Transparency and Financing Choices of Family Firms

Abstract

We examine how corporate transparency and financing choices differ for family and non-family firms in the S&P 1500 Index. While transparency on average is better for firms in the S&P 500 Index than for firms in the S&P MidCap 400 and S&P SmallCap 600 indices, the improvement is much larger for family firms. Outside the S&P 500, family firms are less transparent than their non-family counterparts, whereas the opposite is true for firms in the S&P 500 Index. Family firms outside the S&P 500 Index have shorter debt maturity and higher debt ratios than large family firms (in the S&P 500) as well as non-family firms. These results on firms’ financial choices are consistent with the notion that small family firms prefer opacity and enjoy control benefits at the cost of over-reliance on “monitored finance”, while other firms, especially the large family firms, prefer transparency and the lower cost of external finance.

Keywords: Family firms, Transparency, Debt Maturity, Capital Structure

JEL Classification: G32, G34