different
interests and goals (Sharma et al. 1997). While some
shareholders are employed by the firm and perhaps
actively participate in management (hereafter: active
shareholders), others do not work in the family business
(passive shareholders) (Gersick et al. 1997). These
different roles and responsibilities can shape their point
of view on the family firm objectives and development,
and can give rise to intra-familial principal–principal
conflicts (Gersick et al. 1997; Stewart and Hitt 2012).
Although less recognized than the principal–prin-
cipal conflict of interests in public family firms, these
conflicts are argued to be very common in privately
held family firms, as indicated by several theoretical
contributions in the family business literature (Gersick
et al. 1997;Poza2009; Stewart and Hitt 2012). For
example, passive family shareholders are generally
less tolerant for financial risk and uncertainty than
active family shareholders, because the latter may be
prepared to sacrifice personal needs to those of the
business, whereas the former may not (Dreux 1990).
This intra-familial principal–principal conflict may
aggravate as time passes, and ownership becomes
more dispersed because active and passive family
shareholders are then likely to have a different degree
of identification with and involvement in the family
firm (Ward 1997). Thus, even when the firm has no
outside (i.e., nonfamily) shareholders and the firm’s
equity is distributed among family members, conflicts
between active and passive family shareholders may
arise (Schulze et al. 2003a). Empirical studies on this
topic are rare, with the exception of Vilaseca (2002),
who finds evidence of the existence of a conflict of
interests and diverging objectives among family
business shareholders (nonemployed versus members
of the management team).
According to anecdotal and case-based literature,
dividends may be an instrument to mitigate these intra-
shareholder conflicts in private family firms (e.g.,
Thomas 2002; Ward 1997; Ang 1992; Gallo 2004;
Gallo and Vilaseca 1996). After all, active family
shareholders may take exorbitant salaries or excessive
perquisites, or invest in low return showcase projects
that will advance their career perspectives, at the
expense of passive family shareholders. This threat
could cause the passive shareholders to insist on
greater dividend payouts, even if this is not advanta-
geous from a taxation viewpoint (Ang 1992; Ward
1997; Ayers 1990). Another reason for passive family
shareholders to demand dividend payouts is the fact
that they consider them as a legitimate reward of their
family membership (Gersick et al. 1997). Addition-
ally, passive family shareholders will perceive impor-
tant differences if the earnings generated by the firm
are distributed in the form of dividends or retained in
capital, because the shares are not traded in a fluid
stock market, and thus, dividends are the only means
of satisfying their structural liquidity needs (Gallo and
Vilaseca 1996; Neubauer and Lank 1998).
In sum, conflicts of interest between active and
passive shareholders likely occur in privately held
family firms and dividend policy is likely to reflect
these potential conflicts of interest. Thus, the first
hypothesis expects a higher propensity to pay divi-
dends when passive family shareholders are present, in
order to mitigate potential intra-familial principal–
principal conflicts.
Hypothesis 1: Private family firms with both active
and passive family shareholders have a higher pro-
pensity to pay dividends than private family firms with
only active family shareholders.
2.2 Family governance practices as a moderating
variable
Controlling shareholders generally prefer to keep
power over corporate resources which a lower
302 A. Michiels et al.
123

propensity to pay dividends likely reflects. However,
when vulnerability to expropriation problems is high,
rational minority shareholders in publicly held firms
will demand dividend payouts in order to address these
agency problems. When these dividend calls remain
unanswered, minority shareholders will attach a lower
value to the firm and the share price may drop
significantly (Faccio et al. 2001). Consequently, the
stock market plays a prominent role in convincing the
controlling shareholders to pay out dividends. The
absence of a disciplining stock market for privately
held family firms raises the question whether social
controls aimed at sustaining trust and a shared vision
could replace the stock markets’ role in convincing
controlling shareholders to commit to a dividend
policy. This paragraph introduces family-centric gov-
ernance solutions as an answer to this question and
discusses whether and how these family governance
mechanisms moderate the relationship between poten-
tial principal–principal conflicts of interest and the
propensity to pay dividends.
Intra-familial principal–principal conflicts require
different remedies than those that deal with the
traditional principal-agent conflict or the ownership-
based principal–principal conflicts (between majority
and minority owners) in public family firms (Stewart
and Hitt 2012; Young et al. 2008). The governance of a
family firm consists of two interacting subsystems: the
firm governance and the family governance system
(Storey 1994; Westhead and Cowling 1998). Apart
from the supervision and control of management,
private family firms need to establish distinct gover-
nance structures that consider the multiple roles that
family members play within the family and the firm,
which is necessary to prevent or reduce harmful
conflicts among family shareholders (Bartholomeusz
and Tanewski 2006; Mustakallio et al. 2002; Neubauer
and Lank 1998). By doing so, these specific family
governance structures help to create a shared vision
between active and passive family shareholders (Ber-
ent-Braun and Uhlaner 2012; Hoy and Sharma 2010;
Mustakallio et al. 2002; Sua
´re and Santana-Martin
2004; Vilaseca 2002). Family governance practices
(hereafter: FGP) can be both formal and informal and
may vary overtime in line with the generational stage
of the family firm (Neubauer and Lank 1998;Sua
´re
and Santana-Martin 2004).
