Family Control and Debt When Dual-Class Shares Are Restricted: The Case of Poland

Abstract

Our research, based on an unbalanced panel of 105 companies listed on the Warsaw Stock Exchange during 2006–10, demonstrates that public family firms are, on average, more levered than nonfamily firms and more extensively use control-enhancing mechanisms (CEMs), resulting in a wedge between control (voting) rights and cash flow rights. We decompose the total wedge for family firms into a standard dual-class shares component and a disproportionate board representation component finding inverse relations between each of them and the debt levels (positive for the former and negative for the latter). When dual-class shares are restricted—as in the case of Polish companies once they become public—financial decisions may be driven by control motivations. Family firms have strong incentives to use debt as a nondiluting security.

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