The liquidity paradox in family firms: how family control and CEO identity shape cash holdings and firm value

Abstract

Purpose This study investigates the relationship between family control, CEO identity and cash holdings, and how these factors influence firm value in Egyptian family firms. Operating in a weak governance environment, this paper aims to unpack whether family CEOs behave differently in liquidity decisions and whether such decisions enhance or diminish firm value. Design/methodology/approach Using a panel of 723 firm-year observations from 70 non-financial firms listed on the EGX100 Equally Weighted Index between 2011 and 2022, this study uses ordinary least squares estimations with robust standard errors as the main method, and further applies two-step system generalized method of moments as a robustness check to address potential endogeneity concerns. Findings The results reveal that family firms, particularly those led by family CEOs, hold significantly lower cash reserves than non-family firms, consistent with socioemotional wealth theory. However, cash holdings in family firms are negatively associated with firm value, supporting agency theory’s concern about the misuse of internal funds. Family CEO attributes – such as founder status, ownership stake and duality – further shape cash policies and exacerbate valuation discounts when cash levels are high. Research limitations/implications While the study focuses on Egyptian family firms, its findings are particularly relevant to other emerging markets characterized by concentrated ownership, weak investor protection and institutional voids. However, caution is warranted in generalizing to developed economies with more robust governance systems. Future research should undertake cross-country comparative analyses and incorporate qualitative methods to better understand the institutional, cultural and behavioral factors shaping liquidity decisions in family-controlled firms. Originality/value This study makes a significant contribution to the corporate governance and family business literature by integrating agency theory and socioemotional wealth perspectives to offer a nuanced understanding of cash holding behavior in family firms. It is among the first to empirically demonstrate how CEO identity – including founder status, ownership and dual roles – modulates the effect of cash holdings on firm value in weak institutional contexts. By focusing on an underexplored emerging market, the study extends the boundaries of existing theory and provides actionable insights for policymakers, institutional investors and corporate boards aiming to mitigate governance risks and optimize financial strategies in family-controlled enterprises.