A dividend policy is often a topic that leads to
disunity and family in-fighting (Gallo 2004). FGP
provide an excellent opportunity to alleviate conflicts
between active and passive family shareholders by
enhancing the communication between shareholders
and creating a shared vision among them. By doing so,
the firm can turn passive family shareholders into
well-informed, committed partners (Gallo and Vilas-
eca 1996; Vilaseca 2002). A family forum (also
referred to as family meeting or family council), for
example, can be a catalyst for developing a dividend
policy, which satisfies the needs of both active and
passive shareholder groups. A family forum can occur
in different compositions, but its main goal is to
promote communication among the family sharehold-
ers (Brenes et al. 2011).
Additionally, the forum provides a platform on
which present and emerging family conflicts can be
discussed and resolved before they affect the firm
(Brenes et al. 2011; Gersick et al. 1997; Habbershon
and Astrachan 1997; Poza 2009). Family members can
express their different values, expectations, and opin-
ions, which are afterward presented to the top
management team (Gersick et al. 1997; Poza 2009).
As such, a family forum can help in discussing the
desired balance between the family and the firm and
between reinvestment and liquidity needs (Poza
2009). For example, whereas a family forum gives
the opportunity to passive shareholders to express their
liquidity needs, it also gives the opportunity to active
shareholders to clarify present investment opportuni-
ties and thereby indicating what constitutes realistic
dividend expectations. Additionally, a family charter
(also referred to as family constitution or family code
of conduct) can facilitate the development of a formal
dividend policy as it documents principles and guide-
lines regarding the relationship of the family to the
business. The charter can thus disclose reinvestment
requirements and a ratio of reinvestment to distribu-
tion in the form of dividends (Poza 2009). The
development of a family charter is usually a highly
participatory process involving the entire family
(Berent-Braun and Uhlaner 2012; Brenes et al. 2011;
Sua
´re and Santana-Martin 2004). As such, the charter
represents an important asset to family unity and
transparency and helps with developing a patient
capital culture (Poza 2009).
In conclusion, FGP can facilitate the discussion
over dividend policies. Therefore, whether the exis-
tence of an intra-familial principal–principal conflict
indeed leads to a dividend payment may depend on the
Private family firms 303
123

establishment of FGP in the firm. After all, as a result
of a potential intra-familial principal–principal con-
flict of interest, shareholders are likely to put their own
agendas before anything else and they may exhibit the
behaviors of greedy and ungrateful heirs (Poza 2009).
Active family shareholders may try to use excess cash
for private benefits and perquisites, or they might favor
reinvestment in the firm, as this will probably be more
advantageous to them. So as to prevent this rent
extraction, passive family shareholders will prefer to
receive dividends. However, active family sharehold-
ers usually have decision power over corporate
resources, and the absence of a liquid market for
shares tends to take away one of the main disciplining
governance mechanisms in establishing a dividend
policy. Therefore, the existence of a potential intra-
familial principal–principal conflict as such will not
necessarily lead to dividend payments. Without any
family governance system that enables communica-
tion between family shareholders and thus without the
development of a shared vision about what is best for
the family firm, dividend payments will rather be the
result of who has most power to push through his/her
preferences. As the use of FGP assists in creating a
shared vision between family shareholders (Musta-
kallio et al. 2002), FGP will facilitate the development
of a dividend policy, which is satisfactory for both
passive and active family shareholders. Dividend
payments are, therefore, more likely to occur in firms
with FGP as a result of the shared vision and the desire
to mitigate existing or potential family conflicts and
consequently also reducing the threat of shareholder
exits. Therefore, we postulate:
Hypothesis 2: Family governance practices will
positively moderate the positive relationship between
passive family shareholders and the propensity to pay
dividends.
3 Methods
3.1 Sample
The primary source of data is derived from a wider
cross-sectional survey, conducted during the period
2002–2003. This survey explores general firm char-
acteristics, as well as board and management compo-
sition, strategic, succession, and governance issues in
Belgian family businesses. In our study, firms are
characterized as family firms when they meet one of
the following requirements: (1) at least 50 % of the
shares are owned by family members and the family is
responsible for the management of the business, or (2)
at least 50 % of the shares are owned by family
members, the company is not family managed but the
CEO perceives the firm as a family business.
The survey was mailed to CEOs of 3,400 firms,
randomly selected from a family business database, all
of them being privately owned, independent, and
employing at least five people. The final response rate
was 9.2 % or 311 companies, of which 295 contained
sufficient data to be included in the analysis. This
response rate is in line with previous studies of
privately held firms that target CEOs (Bammens et al.
2008; Berent-Braun and Uhlaner 2012; Cruz et al.
