Family Influence, Leverage and Probability of Financial Distress

Abstract

This chapter studies leverage’s effect on a firm’s probability of financial distress taking into account different forms of family influence on the business. As family firms are a non-homogeneous group and their governance and management characteristics may impact on risk attitude and financial distress likelihood, we also take into account other measures of risk, board and CEO characteristics, accounting variables and macroeconomic indicators. We address this topic by analyzing a sample of 1137 Italian family and non-family private firms for the period 2004–2013, covering the pre and post financial crisis period. The findings point out that these variables have a different significance in family and non-family firms’ probability of financial distress. Family firms have a lower probability of incurring in financial distress. Leverage has a strong effect for family and non-family firms, but a family’s direct influence on the firm, by appointing a family CEO, has a significant lowering effect on a firm’s probability of financial distress when a family exerts its influence directly.