The Effect of Family Shareholders on Firm Leverage.pdf

The Effect of Family Shareholders on Firm Leverage * Shu-hui Lin Department of Business Education, National Changhua University of Education JEL classification: G30, G32, G34 * Address for correspondence: Department of Business Education, National Changhua University of Education, 2, Shi-Da Rd., Changhua 500, Taiwan. Tel: 886-4-7232105 ext. 7135; Fax: 886-4-7211162; E-mail: shlin@.tw (Shu-Hui Lin) The Effect of Family Shareholders on Firm Leverage Abstract In this study, we explore the relation between family shareholders and debt usage decisions by examining the effects of family ownership, control, and management on financial leverage. We find family ownership, control, and management have differential effects on financial leverage. Moreover, our results show that when suffering serious agency problems of debt, firms with higher family ownership operate at a higher level of debt, while those with higher family control and with family management operate at a lower level of debt. Our findings suggest that high family ownership helps to align the interests of controlling families and debt holders. However, family shareholders with tight control over a firm and occupying the CEO position have a detrimental effect on the relation between the families and creditors. The Effect of Family Shareholders on Firm Leverage I. Introduction In firms with widely dispersed ownership managers have a great deal of discretion over corporate policies and a large amount of research has documented how they influence corporate financial leverage (e.g.