The Role of Dividends, Debt and Board Structure in the Governance of Family Controlled Firms

Abstract: We investigate whether family controlled firms use dividends, debt and board structure to exacerbate or mitigate agency problems between controlling and minority shareholders in a capital market environment with high investor protection and private benefits of control. Results indicate family controlled firms employ higher dividend payout ratios, higher debt levels and lower levels of board independence compared to non‐family firms. This suggests family controlled firms use either dividends or debt as a substitute for independent directors. We also find that dividends and debt are more effective governance mechanisms in mitigating the families’ expropriation of minority shareholders’ wealth. Independent directors are, in contrast, more effective in controlling owner‐manager conflict in non‐family firms.