Corporate Governance and Financial Constraints in Family Controlled Firms: Evidence From Malaysia

Abstract

The hypothesis of financial constraints suggests that firms will be denied profitable investment dueto inaccessible to external capital markets as debt and equity financing are no longer perfectsubstitutions after firms utilize internal capital. In view of reduced investments during globalfinancial crisis in 2008-2009, the study investigates 157 firms, whether they face the issues offinancial constraints in Malaysia. In general, non-family firms rely heavily on the external debtmarket while family controlled firms utilizing internal cash and reducing their dependence on debtmarket for their investments, confirming financial constraints in family firms. However, thepresence of CEO duality does not exaggerate the problem of financial constraints, but rather leadsfamily firms to become stagnant in their investments. Independent directors appear to beineffective in governing family firms in issuing finances for investment. Apparently, their presencein family firms reduces firms’ investment opportunities either through internal cash and externaldebt financing, which could reduce shareholders’ value in the long-term.Keywords: Investments; Financial Constraints; Corporate Governance; Duality; IndependentDirector; Family Controlled firms.

Capital Structure and Culture in Malaysia: A Study From Ethnicity and Religion Perspectives

“…Observation showed that non-family firms rely heavily on debt, in contrast with family-controlled firms which are mobilizing internal funds and reduce dependency on debt. This confirms that pecking-order constraints exist in family firms (Chu, Lai, & Song, 2016) . On the other hand, observations showed that asymmetric information has a significant impact on firms' short-term and total capital structure (Newman, Gunessee, & Hilton, 2012).…”

Ownership structure and financial constraints – Evidence from an emerging market

“…They also discover that during financial crises, investment in non-family owned firms and return on investment are higher in non-family controlled firms. The same is also reported by Chu et al (2016), who studied Malaysian family-controlled firms during the global financial period of 2007-08. After using regression analysis, it was discovered that family firms are more financially constrained than non-family-controlled firms due to low investment efficiency in family-controlled firms.…”

“…Hanazaki and Liu (2007) and Lins et al (2013) conclude that financial constraints are more severe in family-owned firms as large shareholders are more inclined to look upon their interests at the cost of minority shareholders. The same is also endorsed by Chu et al (2016), who studied Malaysian family-controlled firms and suggested a positive impact on financial constraints. Further, ownership concentration is positively associated with financial constraints as in those firms; there is a high level of information asymmetry and less governance disclosure; which in turn increases the level of financial constraints (Chen et al, 2008).…”

“…In literature, very few studies are available about financial constraints and corporate governance. Among the very limited studies available that studies the impact of ownership structure on financial constraints (Chu et al, 2016). There are also many studies witnessed in the literature that examine the direct association between ownership structure and financial constraints.…”

“…In literature, very few studies are available about financial constraints and corporate governance. Among the very limited studies available that studies the impact of ownership structure on financial constraints (Chu et al. , 2016).…”