Dividend and debt policies of family controlled firms: The impact of board independence

This paper's aim is to examine whether board independence influences debt and dividend policies of family controlled firms.

The paper examines panel data on a sample of Australian publicly‐listed firms over the period 2000‐2005 using panel (random effects) regression.

Empirical test demonstrates that family controlled firms appear to have higher levels of leverage and dividend payout ratios than their non‐family counterparts. More importantly, the result indicates that the positive impact of family control on dividend policy is due to the higher proportion of independent directors on family boards. This underlines the significant role that independent directors play in influencing firm's dividend policies, especially for family controlled firms. The result also supports the notion that independent directors and dividends are complementary government mechanisms. This paper, however, finds little evidence that board independence moderates the relationship between family control and debt.

While not all family firms are the same, this research treats them as a homogeneous grouping (i.e. firms are delineated into family versus non‐family). The fact that family firms are difficult to identify and define (reflected in the diversity of definitions in the literature) may also affect the validity of studies of family business. For policy makers, the finding could serve to justify initiatives to encourage more independent directors on boards, especially in family controlled firms.

This paper provides evidence about the relationship between board independence, dividends and debt from a country with higher levels of private benefits of control, strong legal shareholder protection but less significant role of external governance mechanisms compared to the USA.