2010; Uhlaner et al. 2007). After removing cases with
missing values, and removing two cases that have a
venture capitalist, our analyses are based on a final
sample of 244 privately held family businesses. The
possibility of a nonresponse bias is tested using
Kruskal–Wallis and v
2
tests, which compare several
key firm characteristics (such as firm size and sector)
between sample and population. No statistically
significant differences are found, which suggests that
the sample is representative for the population.
The secondary source of data is the 2003 Bel-First
database by Bureau Van Dijk, which contains
accounting statements of all Belgian firms. By using
two different sources of data, the risk of common
method bias is mitigated, since the dependent variable
(dividend payout) and several control variables (firm
size, leverage, cash, growth, and sector) result from a
database external to the survey.
3.2 Measures
3.2.1 Dependent variable
Consistent with previous empirical research investi-
gating the propensity to pay dividends (DeAngelo
et al. 2004; Denis and Osobov 2008; Fama and French
2001; Henry 2011; Sharma 2011), this study uses a
binary dependent variable, the likelihood of paying
dividends (DIV), which equals one when the firm has
paid out a dividend in 2003, and zero if the firm has
not.
304 A. Michiels et al.
123

3.2.2 Independent variables
The dummy variable Passive equals one when the firm
has family shareholders who do not work in the firm,
and zero when all the family shareholders are active,
that is, working in the firm. In order to capture the
existence of family governance mechanisms in the
firm, the dummy variable FGP equals one when the
firm has established a family forum and/or a family
charter, and zero otherwise.
2
3.2.3 Control variables
Consistent with prior finance research, the analysis
includes several firm characteristics that might influ-
ence the propensity to pay dividends. First, as higher
profits have proven to be positively associated with
payout (e.g., DeAngelo et al. 2004; Fama and French
2001; Sharma 2011), the variable ROA controls for a
firm’s profitability. ROA (return on assets) is mea-
sured as the income before interest, tax, depreciation,
and amortization, divided by total assets. The natural
log of total assets (Assets) is included in the model as a
proxy for firm size, because larger firms tend to have a
higher propensity to pay dividends (Fama and French
2001; Fenn and Liang 2001; Sharma 2011).
According to Jensen’s (1986) free cash flow
hypothesis, higher cash holdings should be positively
related to dividend payouts (DeAngelo et al. 2006;
Farinha 2003). The variable Cash contains a firm’s
cash holdings as a fraction of its total assets. The
model controls for long-term leverage, measured via
long-term debt divided by total assets (Leverage), as
debt may negatively impact dividends because the
firm needs cash to pay for interests (DeAngelo et al.
2004; Sharma 2011). Additionally, debt covenants and
restrictions imposed by debtholders can limit the
firm’s ability to pay out dividends (Baker 1989;
Farinha 2003; Hu and Kumar 2004; Jensen and
Meckling 1976). The natural logarithm of firm age
(Firm Age) is included as a proxy for a firm’s maturity.
Older firms are typically in later growth phases, which
gives rise to excess cash, and are thus more likely to
pay dividends (Sharma 2011; Yoshikawa and Rasheed
2010).
A firm’s investment or growth opportunities are
expected to be negatively related to the propensity to
pay dividends because these opportunities give a firm
a strong incentive to retain cash and thus not to pay out
dividends. Consistent with prior research (Carney and
Gedajlovic 2002; Denis and Osobov 2008; Fama and
French 2001; Naceur et al. 2006), growth rate of assets
in 2003 (dA
t
/A
t
) is a proxy for a firm’s investment
opportunities (Growth), because greater growth indi-
cates superior investment opportunities (DeAngelo
et al. 2004). As the generational phase of a family firm
might influence the decision to pay dividends (Lub-
atkin et al. 2005), a dummy variable Generation is
included, which equals one for a first-generation
family firm and zero for later generations. Although
our sample does not include any firms in which a
venture capitalist is involved, we should control for
the possible influence of other nonfamily shareholders
on the firm’s dividend policy. Therefore, we include
the dummy variable Nonfam Share, which equals one
when the firm has active nonfamily shareholdings
(managers who do not belong to the family but have
shares of the firm) and zero otherwise. Finally, in order
to control for sector effects, four sector dummy
variables are included: Manufacturing,Construction,
Wholesale, and Service.
4 Results
4.1 Descriptive statistics and univariate analysis
Table 1reports average characteristics of the full
sample and of the subsample of dividend payers and
nonpayers. About 18 % of the sample firms are
dividend payers. This percentage corresponds to the
study of Rommens et al. (2012) whose sample consists
of 19 % dividend-paying private firms in Belgium.
The sample firms have an average dividend payout
ratio of 1.09 % (if measured as dividend to assets) or
18.67 % (if measured as dividend to earnings). About
34 % of the sample firms have passive family
shareholders, and 15 % of the firms have some sort
of FGP in place. On average, the sample firms have
assets of 4.9 million euro and are 40 years old, and
about 79 % of the firms are second- and later-
generation firms.
2
We use this dummy (‘‘and/or’’) as a proxy for family
governance practices because the fairly small sample size does
not allow for a more detailed breakdown in sorts and numbers of
family governance practices.
