Skip to main content
SpringerLink
Log in

Capital structure decisions in family firms: empirical evidence from a bank-based economy

  • Original Paper
  • Published:
Review of Managerial Science Aims and scope Submit manuscript

Abstract

This paper analyzes the question if and how founding families influence the capital structure decision of their firms. By using a unique, partially hand-collected panel dataset of 660 listed German companies (5,135 firm years) over the period 1995–2006, we come up with the following results: German family firms have significantly lower leverage ratios than non-family firms. With respect to the question how families influence the capital structure of their firms, we can show that the family impact is mostly driven via management involvement. In this context, we also detect that the presence of a founder CEO has a strong negative effect on the leverage ratio. Our results prove to be stable against a battery of robustness tests, including the influence of other types of blockholders and the firms’ life cycle. Moreover, we use a propensity-score based matching estimator to alleviate concerns of reverse causality. Overall, our study suggests a strong, negative and causal relationship between family firm characteristics (especially family management) and the level of leverage.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Our definition of a family firm is related to founding family ownership and management. Section 3.4 gives a detailed description of our definition.

  2. Antoniou et al. (2008, p. 59).

  3. It should be mentioned that there is also a strand of literature looking at decision making in family firms from a behavioral perspective (e.g. Sharma and Manikutty 2005 or Zellweger et al. 2011).

  4. Indeed, specification tests indicate the existence of fixed-effects.

  5. Based on their two-digit primary SIC-Codes 60–65 and 67, we identify 153 firms form the financial service sector. Following several other studies we exclude them from our analysis due to their accounting specifics.

  6. Although we have complete ownership and board data for 5,135 firm-year observations, we cannot use all observations in our regressions (Sect. 5) due to incomplete or missing accounting data from Worldscope.

  7. Despite intensive research, we were not able to identify the ultimate owner of unlisted firms in 150 firm-years.

  8. Recent empirical studies on family firm performance for France (Sraer and Thesmar 2007) and Germany (Andres 2008) use similar family ownership thresholds in order to account for the more concentrated ownership structures in Continental Europe compared to the U.S.

  9. For example, Block (2011) uses a similar approach in the context of R&D decisions.

  10. To avoid data inconsistencies, we eliminate all leverage ratios which are larger than one or below zero. Beneath this leverage ratio, several other definitions of leverage are investigated: First, a measure for long-term leverage based on the book value of equity is used. To avoid a potential underestimation of leverage, we analyze the firms’ total liabilities as well. Finally, we calculate a financial leverage that only considers interest-bearing debt components.

  11. Unfortunately, we were not able to obtain the forecast of the German Council of Economic Experts for years before 1998. However, since expected inflation is constant over all companies in one year, it is implicitly covered by the year dummies.

  12. It should be noted that under the German corporate governance system the management board has by far the strongest influence on corporate decision making.

  13. Cf. Fahlenbrach and Stulz (2009) for a similar argumentation about the special capabilities of founder CEOs. See Bertrand et al. (2008) for the “quiet life view” of CEOs and Adams et al. (2005) for empirical evidence on the strong decision power of founder CEOs. In line with this view, several studies have confirmed that corporate performance advantages of family firms depend on CEO identity; see for example Villalonga and Amit (2006) or Perez-Gonzalez (2006).

  14. Cf. Rosenbaum and Rubin (1983), Heckman et al. (1997) or Todd (2008) for a more detailed description of the applied methodology.

  15. Cf. Klasa (2007) for application of a similar treatment in the construction of a matching estimator. Klasa (2007) uses this procedure to study what determines the families’ decision to finally sell their remaining ownership stake within the family business.

  16. The different intervals account for the fact that the firm might need some time to adjust the leverage ratio after the family has left the management board. For example, Hovakimian et al. (2009) argue that firms may face impediments when adjusting their capital structure.

  17. The nomenclature follows Villalonga and Amit (2009). Other possible methods to split family firms in these two sub-groups lead to similar results.

  18. Note that we cannot find ownership information for all preferred shares. Consequently, we drop those firm-years with missing information. Hence, the final number of firm-year observations in this robustness test is reduced.

