Family Control and Cost of Debt: Evidence from Thailand

Abstract

Family firms have attracted considerable attention to form a significant part of most economies and affect firm value. However, research on how family control affects corporate decisions are scarce, particularly in emerging markets where family firms are prevalent. In this paper, we analyze the incentives of controlling families to influence their financing decisions to understand the nature of family firms and enhance firms’ ability to survive in the competition. In this regard, we use a unique, partially hand-collected panel dataset of Thai listed companies over the period 2009-2015. The results for Thai financial system contradict prior findings for other institutional environments. The findings reveal that, compared to non-family firms, family firms in Thailand have lower cost of debt than non-family firms. These puzzling results can be explained by a weak institutional environment, and deficient arm’s length, market-driven system in Thailand which are associated with trustworthy relationship between controlling families and creditors. Family firms apply family control via family ownership structure, control-ownership wedge and family management to access to external debt financing and survive in long term. We also exploit the exogeneity of political uncertainty in Thailand to examine the endogeneity issue between family control and cost of debt. We find that the association between family control and cost of debt become weaker during the 2014 coup d’état possibly due to the rent of establishing political connection. Our findings emphasize that family control is vital and can determine sustainable financing decision significantly.

Keywords: family control, family ownership structure, control-ownership wedge, family management, cost of debt, Thai listed firms, political uncertainty

JEL Classification: G32, G34, G40, L0