Capital Structure Determinants in Family Firms: An Empirical Analysis in Context of Crisis

Stefania Migliori,Francesco Paolone,Fabrizio Maturo

doi:10.5539/ibr.v11n4p65

Abstract

The purpose of this paper is to investigate the capital structure of family firms in a context of crisis. Specifically, it aims to discover whether and how the determinants of their capital structure have a different impact on firms’ leverage before and during the recent global financial crisis. Considering the pecking order theory (POT), trade-off theory (TOT), and agency theory (AT), this study analyzes 1,502 Italian medium family firms comparing the pre-crisis (2005-2007) and crisis (2008-2010) periods. This research shows that that current liquidity, asset structure, and agency costs are the most important variables in influencing medium family firms' leverage, in both the pre-crisis and crisis periods. Moreover, during the crisis, agency costs increase and have a negative influence on the short-term leverage highlighting that crisis contingencies influence the agency-based effects on family firm's leverage. Furthermore, our findings highlight that a more exhaustive understanding of family firms’ capital structure can be achieved through the combined use of different theories.

Highlights

Capital structure decisions are key factors for the development and survival of firms (Mahérault, 2004) and for the economic growth
From the perspective of the agency theory, we extend the traditional proxies of agency costs, which have been tested in non-family firms, to the field of family firms due to the absence, to date, of specific operational measure developed for family firms' agency costs
The residual plots of the LTL models show the presence of two distinct groups, due to the presence of a considerable number of firms that do not use the long-term debt; in effect, we observed that the percentage of companies using consistently the long-term debt is very low

Summary

Introduction

Capital structure decisions are key factors for the development and survival of firms (Mahérault, 2004) and for the economic growth. Firms' decisions about debt or equity assumed great importance during the recent global financial crisis triggered in 20081. This crisis produced important financial effects such as failure of banks and financial intermediaries, credit rationing, reduced investment and consumption, and a long downturn in the economic life cycle (Aiyar, 2015). This severe economic and financial context has influenced firms' financial behaviour, and understanding which factors influence firms’ financial behavior has become increasingly relevant for management studies and policy makers. Firms’ financial choices appear to be the result of a trade-off between the need to increase debt for reducing the risk of losing control and the need for reducing debt to minimize the risk of failure (Gottardo & Moisello, 2014)

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