Ownership concentration, contestability, family firms, and capital structure
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Ownership concentration, contestability, family firms, and capital structure Ma´rio Sacramento Santos • Anto´nio Carrizo Moreira • Elisabete Simo˜es Vieira
Ó Springer Science+Business Media New York 2013
Abstract This study analyses the distribution of power among the several blockholders of a firm and the identity of those blockholders as a determinant of firm leverage. Using a sample of 694 firms from 12 Western European countries, our results support a negative relationship between ownership concentration in the hands of the main blockholder and firm leverage. Moreover, we detect that the presence of a second and third large shareholder (beyond the first blockholder) has a significant positive effect on the leverage ratio. In addition, the results show that contestability in family firms plays a more relevant role. Finally, we show that family firms do have significant impact on firm leverage level, and this impact varies depending on the legal framework and institutional environment. In our main sample the results show family firms negatively affect market leverage, supporting the theory that family firms are more averse to an increase in the debt level due to the risk of bankruptcy and financial distress as a result of having an under-diversified portfolio. In contrast, the opposite effect is found in the sample that excludes the United Kingdom. This last result cannot be explained by agency theory, given that family businesses are those that suffer less from Type I agency problems. This result suggests either some difficulty in financing their investments by issuing new M. S. Santos IPC—Instituto Polite´cnico de Coimbra, Avenida Doutor Marnoco Sousa, 3000-252 Coimbra, Portugal e-mail: [email protected] A. C. Moreira (&) GOVCOPP, DEGEI, University of Aveiro, Campus Universita´rio de Santiago, Aveiro 3810-193, Portugal e-mail: [email protected] E. S. Vieira GOVCOPP, ISCA, University of Aveiro, Campus Universita´rio de Santiago, 3810-193 Aveiro, Portugal e-mail: [email protected]
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equity or the need to use debt as a signal of the quality of its investments. Our results prove to be stable against a battery of robustness tests. Keywords Ownership concentration Agency costs Leverage Family Contestability
1 Introduction Although capital structure has been on the research agendas of financial economists for decades, ‘‘there is no universal theory of the debt-equity choice, and no reason to expect one’’ (Myers 2001: 81). Since Modigliani and Miller’s (1958) irrelevance propositions, a number of theories have been developed to show that corporate capital structure does matter in the presence of capital market frictions and imperfections (e.g., corporate and personal taxes, costly financial distress/bankruptcy, agency problems and information asymmetry). The static trade-off theory focuses on two such frictions, namely taxes and financial distress costs, assuming the existence of an optimal capital structure equating the tax benefits of debt with the costs of distress of the firm (
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