Young family firms: Financing decisions and the willingness to dilute control

Abstract

We study the relationship between leverage and the willingness of listed family firms to dilute control, proxied by the ownership of the main shareholder. We find that the main owner's stake positively impacts on leverage and that this impact is stronger when the business is a young family firm. Furthermore, the life cycle matters when analyzing this relationship. These results allow us to argue that owners with a greater stake prefer to raise finance via debt rather than dilute their position via equity, and that family firms face a trade-off between their control risk aversion and the need for external financing.

Cash holdings in family firms: CEO identity and implications for firm value

“…The presence of a family as the controlling shareholder has important implications for each of the three theoretical models discussed above. First, families tend to be more risk averse than other types of shareholders, as confirmed by their smaller number of corporate investments (Bianco, Bontempi, Golinelli, & Parigi, 2013), lower willingness to dilute control (Keasey, Martinez, & Pindado, 2015), and worse responsiveness to new market opportunities (Cucculelli & Marchionne, 2012). In a trade-off setting, they place greater value on the benefits of having cash as protection against negative events.…”

Funding alternatives and business planning in family businesses

“…There are several motives for family businesses when making decisions on the proposed timing and form of introducing new sources of funds to their operation. One motive of family firms that is likely to influence their financing decisions is the willingness of the main owner to dilute his or her control over the business (Keasey et al 2015). The organization's life-cycle stages represent another factor in financial decisions.…”

“…However, several family specific obstacles can be identified when financial planning is concerned (Keasey et al 2015). Family business owners typically do not have appropriate knowledge of accounting disciplines, such as management accounting and financial accounting.…”

Management practices in micro and small enterprises: the relationships between practices adopted and funding

“…However, assumptions of this theory, e.g., the efficient and rational market hypothesis and the search for maximum profit, leads to a scenario sometimes not applied to small businesses, or even ignored by studies in finance, as stated by Keasey et al (2015). Many of these papers do not consider, for example, the various limitations that these organisations have, such as restricted access to capital and high sensitivity to external events (Chaganti et al, 1995).…”

“…In order to verify the funding decisions in family businesses, Keasey et al (2015) found that family businesses with large participation of the owner tend to use more debt in order to not dilute the control, and this result is more significant to younger companies. Financial institutions expect the loans to have payment guarantee, requiring a demonstration of solvency capacity.…”