Family firms and debt: Risk aversion versus risk of losing control

• Published in: Journal of business research Vol. 66; no. 11; pp. 2308 - 2320
• Main Authors: González, Maximiliano, Guzmán, Alexander, Pombo, Carlos, Trujillo, María-Andrea
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.11.2013; Elsevier Sequoia S.A
• Subjects: Board of directors; Business ownership; Capital structure; Colombia; Control; Corporate debt; Debt management; Family businesses; Family control; Family firms; Family owned businesses; Latin America; Risk aversion; Small and medium sized enterprises; Studies; Colombia; Colombia; Family businesses; G3; Family control; Capital structure; G32
• ISSN: 0148-2963; 1873-7978
• DOI: 10.1016/j.jbusres.2012.03.014

This study examines the effect of family management, ownership, and control on capital structure for 523 Colombian firms between 1996 and 2006. The study finds that debt levels tend to be lower for younger firms when the founder or one of his heirs acts as manager, but trends higher as the firm ages. When family involvement derives from direct and indirect ownership, the family–debt relationship is positive, consistent with the idea that external supervision accompanies higher debt levels and reduces the risk of losing control. When families are present on the board of directors (but are not in management), debt levels tend to be lower, suggesting that family directors are more risk-averse. The results stress the tradeoff between two distinct motivations that determine the capital structure of family firms: risk aversion pushes firms toward lower debt levels, but the need to finance growth without losing control makes family firms to prefer higher debt levels.