This paper tests the hypothesis that Founding Family Controlled Firms (FFCFs) are more averseto control risk than similarnon-FFCFs and therefore avoiddebt. Higherlevelsof debt Increase the likelihood of bankruptcy and the level of control risk. We showthat FFCFsuse less debt; their choice of debt Is more sensitive to conditions associated with control risk; and that leverage Is not significantly related to managerial ownership In non-FFCFs, Indicating that founding family control, not managerial ownership, matters In determining leverage.Founding family controlled firms (FFCFs) seem to eschew debt. The Arthur AndersonlMassMutual American Family Business Survey '97 notes that "Family Businesses tend to avoid debt." It notes that 34.3% report no debt other than trade payables and another 34.2% have debt to equity levels of 1% to 25%. McConaughy (1994) finds that large, public FFCFs use significantly less debt than do non-FFCFs. Agrawal and Nagarajan (1990) note that firms with no long-term debt are more likely to be family controlled. Two-thirds of the firms examined by De Angelo and De Angelo (1985) that raise capital by issuing non-voting common stock (a way to raise capital without debt that maintains control) are family controlled.This study tests the hypothesis that FFCFs use less debt because founding family CEOs are more averse to control risk, the risk of losing control. Control risk increases with leverage because of the higher probability of bankruptcy that is associated with higher leverage. We examine a subset of public family-controlled firms in which the founding family plays a strong and direct role: firms whose CEO is the founder or related to the founder. Looking at these firms, therefore, should lead to a better understanding of distinctive financial characteristics of founder (enterpreneur) owned and operated firms, especially in the context of their control incentives and risks. Finally, we show that ignoring the founding family control factor in the analysis of firms' leverage policies omits an important factor common to many firms and may lead to an incomplete or incorrect understanding of financing decisions in cross-sectional studies of firms.Founding family CEOs have great personal wealth and undiversified human capital tied to the firm. If the unique status of founding family CEOs provides them returns to their family human capital, such as quasi-rents and scope for actions not generally available to non-founding family CEOs, then founding family CEOs have more to lose Summer, 1999

An agency theory framework is used to test the effects of founding family control on firm performance, capital structure, and value. Both the finance and management literatures regarding the relationship between firm control and firm value are explored. Controlling for size, industry, and managerial ownership, the results suggest that firms controlled by the founding family have greater value, are operated more efficiently, and carry less debt than other firms.

We examine the efficiency and value of founding family controlled firms (FFCFs), firms whose CEOs are either the founder or a descendant of the founder. We find that FFCFs are more efficient and valuable than non‐FFCFs that are similar with respect to industry, size, and managerial ownership. We also observe that descendant‐controlled firms are more efficient than founder‐controlled firms. Finally, we show that younger founder‐controlled firms are more efficient than older ones. These results are robust after controlling for the age of the firm and a variety of investment opportunity measures. Our results are consistent with the notions that managerial ownership is endogenous to the firm and that family relationships improve monitoring while providing incentives that are associated with better firm performance.

This study examines CEO compensation in 82 founding‐family‐controlled firms; 47 CEOs are members of the founding family and 35 are not. It tests the family incentive alignment hypothesis, which predicts that family CEOs have superior incentives for maximizing firm value and, therefore, need fewer compensation‐based incentives. Univariate and multivariate analyses show that family CEOs’ compensation levels are lower and that they receive less incentive‐based pay–confirming the family incentive alignment hypothesis and suggesting the possible need for family firms to increase CEO compensation when they replace a founding family CEO with a nonfamily‐member CEO.

This study examines the differences between founder‐controlled firms and firms controlled by descendants or relatives of the founder. In general, we observe that founder‐controlled firms grow faster and invest more in capital assets and research and development. However, descendant‐controlled firms are more profitable. The results are consistent with a life‐cycle view of the family firm in which the early years are characterized by rapid growth. The experience of the early years provides a basis for later, when the firm is more professionally run and can exploit its established position in the market.