Private family firms 305
123

The last column presents tests of mean differences
between dividend payers and nonpayers. Consistent
with prior literature, the dividend payers in our sample
tend to be more profitable, larger, and older and have
higher cash holdings compared to nonpayers. They
also tend to have a lower degree of long-term leverage.
Firms of the service sector and firms with nonfamily
shareholders appear to have a higher propensity to pay
dividends. Dividend payers also appear more often to
have passive family shareholders than nonpayers,
which corresponds to Hypothesis 1 (on a univariate
level). The mean differences between dividend payers
and nonpayers for FGP and Generation are not
statistically significant. This last result is not surpris-
ing as the generational proxy is a crude measure for
agency effects that are already measured more directly
by our passive family ownership variable.
Table 2reports the correlations among the vari-
ables of interest in this study. The dependent variable,
DIV, is significantly and positively correlated with
Passive,ROA,Assets,Cash,Firm Age,Nonfam Share
and is significantly and negatively correlated with the
firm’s Fin. Leverage. The highest absolute correlation
between the explanatory variables is 0.54, which is
well below the 0.80 threshold above which multicol-
linearity threats could arise (Gujarati 2003). Addition-
ally, in all regressions, the highest VIF score is 1.99,
again considerably less than the 10 threshold (Gujarati
2003). Consequently, multicollinearity is not likely to
be a concern in this study.
4.2 The impact of passive family shareholders
on the propensity to pay dividends
Table 3displays the results of the regression models.
The models represent a multivariate logit model where
the probability of paying out a dividend is estimated
using the functional form fzðÞ¼ ez
1þezwhere z=DIV.
Table 1 Descriptive statistics: dividend payers versus nonpayers
Full sample (n=230) Nonpayers (n=192) Payers (n=38) Differences
Mean SD Mean SD Mean SD tvalue
b
zvalue
c
DIV 0.18 0.38
Payout1 0.01 0.05
Payout2 0.19 1.90
Passive 0.34 0.48 0.32 0.47 0.47 0.50 1.84** 1.83*
FGP 0.15 0.36 0.14 0.35 0.19 0.39 0.69 0.69
ROA 6.51 7.50 5.42 7.36 11.58 5.92 5.14*** 5.95***
Assets
a
4,913.87 11,850.07 4,037.25 8,038.51 9,011.51 21,981.67 2.53*** 2.62***
Cash 0.14 0.16 0.21 0.14 0.24 0.20 4.83*** 4.14***
Leverage 0.02 0.04 0.03 0.04 0.01 0.01 -3.18*** -3.70***
Firm Age 40.11 37.97 36.58 27.48 56.63 66.37 3.20*** 2.13**
Growth 0.04 0.21 0.03 0.21 0.07 0.20 1.04 2.02**
Generation 0.21 0.41 0.22 0.41 0.16 0.37 -0.82 -0.82
Nonfam Share 0.06 0.23 0.05 0.21 0.12 0.21 1.84** 1.83*
Manufacturing 0.34 0.48 0.35 0.48 0.33 0.47 -0.28 -0.28
Construction 0.14 0.34 0.14 0.35 0.12 0.32 -0.40 -0.40
Wholesale 0.36 0.48 0.37 0.48 0.30 0.46 -0.82 -0.82
Service 0.16 0.37 0.14 0.35 0.26 0.44 1.80** 1.79*
N=244
FGP family governance practices
*, **, *** Significant at a probability level below 0.10, 0.05, or 0.01 level (two-tailed); Payout1 =dividend to total assets;
Payout2 =dividend to earnings
a
in 000 EUR
b
tvalue based on a two-sample ttest
c
zvalue based on a two-sample Wilcoxon rank-sum (Mann–Whitney) test
306 A. Michiels et al.
123

Model 1 captures the impact of passive family
shareholders on the propensity to pay dividends, while
controlling for firm characteristics and sector. The
Nagelkerke pseudo R
2
is 31 %, and the model v
2
is
significant at p\0.001. Of the control variables, firm
performance, cash, and nonfamily shareholders have
significant positive coefficients, while long-term
leverage has a significant negative coefficient.
The results show that the presence of passive family
shareholders has a significantly positive effect on the
probability of paying dividends, supporting Hypoth-
esis 1.
4.3 The effect of family governance practices
The variable FGP enters in the second model in
Table 3. The results indicate that the use of family
governance practices has no significant direct effect on
the propensity to pay dividends. This result is in line
with the results reported in Tables 1and 2(no
significant difference of FGP between payers and
nonpayers and no significant correlation between DIV
en FGP). Thus, the use of FGP does not directly
influence the dividend decision. However, as argued in
Hypothesis 2, the use of FGP assists in creating a
shared vision among active and passive family share-
holders (Mustakallio et al. 2002), thereby facilitating
the development of a dividend policy which solves
potential intra-familial conflicts of interest. FGP are
thus expected to indirectly affect the relation between
the presence of passive family shareholders and the
firm’s dividend policy.
