Control Considerations, Creditor Monitoring, and the Capital Structure of Family Firms

Posted: 5 Jul 2013

See all articles by Thomas Schmid

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics

Date Written: August 1, 2012

Abstract

In this paper, I analyze the motives moving founders and their families to influence the capital structure decision. For this, I complement detailed corporate governance information for Germany with data from other countries. The results for the German bank-based financial system contradict prior findings for other institutional environments. According to these results, family firms in Germany rely less heavily on debt than non-family firms. Less surprisingly, the opposite holds true for the international dataset. Different empirical tests indicate that this puzzling result can be explained by control considerations. Founders and their families use the capital structure to optimize their control over the firm. However, whether family firms rely more or less on debt depends on the level of creditor monitoring in an institutional environment. These findings emphasize that control considerations of major shareholders are important – although often overlooked – determinants of the capital structure.

Keywords: Capital structure, leverage, family firms, control considerations, creditor monitoring, international evidence

JEL Classification: G32, G34

Suggested Citation

Schmid, Thomas, Control Considerations, Creditor Monitoring, and the Capital Structure of Family Firms (August 1, 2012). Journal of Banking and Finance, Vol. 37, No. 2, 2013. Available at SSRN: https://ssrn.com/abstract=2289292

Thomas Schmid (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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