References

  • Adams R, Almeida H, Ferreira D (2005) Powerful CEOs and their impact on corporate performance. Rev Financ Stud 18(4):1403–1432

    Article  Google Scholar 

  • Anderson RC, Mansi SA, Reeb DM (2003) Founding family ownership and the agency cost of debt. J Financ Econ 68(2):263–285

    Article  Google Scholar 

  • Anderson RC, Reeb DM (2003a) Founding-family ownership and firm performance: evidence from the S&P 500. J Finance 58(3):1301–1328

    Article  Google Scholar 

  • Anderson RC, Reeb DM (2003b) Founding-family ownership, corporate diversification and firm leverage. J Law Econ 46(2):653–680

    Article  Google Scholar 

  • Andres C (2008) Large shareholders and firm performance: an empirical examination of founding-family ownership. J Corporate Finance 14(4):431–445

    Article  Google Scholar 

  • Angrist JD (1998) Estimating the labor market impact of voluntary military service using social security data on military applicants. Econometrica 66(2):249–288

    Article  Google Scholar 

  • Antoniou A, Guney Y, Paudyal K (2008) The determinants of capital structure: capital market-oriented versus bank-oriented institutions. J Financ Quantitat Anal 43(1):59–92

    Article  Google Scholar 

  • Baker HK, Powell GE, Veit ET (2002) Revisiting the dividend puzzle: do all of the pieces now fit? Rev Financ Econ 11(4):241–261

    Article  Google Scholar 

  • Bayless M, Chaplinsky S (1996) Is there a window of opportunity for seasoned equity issuance? J Finance 51(1):253–278

    Article  Google Scholar 

  • Berger PG, Ofek E, Yermack DL (1997) Managerial entrenchment and capital structure decisions. J Finance 52(4):1411–1438

    Article  Google Scholar 

  • Bertrand M, Johnson S, Samphantharak K, Schoar A (2008) Mixing family with business: a study of Thai business groups and the families behind them. J Financ Econ 88(3):466–498

    Article  Google Scholar 

  • Bertrand M, Mullainathan S (2003) Enjoying the quiet life? Corporate governance and managerial preferences. J Polit Econ 111(5):1043–1075

    Article  Google Scholar 

  • Block JH (2011) R&D-investments in family and founder firms: an agency perspective. J Bus Ventur (forthcoming)

  • Boot A (2000) Relationship banking: what do we know? J Financ Intermediat 9(1):7–19

    Article  Google Scholar 

  • Brunner A, Krahnen J (2008) Multiple lenders and corporate distress: evidence from debt restructuring. Rev Econ Stud 75(2):415–442

    Article  Google Scholar 

  • Casson M (1999) The economics of the family firm. Scand Econ Hist Rev 47(1): 10–23

    Article  Google Scholar 

  • Chami R (1999) What’s different about family businesses? Working Paper, University of Notre Dame

  • Claessens S, Djankov S, Fan JPH, Lang LHP (2002) Disentangling the incentive and entrenchment effects of large shareholdings. J Finance 57(6):2741–2771

    Article  Google Scholar 

  • da Silva CL, Goergen M, Renneboog L (2004) Dividend policy and corporate governance. Oxford University Press, Oxford

    Book  Google Scholar 

  • Davydenko S, Franks J (2008) Do bankruptcy codes matter? J Finance 63(2):565–608

    Article  Google Scholar 

  • Ellul A (2009) Control motivations and capital structure decision. Working Paper, Indiana University, March 2009

  • Elsas R, Florysiak D (2008) Empirical capital structure research: new ideas, recent evidence, and methodological issues. Zeitschrift für Betriebswirtschaft Nr. 6:39–71

    Google Scholar 

  • Elsas R, Krahnen JP (2004) Universal banks and relationships with firms. In: Krahnen JP, Schmidt RH (eds) The German financial system. Oxford University Press, Oxford, pp 197–232

    Chapter  Google Scholar 

  • Faccio M, Lang LH (2002) The ultimate ownership of Western European corporations. J Financ Econ 65(3):365–395

    Article  Google Scholar 

  • Fahlenbrach R, Stulz RM (2009) Managerial ownership dynamics and firm value. J Financ Econ 92(3):342–361

    Article  Google Scholar 

  • Fama EF, French KR (2001) Disappearing dividends: changing firm characteristics or lower propensity to pay? J Financ Econ 60(1):3–43