In order to capture this potential moderating effect
of FGP on the relation between passive family
shareholders and the propensity to pay dividends, the
third model introduces a moderating variable Pas-
sive*FGP. According to Baron and Kenny (1986), this
situation, where the moderator variable is uncorrelated
with the dependent variable, is beneficial for the
interpretation of the interaction term. Model 3 presents
the regression model, with a Nagelkerke pseudo R
2
of
33 % and a model v
2
, which is significant at
p\0.001.
The beta coefficient of Passive becomes nonsignif-
icant in model 3. However, the direct effect of the
moderator is not relevant to testing the moderator
hypothesis (Baron and Kenny 1986), and we should
therefore only consider the coefficient of the interac-
tion term. The coefficient of the interaction variable,
which consists of the dummies Passive and FGP,is
significantly positive. This finding supports Hypoth-
esis 2, which indicates that FGP do not directly affect
the propensity to pay dividends, but that they rather are
a mechanism that facilitates dividend payouts in
alleviating the potential intra-familial principal–prin-
cipal conflict of interest in private family firms.
These results thus support the outcome hypothesis
in that private family firms with passive family
Table 2 Pearson correlations
Variable 1 2 3 4 5 6 7 8 9 10
1. DIV 1.00
2. Passive 0.12* 1.00
3. FGP 0.04 0.03 1.00
4. ROA 0.35*** -0.00 -0.01 1.00
5. Assets
a
0.18*** 0.00 0.26** -0.01 1.00
6. Cash 0.30*** 0.07 -0.02 0.35*** -0.06 1.00
7. Leverage -0.20*** 0.09 -0.10 -0.18*** -0.54*** -0.16** 1.00
8. Firm age 0.16** 0.11 0.13** -0.07 0.25*** 0.01 -0.15** 1.00
9. Growth 0.07 0.02 0.05 0.05 0.14** 0.01 -0.08 -0.01 1.00
10. Generation -0.05 -0.02 -0.10 0.00 -0.10 -0.03 0.06 -0.28*** 0.16** 1.00
11. Nonfam share 0.12* -0.03 0.04 -0.05 -0.03 -0.01 0.06 0.23*** -0.02 -0.08
N=244
FGP family governance practices
*, **, *** Correlation is significant at a probability level below 0.10, 0.05, or 0.01 level (two-tailed)
a
Natural logarithm
Private family firms 307
123

shareholders are more likely to pay out dividends to
their shareholders when family governance practices
(FGP =1) are present than firms without any family
governance mechanism.
4.4 Robustness tests
We also executed several robustness tests. First, in our
analyses, we use a 1-year dividend as the dependent
variable. However, one could argue that whether or
not a firm pays out a dividend in one particular year
may also be the result of some specific event that
occurred during that year. Therefore, as a robustness
test, we re-performed the analysis using a proxy that
covers 3 years (dummy equals one when the firm has
paid out a dividend in the period 2000–2003, and zero
otherwise). The results again show a significantly
positive interaction variable, confirming the robust-
ness of our results (results not reported).
Second, an important explanatory factor for our
results may be the existence of a potential passive
ownership threshold. To test whether the interaction
variable ‘‘passive ownership 9FGP’’ becomes only
positive when passive ownership reaches a certain
threshold, we estimated several additional models in
which we used different ownership thresholds (which
measure total ownership by passive shareholders): 10, 25
and 50 %. The dummy variable Passive10 % equals one
for firms who have at least 10 % passive ownership and
zero otherwise (analogous for Passive25 % which equals
one for firms who have at least 25 % passive ownership
and Passive50 % which equals one for firms who have at
least 50 % passive ownership). Table 4reveals that all
passive ownership threshold levels show similar effects
to those reported in Table 3(a positive significant
interaction term ‘‘passive ownership 9FGP’’), regard-
less of the level of passive ownership.
Third, since the variable Nonfam Share is signifi-
cantly positive in all models, we performed an addi-
tional robustness test in order to check their influence.
We removed all firms withnonfamily shareholdersfrom
our sample (14 in total), so that our sample consists of
family firms with only family shareholders. Table 5
reveals that the results remain unchanged, confirming
the important impact of passive family shareholders and
family governance on a firm’s dividend policy, regard-
less of the presence of other nonfamily shareholders.
