Abstract
The purpose of this paper is to investigate whether a difference can be stated in the family firms’ financial choices. Using the Shyam-Sunder and Myers model, our research focus on the financial behaviour of family and non-family privately held firms in Belgium. Out of a sample of 210 privately held firms for the period 2002-2010, panel data methodology is employed to estimate Pecking-Order and Static Trade-off models. Our results show that although neither Pecking Order nor Static Trade-off Theory seems to apply to non-family firms, family firms are more likely to adopt an indebtedness target ratio. Moreover, the introduction of an allowance for corporate equity on the Belgian market is also taken into account. Our results indicate that such a mechanism seems to have an influence on the family firms funding choices.
Highlights
In the literature relative to the financial structure of the firm, two theories are regularly confronted
In order to identify which theory could explain the financial structure of the large privately-held firms of the Belgian market, our methodology is directly linked with the Shyam-Sunder and Myers (1999) models developed for both Pecking-Order Theory (POT) and the Static Trade-off Theory (STT)
The aim of this paper was to distinguish the financial behaviour adopted by family firms in comparison with non-family firms in an environment where tax regulation can influence the financing costs of equity capital
Summary
In the literature relative to the financial structure of the firm, two theories are regularly confronted. By introducing corporate income tax, Modigliani and Miller (1963) demonstrated the superiority of firms using debts, since the take advantage of the deductibility of interest expenses This model was criticized because it did not take into account the costs of distress within the firm. In order to fill this gap, Static Trade-off Theory was built to develop a model based on a costs-profits analysis resulting from the issuance of debt (Krauss & Litzenberger, 1973). This theory assumes the existence of a target indebtedness ratio equalling the profits of the deductibility of interest expenses and the costs of distress of the firm. Due to information asymmetry between managers and external investors, self-financing would be preferred to debts and stocks issuance by the managers
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