The Association between Free Cash Flows and Investment Decisions of Family Firms in Taiwan

This paper investigates how family and non-family firms affect the relation between a firm's investment decisions and free cash flows. Based on a sample of publicly-traded firms in Taiwan from 1998 to 2008, this paper demonstrates that, compared to non-family firms, family firms show smaller over-investment amount when they have positive free cash flows. However, in the case of negative free cash flows, partial results show that family firms under-invest more, compared to non-family firms. Different from those in prior literature, findings in our study show that, when family firms have positive free cash flows and higher levels of deviation of control rights from cash flow rights, family firms' over-investment amount is smaller than non-family firms'. Our results imply that the deviation of control rights from cash flow rights may be an indication of a family firm's funding choice, which in turn affects investment decisions.