Table 3 Binary logit regression analysis of the propensity to
pay dividends
Model 1 Model 2 Model 3
Constant -7.2904***
(2.2604)
-.3927***
(2.3323)
-6.8374***
(2.4033)
Hypotheses
Passive 0.8636**
(0.4399)
0.8684**
(0.4409)
0.34644
(0.5041)
FGP -0.1080
(0.6027)
-1.6662
(1.1365)
Passive*FGP 3.0465**
(1.4230)
CONTROLS
ROA 0.1615***
(0.0363)
0.1613***
(0.0363)
0.1509***
(0.0370)
Assets
a
0.2584
(0.2218)
0.2733
(0.2369)
0.1848
(0.2444)
Cash 2.3996*
(1.2325)
0.24140*
(1.2371)
2.9665**
(1.3344)
Leverage -30.1559**
(15.0732)
-30.0613*
(15.0857)
-28.7833*
(15.2055)
Firm age
a
0.4515
(0.3330)
0.4502
(0.3330)
0.5075
(0.3513)
Growth 0.6099
(1.1643)
0.5863
(0.1728)
1.2976
(1.1974)
Generation -0.1641
(0.5861)
-0.1713
(0.5874)
-0.1342
(0.6005)
Nonfam
share
1.8202**
(0.8101)
1.8338**
(0.8119)
1.6899**
(0.8530)
Construction -0.2757
(0.7150)
-0.2555
(0.7224)
-0.3866
(0.7632)
Wholesale 0.3262
(0.5233)
0.3360
(0.5261)
0.5023
(0.5487)
Service
b
1.0667*
(0.6022)
1.0662*
(0.6028)
1.1500*
(0.6119)
Model LR v
2
71.6 71.29 76.81
Nagelkerke
pseudo R
2
0.3136 0.3138 0.3380
N=244
Standard errors in parentheses
FGP family governance practices
*, **, *** Significance at a probability level below 0.10, 0.05,
and 0.01, respectively (two-tailed)
a
Natural logarithm
b
Manufacturing industry is the suppressed sector comparison
category
308 A. Michiels et al.
123

Finally, one could argue that the use of family
governance practices might have the same effect as
having independent nonexecutive directors on the
board. In order to rule out this reasoning, we re-
estimated all models, replacing the dummy variable
FGP by a dummy BoD, which equals one when the
firm has independent nonexecutive directors on its
board, and zero otherwise. Here, the interaction
variable (Passive*BoD) shows no significant effect,
as opposed to the original interaction variable
(Passive*FGP). This analysis indicates that formal
contractual governance mechanisms do not have the
same effect on a family firm’s dividend policy than the
use of family governance practices (results not
reported).
4.5 Post hoc analyses
Building on the reasoning behind the second hypoth-
esis, FGP may not only increase the propensity to pay
dividends, but meanwhile also lead to an optimal
dividend policy in the sense that dividends will be
more aligned with the firm’s growth opportunities. For
example, when the family firm has very profitable
investment opportunities, FGP are the ideal forum to
Table 4 Robustness test: using ownership thresholds instead of
a dummy variable for passive shareholders
10 % 25 % 50 %
Constant -6.2300*** -6.4419*** -6.9615***
Hypotheses
Passive10 % -0.0544
Passive25 % 0.2116
Passive50 % 0.1384
FGP -1.6335 -1.0560 -0.6025
Passive*FGP
c
3.0651** 3.1254** 3.2590**
Controls
ROA 0.1455*** 0.1528*** 0.1553***
Assets
a
0.1314 0.1708 0.2174
Cash 2.9640** 2.7323** 2.5327**
Leverage -26.9482* -28.3160* -29.3605*
Firmage
a
0.5210 0.4870 0.5574
Growth 1.4718 1.3381 1.0892
Generation -0.1891 -0.1408 -0.1121
Nonfam share 1.1656 1.5067* 1.5123*
Construction -0.2748 -0.4552 -0.5671
Wholesale 0.3815 0.3233 0.2259
Service
b
1.1592* 1.0384* 1.1193*
Model LR v
2
73.72 76.01 74.17
Nagelkerke
pseudo R
2
0.3244 0.3345 0.3264
Binary logit regression analysis of the propensity to pay
dividends; N=244
Standard errors in parentheses
The interaction variable is Passive10 %*FGP for the first model,
Passive25 %*FGP for the second model, and Passive50 %*FGP
for the third model
FGP family governance practices
*,**,*** Significance at a probability level below 0.10, 0.05,
and 0.01, respectively (two-tailed)
a
Natural logarithm
b
Manufacturing industry is the suppressed sector comparison
category
Table 5 Robustness check: firms with nonfamily shareholders
excluded
Model 1 Model 2 Model 3
Constant -7.3518*** -7.3881*** -6.8345
Hypotheses
Passive 0.7713* 0.7725* 0.3134
FGP -0.0522 -1.1134
Passive*FGP 2.7335*
Controls
ROA 0.1582*** 0.1580*** 0.1484***
Assets
a
0.2703 0.2762 0.1923
Cash 1.9639 1.9672 2.5241*
Leverage -31.38* -31.3022* -29.1422*
Firmage
a
0.4516 0.4509 0.4934
Growth 0.7342 0.7265 1.3580
Generation -0.1359 -0.1398 -0.1143
Construction -0.1691 -0.1606 -0.2306
Wholesale 0.5460 0.5480 0.6624
Service
b
1.2212 1.2194 1.2948*
Model LR v
2
60.56 60.57 64.73
Nagelkerke
pseudo R
2
0.2937 0.2938 0.3139
Binary logit regression analysis of the propensity to pay
dividends; N=230
Standard errors in parentheses
FGP family governance practices
*,**,*** Significance at a probability level below 0.10, 0.05,
and 0.01, respectively (two-tailed)
a
Natural logarithm
b
Manufacturing industry is the suppressed sector comparison
category
Private family firms 309
123

discuss these opportunities among family members
and to convince passive family shareholders that the
use of the available cash for these new investment
opportunities will be more optimal than paying out
dividends. However, when no new profitable growth
opportunities are available, active shareholders have
less reasons or arguments in favor of keeping excess
funds in the firm and a dividend policy could be
accordingly agreed upon. In sum, active as well as
passive family shareholders might be more willing to
reach a shared vision concerning the best use of
available funds when they discuss these issues in FGP.
