Does Family Control Shape Corporate Capital Structure? An Empirical Analysis of Eurozone Firms

Abstract

This study investigates the relationship between family control and corporate capital structure considering the dynamic nature of the debt policy and the ownership structure of family firms. Our results show that the sensitivity of debt to fluctuations in cash flow is less pronounced in family firms and highlight that family control increases the speed of adjustment toward target debt. Four dimensions of the family business model explain these results: deviations of voting from cash flow rights, the presence of a second blockholder in the company, involvement of family members in management, and the generation in charge of the business. The weaker negative impact of cash flow on debt is driven by family firms with no control-enhancing mechanisms, companies with active family participation in management and family businesses that are still controlled by the first generation. By contrast, the more severe agency conflicts between owners and creditors in family firms with a second blockholder lead to more pronounced pecking order behaviour. Furthermore, the higher flexibility in corporate decision-making of family firms managed by the family and under the influence of the first generation explains why family companies are able to rebalance their capital structure faster.

Radiografía Económico-Financiera de las pequeñas empresas familiares españolas

“…As a result, family firms are considered reliable debtors and thus obtain better borrowing conditions, at lower cost (Anderson & Reeb, 2003). Another relevant factor is that the family will have special interest in complying with its debt commitments, due to the use of its personal wealth as collateral, together with the involvement of human capital by family members (Pindado et al, 2015). Our analysis shows that borrowing costs varied significantly, in all the economic scenarios considered, between family and non-family businesses.…”

Do shareholder protection and creditor rights have distinct effects on the association between debt maturity and ownership structure?

“…Along this line, agency theory predicts that creditors assess and take into account agency costs at firm‐level when deciding the amount, the cost, and the maturity of the borrowings (e.g., Fan et al., ; Lin, Ma, Malatesta, & Xuan, ; Pindado et al., ). Debt‐related agency costs are typically illustrated by three agency problems.…”

“…From a governance perspective, ownership structure and debt financing are considered substitute mechanisms as both can act as disciplinary tools to limit agents’ moral hazard and reduce information asymmetry among different types of stakeholders (e.g., Florackis, ; Pindado et al., ; Shleifer & Vishny, ; Shyu & Lee, ). Short‐term debt maturity is assumed to reduce debt‐related agency costs arising from information asymmetry because the value of short‐maturity debt is less sensitive to borrower's private information (Barclay & Smith, ; Khurana & Wang, ).…”

“…weak creditor rights—over risk‐taking decisions than is perceived as optimal by debtholders. Conversely, the strength of creditor rights may favor the supply of long‐term debt, but large shareholders may choose short‐term debt to avoid close monitoring by debtholders (Cho et al., ) or the risk of losing control (Pindado, Requejo, & De La Torre, ).…”

Propping in the Pyramidal Business Groups in Turkey

“…Theoretically, control concentrating mechanisms such as stock pyramids, crossownership structures and dual class equity potentially create very large agency costs as many seminal articles delineate (Bebchuk, Kraakman, & Triantis, 2000;Chan & Hsu, 2013;Pindado, Requejo, & La Torre, 2015;Villalonga & Amit, 2006). Such mechanisms often lead a controlling shareholder to gain a lock on control which is not equal to his cash flow ownership.…”