Family Control and Financing Decisions

Ettore Croci · John A. Doukas · Halit Gonenc B

269 citations0/0 files storedEuropean Financial Management

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Family Business Performance and Succession Corporate Finance and Governance Working Capital and Financial Performance

Abstract

This study uses a comprehensive European dataset to investigate the role of family control in corporate financing decisions during the period 1998–2008. We find that family firms have a preference for debt financing, a non-control-diluting security, and are more reluctant than non-family firms to raise capital through equity offerings. We also find that credit markets are prone to provide long-term debt to family firms, indicating that they view their investment decisions as less risky. In fact, our empirical results demonstrate that family firms invest less than non-family firms in high-risk, research and development (R&D) projects, but not in low-risk, fixed-asset capital expenditure (CAPEX) projects, suggesting that fear of control loss in family firms deters risk-taking. Overall, our findings reveal that the external financing (and investment) decisions of family firms are in greater (lesser) conflict with the interests of minority shareholders (bondholders).

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1997A Survey of Corporate Governance 1977Determinants of corporate borrowing 1999Corporate Ownership Around the World 1984The Capital Structure Puzzle 1985The Structure of Corporate Ownership: Causes and Consequences

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