Capital structure of family firms: the effect of debt and equity market timing

Abstract

PurposeThis study aims to investigate how the timing behavior affects the capital structure decisions of South Asian family firms. A strand of literature is available based on the capital structure of firms in general but inconsistent with family businesses framework and not from market timing outlook. This study looks at the issues from the market timing perspectives of both equity and debt market timing.Design/methodology/approachThe sample of the study is the listed family firms of India, Pakistan and Bangladesh. The firm-level data are collected from Thomson Reuters' DataStream and the ownership data collected from the countries' stock exchanges and financial statements of the family firms.FindingsThe results show that there is strong support for the market timing in the family firms' capital structure. Moreover, the financial crisis of 2007–2009 surprisingly had a positive effect on the capital structure of South Asian family business.Originality/valueThis study looks at the issues from the market timing perspectives of both equity and debt market timing. It provides evidence for supporting the equity and debt market timing effect on the capital structure and financing decision of family firms. It also addresses the impact of the 2007–2009 financial crisis on the capital structure of family firms.

Understanding debt financing decisions in family firms – Are there new insights from the recent literature?

“…Another contextual factor influencing indebtedness of firms is the financial-economic situation. The results of Muhammad et al (2021) show that during the financial crisis of 2007-2009, FFs in India, Pakistan and Bangladesh took more external finance. The leverage of the firms increased, which may denote the need of firms to be competitive or perhaps private benefit of the managers motivated them to take more external debt.…”

Pengaruh Equity Market Timing Terhadap Struktur Modal Perusahaan Manufaktur di Bursa Efek Indonesia

“…Teori lain terkait dengan keputusan pendanaan adalah market timing theory (Zhao et al, 2020;Muhammad et al, 2021;Ratih, 2021). Market timing ekuitas menunjukkan praktik yang dilakukan oleh perusahaan dengan menerbitkan saham pada saat harga (nilai) pasar ekuitas tinggi dan melakukan pembelian kembali saham pada saat harganya rendah.…”

Income Diversification and Capital Structure: International Banks Evidence

“…The larger the size of the company, the higher the confidence of creditors (debt holders) in providing loans to the company; thus, large companies tend to have higher debt (Al-Hunnayan, 2020;Al-Ajmi et al, 2009;Czerwonka & Jaworski, 2021;Dawar & M. Hull, 2014;Feng et al, 2020;Guizani & Ajmi, 2021;Kraus & Litzenberger, 1973;Muhammad, Ei Yet, Tahir, & Nasir, 2020;Yu & Yu, 2012). However, according to the pecking order theory, information asymmetry is more likely to occur in large companies.…”

“…From the creditor's perspective, the company's tangible assets will be more valuable when the company is liquidated. Therefore, ownership of tangible assets in the company will make it easier for the company to obtain loans from third (Dawar & M. Hull, 2014;Farhangdoust, Salehi, & Molavi, 2020;Guizani & Ajmi, 2021;Muhammad et al, 2020;Yu & Yu, 2012). However, from another point of view, a high level of debt can indicate the company's overinvestment in its tangible assets, which will trigger agency costs between shareholders and debtholders (Jensen & Meckling, 1976).…”