The Impact of Family Control of Firms on Leverage: Australian Evidence

Harijono, Harijono; Ariff, Mohammed; Tanewski, George

doi:10.2139/ssrn.487706

Cited by 9 publications

(11 citation statements)

References 26 publications

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“…More importantly, even in case of bankruptcy of a highly leveraged operating unit, the large use of pyramidal structures, together with the limited liability of the holding company, allow the controlling family to maintain the control of the group and to bear only a small portion of the wealth destruction. The higher leverage in family-owned listed firms is consistent with previous studies that rely on the agency approach (e.g., Harijono et al, 2004;King & Santor, 2008). non-family firms do not seem to show any expropriation risk through debt: higher separation between ownership and control leads to lower debt ratios.…”

Section: Discussionsupporting

confidence: 89%

“…Romano et al (2001) find that family businesses, whose owners have a strong preference for retaining family control, are more likely to derive their funds from bank debt and leasing arrangements. Wiwattanakantang (1999), Harijono et al (2004), and King and Santor (2008) find that family firms are more leveraged than non-family counterparts because controlling families do not want to risk losing control in order to continue to obtain private benefits of control.…”

Section: Introductionmentioning

confidence: 99%

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Are Family Firms Different in Choosing and Adjusting Their Capital Structure? An Empirical Analysis through the Lens of Agency Theory

Morresi¹,

Naccarato²

2016

IJEF

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How do family firms choose and adjust their capital structure? A significant number of contributions have examined the problem from several angles but many issues remain a puzzle. We examine capital structure choices of family firms in Italy, a context characterized by high private benefits of control, separation between ownership and control, and diffusion of family-controlled pyramidal groups. Consistent with the agency-based models, family firms are found to be more leveraged than non-family counterparts as a result of their desire to hold control. We also find higher debt ratios in firms with a higher separation between ownership and control if and only if the firm is controlled by a family. This lends support to the fact that controlling families may want to allocate more debt to subsidiaries, where the separation is higher, in order to inflate assets under domination at the expense of minority shareholders, while controlling negative effects in case of bankruptcy of an affiliate. Finally, family firms are also found to behave differently when they adjust their debt ratio. We show that leverage persistence is higher in family firms because they bear higher adjustment costs as a result of higher agency costs of equity, but lower costs of deviating from the optimal debt level, because the tight links between controlling families and banks may allow family owners to negotiate deviations with banks more easily

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Section: Discussionsupporting

confidence: 89%

Section: Introductionmentioning

confidence: 99%

Are Family Firms Different in Choosing and Adjusting Their Capital Structure? An Empirical Analysis through the Lens of Agency Theory

Morresi¹,

Naccarato²

2016

IJEF

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“…Mexico belongs to the group of countries with Roman style civil law systems, as opposed to Anglo-Saxon common law systems, which means that there is high ownership concentration and low protection for minority shareholders [8,24,27]. Mexican companies also tend to have pyramidal structures and thus concentrate ownership [24].…”

Section: Ownership Concentrationmentioning

confidence: 99%

Effects of Family Ownership, Debt and Board Composition on Mexican Firms Performance

Martín-Reyna

Durán-Encalada

2015

IJFS

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This study examines the relationship between ownership structure and performance of public firms in Mexico, considering debt and the structure of the board of directors as contextual and institutional factors. This research seeks to explain the mixed results about the relationship of ownership and performance presented by other relevant studies in family and non-family businesses, mainly in emerging countries. The results confirm the positive association between family ownership concentration and performance, calculated by Tobin's Q, showing how the participation of inside shareholders on the board and a low debt level contribute to higher performance. However, the association of these variables with performance shows a contrasting effect in the case of family as compared to non-family businesses. The particular corporate legal context in Mexico could be highlighted as one of the main reasons for these results.

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“…However, the effect of agency costs in other ownership structures, in particular, the family-founded, -owned, and -controlled firm is covered by the literature with relative paucity. While important work has been directed towards developing an understanding of this unique ownership structure, when it is considered that family firms account for around 20 percent of the listed companies in Australia (Mroczkowski and Tanewski 2006;Harijono, Ariff, and Tanewski 2004), approximately one-third of the S&P 500 in the United States (Anderson, Mansi, and Reeb 2003), and more than half of the 250 largest firms on the Paris and Frankfurt bourses are family-controlled (Blondel, Rowell, and Van der Heyden, 2002;Klein and Blondel 2002). It would seem that the economic significance of family firms has been underrepresented by the academic literature.…”

Section: Family Firms and Agency Theorymentioning

confidence: 99%

“…Previous research has suggested that family firms experience a lower cost of debt capital (Anderson, Mansi, and Reeb 2003) than nonfamily firms. Moreover, Australian evidence suggests that family firms are likely to be more highly leveraged than nonfamily firms (Harijono et al 2004). Despite this, the evidence suggests that family firms do not fully utilize this competitive advantage over nonfamily firms.…”

mentioning

confidence: 99%

The Relationship between Family Firms and Corporate Governance*

Bartholomeusz¹,

Tanewski²

2006

J Small Business Management

176

111

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This paper contributes to the agency theory literature by identifying relations between family control and corporate governance structure. Emerging literature supports the notion that family control creates strong incentives that have potentially competing influences on the manner in, and extent to, which internal corporate governance mechanisms are utilized. A sample of 100 listed companies (evenly divided between family and nonfamily firms) is used to test the hypotheses that corporate governance structures are different between family and nonfamily firms; and that family firms adopt optimal corporate governance structures. This research finds evidence that suggests that family firms utilize substantially different corporate governance structures from nonfamily firms and that these differences lead to performance differentials. Indeed, results suggest that family control creates, rather than negates, agency costs and future research may be well rewarded by pursuing this latter notion further.

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The Impact of Family Control of Firms on Leverage: Australian Evidence

Cited by 9 publications

References 26 publications

Are Family Firms Different in Choosing and Adjusting Their Capital Structure? An Empirical Analysis through the Lens of Agency Theory

Are Family Firms Different in Choosing and Adjusting Their Capital Structure? An Empirical Analysis through the Lens of Agency Theory

Effects of Family Ownership, Debt and Board Composition on Mexican Firms Performance

The Relationship between Family Firms and Corporate Governance*

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