How do family ownership and founder management affect capital structure decisions and adjustment of SMEs?

Abstract

Purpose – The purpose of this paper s to study the financing behavior of family firms (FF), as these differ from their small- and medium-sized enterprise (SME) counterparts in their capital structure decision, mainly due to an increased risk aversion and the desire to maintain control over the firm. Design/methodology/approach – A sample of 470 SMEs from a bank-based environment is examined for the period of 2005-2010. A dynamic panel data model is utilized to assess both the role of several capital structure determinants and the target-adjusting behavior for different subsamples of firms. Findings – The results show that FF, whether controlled by founders or not, are relatively more leveraged. The aim to maintain long-term control and limited financing options and other factors seem crucial to the observed differences in leverage and dominate risk considerations associated with higher debt. Presumed differences in agency costs across generations do not drive capital structure decisions, as overall leverage does not differ between founder- and descendant-controlled family firms (FCFF and DCFF, respectively). Firms with a founder-chief executive officer (CEO), however, adjust faster to deviations from a target debt ratio. The effects of many proposed capital structure determinants differ across firm types, but are highly consistent with predictions from the pecking order theory. Practical implications – Based on the results of this study, we suggest policy-makers in bank-based economies like Austria to strongly focus on mechanisms that facilitate the access to bank debt to ensure adequate allocation of finances to SMEs. This is especially important to stimulate growth and further innovation for the dominant group of FF, as they rely on debt the most to maintain family control. Originality/value – This paper makes a novel contribution to the literature, as it combines an analysis of the capital structure of non-listed family firms (NFF) in a bank-based economy, the respective role of founder management, the dynamic adjustment to a presumed debt target and joint tests of capital structure theories.

Ownership and Debt Financing: Indonesia Evidence

“…For instance, [19,21] find family-owned firms are considerably underleveraged comparative to the non-family-owned firms. In contrast, there are studies that reveal positive relationships, indicating that family-owned firms are more leveraged than the non-family-owned firms [14,22,23]. Looking at the financial behavior of the firms, [21] depict family management as the main determinant of lower debt level of family-owned firms.…”

“…Thus, family-owned firms become more leveraged comparative to other types of ownership structure or non-family-owned firms. Studies like [14,22,23] report a positive relationship between ownership identity (family owned) and leverage.…”

“…Being considered as less risky encourages lender to lend more and firms can reap the benefits of debt following the trade-off theory. From the view of family-owned firms, with the impressive track record over the years, these aged family-owned firms enjoy greater availability of credit [16] and a lower cost of debt financing [23].…”

A project management framework for small- and medium-sized entities: Accounting software implementation

“…Small-and medium-sized entities are a very important part of economies worldwide (Burgstaller & Wagner 2015). In Europe, they are seen as the key sources of jobs, almost twothirds of jobs are produced by SMEs (Gama & Geraldes 2012).…”

Managing Risks through Mitigation Strategies: Evidence from Cameroonian Small and Medium Enterprises

“…It is, therefore, subject to much interest given its economic weight and their contribution to wealth and job creation. Compared to larger companies, SMEs are confronted with several types of risks, benefit less from economies of scale and fewer have access to a wide resources base (Burgstaller and Wagner, 2015). For that, it is important for the enterprise to implement enterprise risk management.…”