    Article  Google Scholar 

  • Fama EF, French KR (2004) The capital asset pricing model: theory and evidence. J Econ Perspect 18(3):25–46

    Article  Google Scholar 

  • Fohlin C (2007) The history of corporate ownership and control in Germany. In: Morck RKA (ed) A history of corporate governance around the world. The University of Chicago Press, Chicago, pp 223–281

    Google Scholar 

  • Frank MZ, Goyal VK (2009) Capital structure decisions: which factors are reliably important? Financ Manage 38(1):1–37

    Article  Google Scholar 

  • Franks JR, Mayer C, Volpin PF, Wagner HF (2009) The life cycle of family ownership: international evidence. Working Paper, London Business School

  • Gomez-Mejia LR, Makri M, Kintana ML (2010) Diversification decisions in family-controlled firms. J Manage Stud 47(2):223–252

    Article  Google Scholar 

  • Gorton G, Schmid FA (2000) Universal banking and the performance of German firms. J Financ Econ 58(1/2):29–80

    Article  Google Scholar 

  • Greenbaum S, Thakor A (1995) Contemporary financial intermediation. Dryden Press, Fort Worth

    Google Scholar 

  • Gugler K (2003) Corporate governance, dividend payout policy, and the interrelation between dividends, R&D, and capital investment. J Bank Finance 27(7):1297–1321

    Article  Google Scholar 

  • Harris M, Raviv A (1988) Corporate governance: voting rights and majority rules. J Financ Econ 20(1/2):203–235

    Article  Google Scholar 

  • Heckman J, Ichimura H, Petra T (1997) Matching as an econometric evaluation estimator. Rev Econ Stud 64(4):605–654

    Article  Google Scholar 

  • Hovakimian A, Opler T, Titman S (2009) The debt-equity choice. J Financ Quantitat Anal 36(1):1–24

    Article  Google Scholar 

  • Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3(4):305–360

    Article  Google Scholar 

  • Johnson W, Magee R, Nagarajan N, Newman H (1985) An analysis of the stock price reaction to sudden executive deaths. J Account Econ 7:151–174

    Article  Google Scholar 

  • Jostarndt P, Sautner Z (2010) Out-of-court restructuring versus formal bankruptcy in a non-interventionist bankruptcy setting. Rev Finance 14(4):623–668

    Article  Google Scholar 

  • Julio B, Ikenberry D (2004) Reappearing dividends. J Appl Corporate Finance 16(4):89–100

    Article  Google Scholar 

  • King MR, Santor E (2008) Family values: ownership structure, performance and capital structure of Canadian firms. J Bank Finance 32(11):2423–2432

    Article  Google Scholar 

  • Klasa S (2007) Why do controlling families of public firms sell their remaining ownership stake? J Financ Quantitat Anal 42(2):339–367

    Article  Google Scholar 

  • La Porta R, Lopez-de Silanes F, Shleifer A (1999) Corporate ownership around the world. J Finance 54(2):471–517

    Article  Google Scholar 

  • La Porta R, Lopez-de Silanes F, Shleifer A, Vishny RW (1998) Law and finance. J Polit Econ 106(6):1113–1155

    Article  Google Scholar 

  • Lemmon ML, Roberts MR, Zender JF (2008) Back to the beginning: persistence and the cross-section of corporate capital structure. J Finance 63(4):1575–1608

    Article  Google Scholar 

  • Lowry M, Schwert WG (2002) IPO market cycles: bubbles or sequential learning? J Finance 57(3):1171–1200

    Article  Google Scholar 

  • Margaritis D, Psillaki M (2010) Capital structure, equity ownership and firm performance. J Bank Finance 34:621–632

    Article  Google Scholar 

  • Miller D, Le Breton-Miller I, Lester RH (2011) Family and lone founder ownership and strategic behaviour: social context, identity, and institutional logics. J Manage Stud 48(1):1–25

    Article  Google Scholar 

  • Miller D, Le Breton-Miller I, Lester RH, Cannella AA (2007) Are family firms really superior performers? J Corporate Finance 13(5):829–858

    Article  Google Scholar 

  • Mishra CS, McConaughy DL (1999) Founding family control and capital structure: the risk of loss of control and the aversion to debt. Entrepreneurship Theory Practice 23(4):53–64

