Family ownership, control and corporate capital structure: An examination of small capitalization public firms

Abstract

Purpose

The purpose of this paper is to explain how family firm ownership and management control affect corporate capital structure strategy after controlling for other significant variables. The authors argue that, although family ownership has a positive effect on a firm’s leverage, family control through the CEO position and equity performance moderate its impact.

Design/methodology/approach

Using a stratified random sample of 200 US public firms in the S & P Small-Cap 600 index from 1999 to 2007, this study uses random effect panel regressions to test the impact of family ownership on market value and book value debt ratios and the moderating effects of family control and equity performance after controlling for firm, industry, and macroeconomic variables.

Findings

The initial panel regression suggests that family ownership is not related to debt ratios. However, further examination with controls for family CEO and equity performance shows that family ownership is positively related to market and book value debt ratios, but its effect is offset by family control through the CEO position and equity performance.

Research limitations/implications

This study’s methodology can be extended to examine how family firm governance factors affect other firm behaviors such as investment, risk management, and CEO compensation.

Practical implications

Practitioners should consider family ownership and management control factors when establishing financing strategy. The Small Business Administration and other government agencies should make similar considerations when setting policies.

Originality/value

This paper separates ownership and management control factors to explain why family firms use more or less leverage. This study, thus, reconciles the mixed results of prior studies, which do not differentiate between these two governance factors.

Citation

Baek, H.Y., Cho, D.D. and Fazio, P.L. (2016), "Family ownership, control and corporate capital structure: An examination of small capitalization public firms", Journal of Family Business Management, Vol. 6 No. 2, pp. 169-185. https://doi.org/10.1108/JFBM-02-2015-0006