The regression models in Table 3already contain a
variable that controls for growth opportunities. While
the coefficient of this variable is insignificant, Table 6
presents a test of mean differences in order to find out
whether a firm’s dividend policy is more related to its
growth opportunities in the presence of FGP. Because
perfectly capturing a firm’s future growth opportuni-
ties in one single measure is impossible (DeAngelo
et al. 2004), the analysis uses two proxies as a measure
for growth opportunities: average growth rate of
assets in the period 2000–2003 (results reported in
Table 4) and asset growth during 2003 as a measure
for growth opportunities (results not reported but
similar to results reported in Table 6) (Carney and
Gedajlovic 2002; DeAngelo et al. 2004; Fama and
French 2001; Naceur et al. 2006).
Table 6gives a preliminary indication that the
reasoning behind Hypothesis 2 might be plausible:
firms with FGP show a lower propensity to pay
dividends when the growth opportunities are high and
a higher propensity to pay when the growth opportu-
nities are low (i.e., an optimal dividend policy). Firms
without any FGP show an opposing trend (i.e., a
suboptimal dividend policy). In sum, FGP thus can
align family and business incentives in ways that
reduce the intra-familial conflict of interest while
encouraging efficiency in decision-making. Despite
the small amount of observations in each group, and
thus the limited statistical significance, these results
indicate that the reasoning above is plausible. Also,
according to a recent literature study of Siebels and
Knyphausen-Aufseß (2012), theory on FGP lacks
testable hypotheses and calls for research that exhausts
the potential of empirical data in order to develop new
propositions. Therefore, an explorative empirical
research strategy as the one applied above is legitimate
in this context and thus might raise some important
issues that future research may explore in more depth
on a larger sample.
5 Discussion and conclusions
This paper focuses on why and in which cases
privately held family firms pay out dividends. After
all, according to traditional agency theory, dividends
are supposed to be irrelevant in this type of firms
because of the absence of a principal-agent conflict of
interest, but yet these firms do pay out dividends
regularly. This study therefore aims at filling two gaps
in the finance and governance literature. On the one
hand, past research in finance neglects privately held
family firms in the dividend discussion. On the other
hand, prior governance research largely ignores an
important conflict in privately held family firms: the
intra-familial principal–principal conflict of interest
between active and passive family shareholders. In an
attempt to fill these gaps in literature, we investigate
whether FGP have a moderating impact on the ability
of dividends to mitigate possible conflicts of interest
between active and passive family shareholders.
The results of our empirical analyses on a sample of
Belgian privately held family firms support the
argument that the presence of passive family share-
holders, implying a potential intra-shareholder conflict
of interest, increases the propensity to pay dividends.
Table 6 Additional analysis: link between dividends and
growth opportunities for firms with passive family shareholders
Growth
opportunities
a
for…
Tests of
mean
differences
Nonpayers Payers tvalue
Firms with passive family
shareholders and with
FGP (n=14)
0.09 -0.06 -1.61*
Firms with passive family
shareholders and
without FGP (n=70)
0.05 0.10 1.56*
Analyses repeated with asset growth in 2003 as a proxy for a
firm’s future growth opportunities gave the same results
FGP family governance practices
* Significance at a probability level below 0.10
a
Growth opportunities are measured as the average growth
rate of assets in the period 2000–2003
310 A. Michiels et al.
123

Additionally, the use of FGP strengthens this relation-
ship. This finding suggests that FGP can be seen as a
facilitating mechanism for dividend payouts to allevi-
ate the potential intra-familial principal–principal
conflicts of interest. Furthermore, additional explor-
atory analyses indicate that FGP might also lead to an
optimal dividend policy that is in line with the firm’s
growth opportunities, in contrast to firms without FGP.
Dividends are not always an obvious solution to
potential principal–principal conflicts of interest. In
the absence of a disciplining stock market, whether the
privately held family firm pays out dividends is likely
to be the result of a voluntary action of active family
shareholders who usually have decision power. There-
fore, the findings indicate that FGP appear to be an
important facilitating mechanism to avoid or mitigate
conflicts among family shareholders by paying out
dividends. Thus, passive family shareholders seem to
be successful in demanding dividends in privately held
family firms when FGP are present. According to La
Porta et al. (2000), dividends can be considered as
substitutes (substitute hypothesis) or outcomes (out-
come hypothesis) of corporate governance mecha-
nisms. Our results support the outcome hypothesis in
the case of private family firms: Therefore, we can
consider FGP to be a mechanism that facilitates
dividend payouts as an instrument to alleviate
potential intra-familial conflicts of interest between
active and passive shareholders.
