Testing the capital structure of Portuguese family businesses

Luciana J Pestana,Cristina Lopes,Luís Pereira Gomes

doi:10.1590/1808-057x202113190

Abstract

ABSTRACT The main objective of this study is to empirically test capital structure decisions in Portuguese family-owned businesses under trade-off theory (TOT) and pecking order theory (POT) and attend to the relationships between family/business interaction and agency conflicts. Family-owned businesses are essential for the development of economies, but the financing logic they adopt is not yet adequately clarified by scientific research, especially as they are more exposed to the constraints of markets imperfections. The specific pattern of business ownership may affect the financing decision and the ability to obtain funds externally. This issue is more relevant in economies where family business initiatives and less sophisticated management strategies are expressive. The greater convergence of interests in family businesses and the consequent decrease in agency costs may lead to higher levels of recognized reputation and thus easier access to indebtedness. The empirical study uses static models and dynamic panel models in order to analyze data from 4,952 Portuguese family-owned firms over the period from 2009 to 2016: the TOT following the partial debt adjustment model, and the POT following the model of the impact of the deficit of funds on debt and the model of the relationship between debt and the determinants of financing. The results of the individual tests suggest that Portuguese family-owned businesses adjust debt at the target ratio, albeit influenced by adjustment costs that keep them distant from the optimal, as well as use sources other than debt when a financial deficit occurs. Although the impact of the financial deficit is greater in total debt ratio, the velocity of adjustment to the optimal level is higher in short-term debt. Evidence from a joint test confirms that both theories explain part of the capital structure of Portuguese family-owned businesses.

Highlights

Considering the scarcity of information on succession issues, this study follows the criterion of ownership to identify family businesses, the reference proposed by López-Gracia and Sánchez-Andújar (2007, p. 276): “We considered all those businesses with a shareholder owning more than 50% and the rest of the shares being relatively diluted as a family firm.”
The results of the isolated test to the trade-off theory (TOT) suggests that the Portuguese family companies adjust the level of indebtedness towards the target, influenced by transaction and adjustment costs that keep them away from the optimum
The results of the isolated test to the pecking order theory (POT), considering the model of Shyam-Sunder and Myers (1999), suggest that, when the financing needs are not covered by the internal resources, the Portuguese family companies resort to sources other than debt

Summary

Introduction

Family-run businesses are usually affected by the duality of objectives, which are reflected in the renouncement of share issuance and in the junction of family and business finances (Csákné & Karmazin, 2016) In this context, non-economic factors are highly relevant, and may justify differences in the use of financing sources and in the decision-making process (Acedo-Ramírez et al, 2017; Mohamadi, 2012). Considering that family businesses, with traits of stability and growth expectations, are essential for the development of the economy, it becomes relevant to clarify the financing patterns they adopt. This is the motivation of choosing the theme

Objectives

Methods

Results

Conclusion