Do Family Firms Use More or Less Debt?: Imen Latrous

182 Int. J. Corporate Governance, Vol. 3, Nos.
2/3/4, 2012
Do family firms use more or less debt?
Imen Latrous
University of Quebec at Chicoutimi,
555 Bd University, G7H 2B1,
Chicoutimi, Canada
E-mail: ilatrous@uqac.ca
Samir Trabelsi*
Brock University,
500 Glenridge Ave.,
St. Catharines L2S 3A1, Canada
E-mail: strabelsi@brocku.ca
*Corresponding author
Abstract: This paper investigates whether the identity of controlling

shareholders influences the financing decision of the firm. In particular, we
explore the impact of family control on firm debt levels. We also study the
effect of family involvement in management on firm leverage. Using a sample
of firms listed on the French stock market, our results show that family firms
use less debt than non-family firms. Our findings are consistent with the
hypothesis that family-controlled-shareholders prefer less debt as a mean to
reduce firm risk. Furthermore, our results show that family firms that have a
family member as CEO use more debt than family firms with outside CEOs.
Keywords: family firms; debt leverage; controlling shareholders; incentive

effect; entrenchment effect.
Reference to this paper should be made as follows: Latrous, I. and Trabelsi, S.

(2012) ‘Do family firms use more or less debt?’, Int. J. Corporate Governance,
Vol. 3, Nos. 2/3/4, pp.182–209.
Biographical notes: Imen Latrous is an Assistant Professor of Finance at

University of Québec at Chicoutimi, Canada. She holds a PhD in Finance from
University of Paris 1-Pantheon Sorbonne in 2006. Her main research interests
include corporate governance, family firms financing and performance. She has
recently published academic paper in Journal of Multinational Financial
Management.
Samir Trabelsi is an Associate Professor of Accounting, joined the Faculty

of Business in 2004. He received his PhD in Accounting from HEC Montreal.
His teaching interests are corporate governance, capital market research
in accounting, introduction to financial accounting, accounting theory,
and intermediate accounting. His research interests are in the area of
voluntary disclosure, corporate governance, mutual fund governance, earning
conservatism, and extensible business reporting language (XBRL).
Copyright © 2012 Inderscience Enterprises Ltd.

