Capital Structure Determinants in Family Firms: An Empirical Analysis in Context of Crisis

Abstract

The purpose of this paper is to investigate the capital structure of family firms in a context of crisis. Specifically, it aims to discover whether and how the determinants of their capital structure have a different impact on firms' leverage before and during the recent global financial crisis. Considering the pecking order theory (POT), trade-off theory (TOT), and agency theory (AT), this study analyzes 1,502 Italian medium family firms comparing the pre-crisis (2005)(2006)(2007) and crisis (2008)(2009)(2010) periods. This research shows that that current liquidity, asset structure, and agency costs are the most important variables in influencing medium family firms' leverage, in both the pre-crisis and crisis periods. Moreover, during the crisis, agency costs increase and have a negative influence on the short-term leverage highlighting that crisis contingencies influence the agency-based effects on family firm's leverage. Furthermore, our findings highlight that a more exhaustive understanding of family firms' capital structure can be achieved through the combined use of different theories.

The Impact of Family Ownership on the Capital Structure of Palestinian Firms

“…Here, it was pointed out that big companies tend to be more diversified and have more assets as guarantees to loans, thus, are more ready to access fund sources (Al-Najjar, 2011). The current results showed that asset utilization inversely measures agency conflicts) has a positive and significant effect on the debt, consistent with previous studies (Migliori et al, 2018;Tarus and Ayabei, 2016). Moreover, these findings could be interpreted in line with that risk-efficiency argument which states that an efficient company (common agency problems) has a lower risk of bankruptcy and financial distress, thus, tend to select rise the debt ratio (Migliori et al, 2018).…”

“…In the light of resources independence theory, the family has its network, thus making it easier to access the sources of the funds for the families to increase their debt. The firm's size was found to have a positive effect on the leverage, as gauged by sales, and these findings are in line with Al-najjar (2011), andMigliori, Maturo, andPaolone (2018). This could be the scenario as sales rise, the need for cash also increases particularly, and if the firms are not good at collecting cash, this may resort to using debts to fund their needs.…”

Capital structure, firm value and managerial ownership: Evidence from East African countries

“…The majority of firms fail as a result of challenges facing managers and owners on financing decisions. This is because, most firms and organizations fail or perform poorly because of diverse challenges managers or owners face regarding financing decisions (Migliori et al, 2018). This phenomenon gained considerable attention among financial economists after the formulation of Modigliani and Miller's (1958) capital structure irrelevance theory.…”

“…Many researchers such as Migliori et al (2018) and Salam and Shourkashti (2019) maintain that there is an optimal capital structure, which involves the one that increases the wealth and value of shareholders whilst minimizing the cost of capital. However, Pinto and Quadras (2016) argue that it is difficult for managers of firms to decide an accurate and optimal capital structure, since it involves uncertainty and risks.…”

“…This suggests that the choice of a specific capital structure would have a minimal effect on firms' performance unless specific characteristics of management prevail. Therefore, Migliori et al (2018) argue that firms managed by owners would make a better choice on capital structure than those managed by individuals who are not owners. The paradox is that Modigliani and Miller's (1958) theory, which is supported by Cheng et al (2010), maintains that capital structure is irrelevant to the financial performance of firms.…”