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Family Capital Structure

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Capital Structure of a Family Firm

Earlier research has shown that family business differ from non-family business in its financing decision (Mishra and McConaughy, 1999; Romano et al., 2001; Serrasqueiro and Silva, 2011). Serrasqueiro and Silva (2011) finds that family firms prefer higher level of long-term debt compared to family firms. For long term financing family firms follow the pecking order. They utilize internal capital first followed by debt then equity. Serrasqueiro and Silva (2011) attributed high long-term debt compared to level of long-term debt in non-family businesses to preference of control.

Mishra and McConaughy (1999) argue in opposite way. The findings are similar to Serrasqueiro and Silva (2011) that the family owned …show more content…

(2001) conducted a survey of about 5000 business owners in Australia. The results show that family firms tend to rely on internal capital for growth. Family firms are averse of debt as lead to bankruptcy and loss of control.

Earlier research reveals that family firms are debt averse and cite preference for control and bankruptcy risk as the major reason.

Determinants of Capital Structure

Collateral value of assets Collateral value of assets is one of the determinants of capital structure. There is a possibility that the stockholders transfer wealth from bondholders. Bondholders feel less vulnerable when an asset is collateralized against the funds (Titman and Wessels, 1988). Firms with a high collateral value of assets find it easy to issue debt. Collateral value of assets may have positive relationship with level of debt.

Agency cost is high for firms that have lower collateral value of assets. Such firms may issue debt to monitor managers. Collateral value of assets may have negative relationship with level of debt (Titman and Wessels, 1988).

Two proxies have been used in earlier research to measure collateral value of assets. First one is the ratio of the sum of tangible assets and inventory over total assets. The second measure is the ratio of Intangible assets to the ratio of total assets.

Non-debt tax …show more content…

Dividends can be viewed as a monitoring devices and act as a substitute to control managers. Agency theory predicts a negative relation between dividend paid and level of debt. Dividend ratio is defined as ratio of dividend paid to operating income.

Cost of debt

It is the average overall cost that a firm bears on its debt. The cost of debt along with the cost of equity determines the capital structure. If the cost of debt increases we can expect a firm to decrease its leverage ratio. The ratio of interest upon the long-term debt is considered as a measure of the cost of debt.

Liquidity It is the ease by which a company meets its current liabilities using current assets. A firm with more liquid assets will find it easy to get debt given the fact that in the worst case also the company can meet its current obligations using its current assets. Thus, a positive correlation is expected between liquidity and leverage ratio. The ratio of current assets to current liabilities is used as a measure of liquidity of the

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