Do Managerial Entrenchment and High Free Cash Flow Always Have a Negative Impact?

Presence of free cash flow and anti-takeover provisions are often symptomatic of agency problem in a firm. We argue that this relationship is likely to be mediated by motivations of the management. Extant family firm research suggests that the management in family firms are more likely to focus on long-term performance and are more likely to be motivated by the desire to build legacy and attain longevity. This study finds that whereas on average for a non-family firm, both free cash flow and anti-takeover provisions are negatively related to firm performance, the relationship flips in the case of family firms. We find that increased anti-takeover defenses and high free cash flow are related to superior performance in the case of family firms.