    Google Scholar 

  • Morck R, Shleifer A, Vishny RW (1988) Management ownership and market valuation: an empirical analysis. J Financ Econ 20(1/2):293–315

    Article  Google Scholar 

  • Perez-Gonzalez F (2006) Inherited control and firm performance. Am Econ Rev 96(5):1559–1588

    Article  Google Scholar 

  • Petersen MA (2009) Estimating standard errors in finance panel data sets: comparing approaches. Rev Financ Stud 22(1):435–480

    Article  Google Scholar 

  • Rosenbaum PR, Rubin DB (1983) The central role of the propensity score in observational studies for causal effects. Biometrika 70(1):41–55

    Article  Google Scholar 

  • Rozeff MS (1982) Growth, beta and agency costs as determinants of dividend payout ratios. J Financ Res 5(3):249–259

    Google Scholar 

  • Setia-Atmaja L, Tanewski G, Skully M (2009) The role of dividends, debt and board structure in the governance of family controlled firms. J Bus Finance Account 36(7/8):863–898

    Article  Google Scholar 

  • Sharma P, Manikutty S (2005) Strategic divestments in family firms: role of family structure and community culture. Entrepreneurship Theory Practice 29(3):293–311

    Article  Google Scholar 

  • Shleifer A, Vishny RW (1986) Large shareholders and corporate control. J Polit Econ 94(3):461–488

    Article  Google Scholar 

  • Sraer D, Thesmar D (2007) Performance and behavior of family firms: evidence from the French stock market. J Eur Econ Assoc 5(4):709–751

    Article  Google Scholar 

  • Theissen E (2004) Organized equity markets. In: Krahnen J, Schmidt R (eds) The German financial system. Oxford University Press, Oxford

    Google Scholar 

  • Todd PE (2008) Matching estimators. In: Durlauf SH, Bloom LL (eds) The new palgrave dictionary of economics, 2nd edn. Palgrave Macmillan, New York

    Google Scholar 

  • Villalonga B, Amit R (2006) How do family ownership, control and management affect firm value? J Financ Econ 80(2):385–417

    Article  Google Scholar 

  • Villalonga B, Amit R (2009) How are U.S. family firms controlled? Rev Financ Stud 22(8):3047–3091

    Article  Google Scholar 

  • von Eije H, Megginson W (2008) Dividends and share repurchases in the European Union. J Financ Econ 89(2):347–374

    Article  Google Scholar 

  • Wenger E, Kaserer C (1998) The German system of corporate governance: a model which should not be immitated. In: Black S, Moersch M (eds) Competition and convergence in financial markets. North-Holland, Amsterdam, pp 41–78

    Google Scholar 

  • White H (1980) A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroscedasticity. Econometrica 48:817–838

    Article  Google Scholar 

  • Zellweger TM, Nason R, Nordqvist M, Brush C (2011) Why do family firms strive for nonfinancial goals? An organizational identity perspective. Entrepreneurship Theory Practice (forthcoming)

Download references

Acknowledgments

We thank Andrew Ellul, Jana Fidrmuc, Randall Morck, Paolo Rodriguez, two anonymous referees and seminar participants at the Corporate Governance Workshop 2009 in Copenhagen, the 5th EIASM Workshop on Family Firms Management Research 2009 in Hasselt, the European Finance Association 2009 annual meeting in Bergen and the German Finance Association 2009 annual meeting in Frankfurt for their helpful comments and suggestions.

Author information

Authors and Affiliations

  1. Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München, Munich, Germany

    Markus Ampenberger, Thomas Schmid, Ann-Kristin Achleitner & Christoph Kaserer

Authors
  1. Markus Ampenberger
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Thomas Schmid
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Ann-Kristin Achleitner
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Christoph Kaserer
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Thomas Schmid.

Appendix

Appendix

See Table 9.

Table 9 Definition of variables
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Ampenberger, M., Schmid, T., Achleitner, AK. et al. Capital structure decisions in family firms: empirical evidence from a bank-based economy. Rev Manag Sci 7, 247–275 (2013). https://doi.org/10.1007/s11846-011-0077-2

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11846-011-0077-2

Keywords

JEL Classification

Search

Navigation