Do family firms use more or less debt? 183
1 Introduction
Many empirical studies in corporate governance show the prevalence of family controlled
firms in most countries (La Porta et al., 1999; Claessens et al., 2000; Faccio and Lang,
2002; Anderson and Reeb, 2003). La Porta et al. (1999) find that 35% of large publicly
traded firms around the world are family-controlled. Faccio and Lang (2002) analyse the
ultimate controlling owners of Western European corporations at the 20% cut-off level
and find that 44.29% are family controlled. They also show that 13.81% of Western
European family firms are controlled via pyramids and 17.81% through dual class shares.
These devices permit families to separate ownership from control and allow family
controlling shareholders to dominate a firm owning only a small fraction of its capital.
Consequently, important private benefits of control are took out at the expense of outside
shareholders. Furthermore, the management team of family controlled firms is often
dominated by family members. Faccio and Lang (2002) show that as many as 68.45% of
Western European firms have a family member in management either as CEO, or as
chairman or as vice chairman or as honorary chairman. La Porta et al. (1999) find that
68.59% of families around the world have controlling shareholders in firm management.
For US firms, Anderson and Reeb (2003) show that almost one third of S&P 500 firms
are family-owned. These distinctive characteristics can potentially influence firm’s
financial policy. Nevertheless, although the prevalence of family firms around the world
and family member’s active involvement in the firm’s management, our understanding of
the financial decisions of this distinctive class of firms is somewhat limited.
Empirical results on ownership and leverage have produced mixed results. Some
studies, suggest that financial leverage is positively related to managerial ownership
(Stulz, 1988; Harris and Raviv, 1988). On the other hand, some empirical studies argue
for a negative relationship of managerial ownership on debt levels (Friend and Lang,
1988). Anderson and Reeb (2003b) find that insider ownership, either by managers or
families has no effect on capital structure choices. Whether family firms are more or less
leveraged than non-family firms remains an open question. For US firms, Mishra and
McConaughy (1999) show that family firms use less debt than non-family ones
while Anderson and Reeb (2003) show that family firms use similar levels of debt as
non-family firms. In other countries, Setia-Atmaja (2010), Ellul (2008), Hagelin et al.
(2006), King and Santor (2008), Harijono et al. (2004), Wiwattanakantang (1999) and
Gallo and Vilaseca (1996) find contrasting results. We continue this line of research and
investigate the effect of family ownership, control and management on debt policy. We
also address the reverse causality from capital structure to family ownership.
Family-controlling shareholders represent an important and distinctive class of large
shareholders. Family firm’s unique ownership structure may have significant impact on
its capital structure. First, family controlling shareholders are more risk averse than
non-family shareholders due to their less diversified human and financial capital. They
generally invest a large part of their personal wealth into the capital of family firm. They
are also concerned with the firm’s long-term survival and reputation. This implies that
family controlling shareholders prefer less debt to reduce firm risk. On the other hand,
unlike external equity financing leading to dilution of their control, family controlling
shareholders may employ more debt to maintain their dominant position. Furthermore,
family-controlling shareholders are usually involved in the operational management of
the firm, which gives them a large discretion over firm’s decisions. They can influence
184 I. Latrous and S. Trabelsi
firm’s capital structure toward their preferences. This results in more severe agency
problems between family controlling shareholders and outside shareholders. Thus, the
control motivation hypothesis is more likely to hold when family member is active in
firm management.
La Porta et al. (1997) show that French civil law countries such as France have poor
investor protections and less developed equity and debt markets. Thus, the access to
finance is limited for French firms. According to KPMG France (2007), French family
firms suffer from under-financing. They have relatively low capital but they reinforce it
gradually, at the expense of dividend distribution. Furthermore, French family firms
employ less debt (32%) than French SMEs and large firms (78%). They also invest in
low risk projects and only one third of them rely on corporate diversification. No more
than 27% of family firms finance their investments by debt. In addition to that, a member
of family controlling shareholders usually belongs to management (89%). Family firms
are recruiting in their hiring by ‘consanguinity’. More than half of the recruits (52%) are
from the network of family firm and its employees. Another characteristic of the French
family firms is the lack of good corporate governance. Only 6% of family firms have
implemented a governance charter.
The French context provides an especially good platform to study whether family
firms employ more or less debt than non-family ones as family firms are prevalent in
France. Furthermore, the French institutional environment and ownership structure
differs from those in the USA (La Porta et al., 1999). The corporate governance system in
France is typified by a high concentration of ownership, family controlled firms, a
relative lack of good protection of outside shareholders and inefficient law enforcement
system (La Porta et al., 1999). This may lead to expropriation of outside shareholders by
controlling shareholders. Bloch and Kremp (2001) find that the largest blockhloder holds
about 20% to 30% of voting rights for CAC 40 French firms. Family ownership or
control is a common characteristic of French firms (Bloch and Kremp, 2001; Faccio and
Lang, 2002; La Porta et al., 1999; Allouche and Amman, 2000). The first study about the
ownership structure of French firms was done by Morin (1974) who found that 50% of
