The influence of family board involvement on working capital management

Abstract

While research on long-term capital structures of family and non-family firms is well established, differences in current assets- and liabilities-management are largely under-researched. The aim of the study is to examine whether the type and degree of family involvement in the firm affect the efficiency of working capital management. Employing a partially hand-collected panel of 278 listed firms from 2000–2013 this paper analyzes the impact of family shareholders as owners, managers, and supervisors on working capital handling in Germany. The results show that primarily the share of family members in the executive board increases the length of the cash conversion cycle (CCC), particularly in smaller and non-service firms. Most notably, family management increases the inventory period (DIO). The higher average equity ratio of family firms suggests that family firms may face reduced financing pressure to address such inefficiencies in current assets and current liabilities management. Furthermore, family-managed firms may be less professional in their working capital management. The findings contribute to the literature by showing that in a country with a less investor-friendly corporate governance system, family influences on working capital management are primarily due to management presence, not plain shareholder influence. The results stress the need for researchers to consider the degree of family management involvement when analyzing the financial aspects of family firms.