The Effect of Founding Family Ownership on Financial Constraints

Sammanfattning: This paper studies the effect of founding family ownership on financial constraints. We hypothesize that capital markets frictions arising from informational asymmetries and agency conflicts are mitigated by the presence of founding family shareholders, thus rendering lower financial constraints. The underlying reason behind this hypothesis stems from the nature of family owners as being committed, long-term and undiversified shareholders. This in turn induces monitoring incentives and less proneness to promote risk shifting activities. We test our hypothesis using traditional measures (indices) of financial constraints by performing regressions on a US panel dataset containing 16,230 firm-years with observations ranging from 2001 to 2010. A second test is conducted studying corporate actions with regards to liquidity management and investment policies over the 2008 Financial Crisis. Our results indicate that family firms on average may face lower financial constraints than non-family firms. This is true when electing to place more weight on two proxies, which arguably have more solid theoretical and empirical foundations than other proxies. We, furthermore, find that family firms deploying supervoting share class systems see lower benefits of family ownership. This may be due to the risk of family private benefit extraction, through for instance excessive risk aversion, being exacerbated. Also, family CEOs appear to be more efficient than outside (professional) CEOs in lowering financial constraints. This may be due to private creditors valuing the long-term nature of their relationship to the families as well as the unique idiosyncratic knowledge of especially founders. Finally, we raise the possibility that our results are not due to family ownership mitigating information asymmetries and net agency costs, but that they rather stem from excessive risk aversion.