Family firm identity and capital structure decisions

Abstract

Purpose The purpose of this paper is to grasp the effect of familiness on capital structure decisions in family firms, as family firm identity may be an important source of competitive advantage due to its potential to moderate relationships with stakeholders such as banks. Design/methodology/approach The paper uses panel data from 2010 to 2014, which combine financial and structural data on 691 large private German companies. The econometric approach is a random-effect and tobit panel regression using different dependent variables relating to debt. Findings The study reveals that family firms have significantly higher overall and long-term debt levels compared to their non-family counterparts. Contrary to the extant literature, tangibility is not significantly related to debt in the context of family firms and the hypothesized higher usage of trade credits by family-owned businesses could not be supported. Research limitations/implications Future research can improve the measurement of familiness by changing from a dichotomous to a continuous variable, acknowledging that family businesses are not homogenous. This would also enable a different econometric approach. Practical implications A practical implication for family firms is to actively capitalize on their identity and thus, improving the way they present themselves towards different groups of stakeholders to mitigate information asymmetries and enhance trust. Originality/value The paper investigates large private family-owned businesses, applies multiple dependent variables, and uses a family firm specific theoretical framework, namely familiness, to explain the family’s influence on the business.

Ownership and Debt Financing: Indonesia Evidence

“…Croci et al [16] also confirm that family-owned firms' main concern is to maintain good rapport with the lenders for the purpose of long-term orientation. However, on the other hand, as argued by [13], family-owned firms are more worried about preserving their control over the firm rather than worrying about bankruptcy risk and insolvency and thus engage more debt in their capital structure. Other example of positive relationship between capital structure and family-owned firms is by [14] where family-owned firms employ high level of debts in their capital structure.…”

“…The preference of internal financing with regard to the information asymmetry issues reinforces the importance of the pecking order theory in this particular framework. Moreover, Thiele and Wendt [13] state that succession is the priority of concerns in family-owned firms. Therefore, dilution of control is very much a worry and seeking external financing is not the main agenda in the financing decision [11].…”

“…This notion is confirmed by [16] with evidence that family ownership is associated with greater availability of credit and a lower cost of debt financing for family firms. The concern over power dilution and control of the firm with the intrusion of outsiders drive these family-owned to engage with higher level of debt if they need to employ external financing over equity and thus follow strategies that are focusing on the survival of the company in the long run rather than pursuing value maximization [13].…”

“…Thiele and Wendt [13] state that family-owned firms tend to use their voting power to monitor the management of the firm as they have sufficient rights to interfere in the decision making. This active monitoring can avoid managerial opportunism and can exercise their power to replace underperforming managers and cut unnecessary managers' self-interest expenditure [6].…”

“…Gottardo and Moisello [22] on the other hand report active family management as the major determinant of high debt level. Other determinants like maintenance of control and influence, growth opportunities, and risk aversion do play a part in the debt financing decisions of family-owned firms [13].…”