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 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.
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Notes
This relationship between dividends and leverage appears to be robust to different contexts (Michaely and Vincent 2012).
A negative relation between debt and dividends indicates that both are used as substitute monitoring mechanisms (Setia-Atmaja et al. 2009).
Specifically, “TOP 1.5 million module” of AMADEUS, which comprises the largest 1.5 million corporations that operate in the Eastern and Western European regions. The merits of this database as well as its complementary OSIRIS are measured by their increasing use in research of corporate governance (Lins et al. 2012, Franks et al., 2012, among others).
The Ownership Database (AMADEUS) intends to track control relationships rather than patrimonial relationships. This is why, when there are two categories of shares split into Voting/Non-voting shares, the percentages that are recorded are those attached to the category of voting shares.
The AMADEUS and OSIRIS data report the percentage of direct and/or indirect ownership of each shareholder. A direct link indicates that company ‘A’ owns a certain percentage of company ‘B’, while an indirect link means that company ‘A’ owns company ‘B’ through company ‘C’. AMADEUS traces control by first calculating voting rights but not cash-flow rights. A shareholder is defined as ‘large’ if direct and indirect voting rights sum to 10 % or more (Maury and Pajuste 2005; Laeven and Levine 2008; Jara-Bertin et al. 2008; Attig et al. 2009).
After analyzing the univariate statistics of the voting rights for the latter group of observations we can affirm that there is a very large probability that they are not the ultimate owners (mean = 49.23, median = 47.10; first quartile = 34.10 and the fourth quartile = 62.50 %). Data not reported in any table.
Because country analysis would produce biased results where there are significant differences in the number of observations by country, and following Gungoraydinoglu and Öztekin (2011) and Alves and Ferreira (2011), we decide to focus on groups of countries with the same legal system (Common-law origin; German origin; Scandinavian origin; French origin).
As can be seen, our evidence does not confirm Margaritis and Psillaki’s (2010) results for French firms. Margaritis and Psillaki (2010) found that in general firms with more concentrated ownership carry more debt in their capital structure. We could speculate that as the OLS methodology does not consider the problems arising from reverse causality between ownership concentration and debt. It may just happen that the blockholder seek more indebted companies once the same level of participation provides greater control in managing them.
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Santos, M.S., Moreira, A.C. & Vieira, E.S. Ownership concentration, contestability, family firms, and capital structure. J Manag Gov 18, 1063–1107 (2014). https://doi.org/10.1007/s10997-013-9272-7
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DOI: https://doi.org/10.1007/s10997-013-9272-7