Are Family Firms Different in Choosing and Adjusting Their Capital Structure? An Empirical Analysis through the Lens of Agency Theory

Abstract

How do family firms choose and adjust their capital structure? A significant number of contributions have examined the problem from several angles but many issues remain a puzzle. We examine capital structure choices of family firms in Italy, a context characterized by high private benefits of control, separation between ownership and control, and diffusion of family-controlled pyramidal groups. Consistent with the agency-based models, family firms are found to be more leveraged than non-family counterparts as a result of their desire to hold control. We also find higher debt ratios in firms with a higher separation between ownership and control if and only if the firm is controlled by a family. This lends support to the fact that controlling families may want to allocate more debt to subsidiaries, where the separation is higher, in order to inflate assets under domination at the expense of minority shareholders, while controlling negative effects in case of bankruptcy of an affiliate. Finally, family firms are also found to behave differently when they adjust their debt ratio. We show that leverage persistence is higher in family firms because they bear higher adjustment costs as a result of higher agency costs of equity, but lower costs of deviating from the optimal debt level, because the tight links between controlling families and banks may allow family owners to negotiate deviations with banks more easily.