Prior family business research concluded that FGP
play an essential role in maintaining strong cohesion,
high mutual trust, and commitment among family
members, which are key resources for the family firm,
leading to a competitive advantage (Steier 2001;
Sundaramurthy 2008) and superior firm performance
(Uhlaner et al. 2007; Berent-Braun and Uhlaner 2012).
Hence, FGP ‘‘not only enhance the effectiveness of the
business-owning family, but also the business it owns’’
(Berent-Braun and Uhlaner 2012, p. 104). Our study
adds another perspective from which FGP may benefit
the business system. The usual dream of the founder to
perpetuate the firm over family generations is often
reflected in a longer time horizon, resulting in patient
financial capital which is a very valuable asset for
family firms (Sirmon and Hitt 2003). The occurrence
of passive family shareholders may make the contin-
uation of capital to remain patient a real challenge in
family firms. Passive family shareholders may
demand a dividend policy, even when there are several
value-enhancing investment opportunities that cannot
be financed with external financing sources. Indeed,
private family firms usually have limited or no access
to traditional capital markets (Sirmon and Hitt 2003),
which makes internal financial resources very impor-
tant for these firms (Lo
´pez-Gracia and Sa
´nchez-
Andu
´jar 2007). Consequently, paying dividends when
interesting investment opportunities need to be
financed may not be an efficient decision.
The findings of our additional exploratory analysis
suggest that FGP will increase the efficiency in
decision-making concerning dividend payouts since
firms with FGP pay out dividends only when it is
appropriate to do so, that is, when the growth
opportunities are low. This finding suggests that FGP
indeed are a useful tool for openly discussing dividend
and reinvestment preferences while simultaneously
aligning the interests and creating a shared vision
between active and passive family shareholders. Con-
trarily, when reinvestment in the business is needed,
that is, when growth opportunities are high, FGP will
be an excellent instrument to express the importance of
these opportunities to the passive family shareholders.
After all, FGP are found to have a positive effect on
creating a shared vision on what is best for the future
development of the firm (Mustakallio et al. 2002). This
way, passive family shareholders will feel involved in
the decision-making process, and they are more likely
to understand the need to keep the money in the firm,
compared to the case without FGP. These results
suggest that family governance mechanisms are an
essential tool in developing a dividend policy that is
efficient in both aligning the interests of active and
passive family shareholders, as well as efficient in
terms of adapting to the firm’s growth opportunities,
thereby keeping financial capital patient.
Our results also contribute to the debate whether
formal/contractual governance (e.g., the board of
directors) and relational governance (e.g., family
governance practices) are substitutes or complements
(Poppo and Zenger 2002). Although we did not
formally test for substitution effects, the fact that we
find significant effects for FGP and not for a board of
directors (see Sect. 4.4 Robustness tests) suggests that
FGP and a board of directors may be substitutes that
are in line with the findings of Gnan et al. (2013).
Although contractual governance institutions such as a
board of directors have a formal role in approving the
family firm’s policy, FGP are much more effective in
Private family firms 311
123

translating family member’s opinions, visions, and
values into collective plans and actions. FGP may
therefore play a pivotal role in reaching family unity
concerning important business topics such as dividend
policy, which can be easily approved by the board
afterward. From this perspective, FGP perform impor-
tant roles usually executed by the board of directors
(Eckrich and McClure 2012; Gnan et al. 2013).
Several practical implications can arise from our
findings. As our results indicate that FGP are a
facilitating mechanism for dividend payouts to allevi-
ate the potential intra-familial principal–principal
conflicts of interest, private family firms should be
encouraged to establish FGP. Based on our sample,
FGP are only installed by a minority of private family
firms. However, it can help mitigate conflicts of
interest between active and passive shareholders that
potentially threaten the long-term continuity of the
family firm. Moreover, as our results suggest that FGP
may tailor dividend payout to the firm’s growth
opportunities, FGP can help to keep sufficient internal
financing sources in the firm, taking into account the
often limited availability of external finance. There-
fore, family firms can seize the opportunity to grow.
This study has some limitations, which could
provide opportunities for further research. First, using
longitudinal data instead of cross-sectional data will
allow researchers to investigate the moderating impact
of FGP on dividend policy overtime, which might
provide additional interesting insights. Second, the
sample consists only of Belgian privately held family
firms. Even though this might seem a limitation of the
study, the sample gives us the advantage of having
accurate, objective financial data on privately held
firms (obtained from the Bel-First database of Bureau
Van Dijk), which is uncommon in most countries.
Third, data from a more detailed survey and a larger
sample of family firms could build further on the
findings of this study. Future research might then, for
example, empirically investigate whether FGP indeed
reduce family conflicts and thus reduce the threat of
continuation. Finally, the results give an indication
that FGP increase the efficiency in decision-making
concerning dividend payouts. This result could inspire
many future research directions, for example, inves-
tigating the impact of FGP on decision-making
efficiency in other areas such as keeping the firm
focused on an entrepreneurial and innovative strategy
and avoiding resistance to change.
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