Abstract
This study examines the whether or not family firms are financially healthier than non-family in terms of capital structure and leverage. It therefore takes into consideration the existence of any significant differences between the leverage and risk choices of family and non-family firms. Using a panel data set of 888 firms and 7104 firm-year observations of unlisted small and medium size firms over the period 2007–2014, we present that family owned businesses have lower financial structure than those of non-family owned businesses. This indicates that most family firms use less debt financing than non-family firms, and as such maintain a lower level of debt. Secondly, family firms demonstrate lower risk as illustrated by the Altman Z-score. The Altman Z-score scale illustrates a contrary relationship of significance with respect to family firms and their counterparts in terms of the operation aspect of the business’s risk factors. Family firms managed their business operations with lower risk and are generally healthier financially than their counterpart firms. Lastly, findings from the robust tests for the hypotheses using a sample of bankrupt firms in Iberian Balance sheet Analysis System (SABI) reveal that the proportion of failure of family firms as opposed to their counterpart firms is relatively low. Analyzing the bankruptcy files of firms from 2002 to 2014 shows a considerably low ratio of family firms at the 5% significant level. This affirms that the low risk illustrated in the Altman Z-score regression is consistent to the lower ratio of family firms that were declared bankrupted over the study period, which makes Spain an important case in this study.
Highlights
Introduction and Literature ReviewFollowing the evidence cited by several researchers over the years, one principal characteristic to influence the management of firms is that of its risk profile
With respect to debts/EBITDA as a dependent variable for leverage, our results from Table 3 show negative significance at the debt level for the first regression. This indicates that most family firms use less debt financing than non-family firms, and as such maintain a lower level of debt.Regarding the profitability measure, the result from regression 1 illustrates a negative and statistically significant relationship between level of debt and profitability at the 5% level
With respect to the interest coverage ratio as a dependent variable for leverage, our results from Table 4 show a similar result in Table 3, with negative significance at the debt level for the first regression. This indicates that most family firms use less of debt financing than non-family firms, as such maintain a lower level of debt
Summary
Following the evidence cited by several researchers over the years (such as Shleifer and Vishny 1986; DeAngelo and DeAngelo 2000; Anderson and Reeb 2003), one principal characteristic to influence the management of firms is that of its risk profile. Anderson and Reeb (2003) argue that the agency problems that exist between management and stakeholders is reduced when the structure of a family firm is adopted by a company They suggest that the risk averse nature of the controlling families is disintegrated through monitoring. From a financial standpoint, this paper presents indicators that are specific to family-orientedbusiness with long-time horizon, family orientation, and generational continuity as potential reasons for family business risk aversion and the choice of capital structure for medium and small oriented family companies in Spain. 14−16) suggests that “managers in both family and non-family businesses will prefer having less leverage than shareholders in order to reduce the risk of their undiversified investment in the company” Consistent with this view, Grossman and Hart (1986) argue that increased leverage reduces the agency cost of type I associated with managerial discretion and managers’ discretion over corporate decisions. This is true because the use of less debt creates the founding family’s aversion to the risk of loss of control
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