Testing the contributions of outside directors: should family firms respond differently?

Purpose – This paper demonstrates that the effects of the presence of outside directors on the board of directors can be different across family vs. non-family firms, regarding the financial performance. We propose that the presence of outside directors in the board is relevant to explain the performance of family firms, because they better deal with mechanisms that reduce the type II agency conflicts. Theoretical framework – Based on agency theory and its derivatives, we capture the specificities of family firms relative to non-family firms. Design/methodology/approach – Drawing from an extensive and updated database of over 370 publicly listed companies in Brazil, this study conducted panel data regressions with fixed effects on three different response variables, in order to have a broader perspective and reduce the bias of the results. Moreover, we performed robustness tests with different measurement methods. In addition, we tested the selection of variables by addressing both internal and external validity criteria, in addition to convergent and nomological validity, according to the literature. Findings – The empirical results indicate that there is a relationship between board independence and short-term financial performance for a cohort of family firms. Practical & social implications of research – This research contributes to various stakeholders by providing relevant insights about an important ESG criterion, which opens up a path for further studies.