200 largest firms for 1971 are family controlled, such as Wendell family, Michelin
family, etc… Allouche and Amman (2000) show that 28.3% of top 1,000 industrial
French firms are family owned. Bloch and Kremp (2001) find that family ownership and
control is important both in French unlisted firms (40% of them) and CAC 40 firms.
Blondel et al. (2002) observed that 57% of top 250 listed French firms are dominated by
families. Sraer and Thesmar (2004) findings confirm these results that family control is
common in France. Faccio and Lang (2002) analyse the ultimate controlling owners of
Western European corporations at the 20% cut-off. They find that, on average, families
control 70.92% of the French non-financial firms.
Family controlling shareholders use several mechanisms to enhance their control.
These mechanisms such as dual class shares, pyramids and cross-shareholdings limit the
outside shareholders’ perception of the expropriation risk by family controlling
shareholders. The European Union directive on large shareholdings (88/627/EEC) has
been adopted by the French law of august 1989, which amended the French law 1966.
The French law of august 1989 imposes that any shareholder who holds a significant
stake of firm’s capital must inform as well as the company itself and the competent
authorities.1 Thus, all shareholders who control at least 5% of voting rights must
disclosure their identity. French regulations require 40% of voting rights as cut-off level
for presumed control. Faccio and Lang (2002) show that, in more than 62% of French
family controlled firms, family member belongs to management. This result suggests that
family controlling shareholders exert dominant influence on strategic decisions of the
firm and otherwise protect the controlling family’s interests. Finally, top 15 families
control 33.8% of total market capitalisation in France (Faccio and Lang, 2002).
We distinguish between three fundamental elements in the definition of family firms,
specifically, ownership, control and management, to explore whether family firms use
more or less debt than their non-family counterparts. First, do family-controlled firms use
high or low levels of leverage? Family controlling shareholders own poorly diversified
portfolios and have incentives to reduce firm risk. Debt is used as a means of reducing
firm risk because less debt decreases the probability of financial distress (Friend and
Lang, 1998). Nevertheless, to avoid the dilution effect of equity financing, family
controlling shareholders should use more debt to inflate their power and to become more
entrenched (Stulz, 1988). Second, How family ownership affect firm debt levels? The
relationship between family ownership and firm leverage may be non-linear. At low level
of family ownership, family equity stakes are increasing with debt levels, but, over a
certain point, debt is reduced when the level of family controlling shareholders ownership
becomes high. Finally, are debt levels related to the presence of a family member as
CEO? Family management can reduce agency problem (Berle and Means, 1932; Jensen
and Meckling, 1976). Agency theory would predict that debt is not used as a disciplinary
device limiting managerial opportunism (Jensen, 1986). On the other hand, family
members having CEO positions may influence firm policies to meet family own-interests
(Villalonga and Amit, 2006). In such corporations, a family member serving as CEO may
use his/her controlling position to extract private benefits at the expense of the outside
shareholders. Using data on all Fortune-500 firms during 1994 to 2000, Villalonga and
Amit (2006) find that when descendants act as CEOs firm value is destroyed, in
particular, for second-generation heirs. Since debt permits the family to dominate more
resources without diluting control stake, family members acting as CEOs have incentive
to use debt to enhance the control power of family shareholders and expropriate small
shareholders further (Faccio et al., 2001a). Consistent with the opportunistic behaviour of
family management, Anderson et al. (2003) find that when family members hold the
CEO position, the cost of debt financing is higher relative to family firms with outside
CEOs.
We use a sample of firms listed in the French stock market from SBF 250 index over
the period 1998 to 2002 to explore these questions. Our results show that the use of debt
by family firms is significantly lower than that of non-family firms. Family firms prefer
to use financing forms with low probabilities of default, suggesting a lower reliance on
debt financing. On the other hand, our findings indicate that family firms having family
members as CEOs use more debt than family firms with outside CEOs. Family CEOs
prefer to employ more debt to limit the dilution of their power and to extract valuable
private benefits of control. Yet, firms placing family members as CEOs employ less debt
when an outside blockholder is present. Then, outside blockholdings appear to have a
significant impact on the opportunistic behaviour of family CEO.
Our research contributes to the extant literature on family ownership in several ways.
Our results show that distinguishing between family ownership, control and management
is crucial to understand the financing decisions of family firms. Furthermore, our paper is
different from that of Anderson et al. (2003). Indeed, Anderson et al. (2003) investigate
the agency costs of debt of US family firms. Thus, they consider the agency conflict
between family controlling shareholders and bondholders. In contrast, our paper explores
the conflict of interest between family controlling shareholders and outside shareholders.
The French model of corporate ownership and control is somewhat different than the
Anglo-American model. French family controlling shareholders exert their control
mainly through pyramids but this mechanism is insignificant in the USA (La Porta et al.,
1999). Using pyramids, family controlling shareholders acquire more control in excess of
their cash flow rights, thus they may seek to expropriate other investors by diverting firm
resources for their own use. Exploring the impact of US founding family on the firm’s
diversification and financing decisions, Anderson and Reeb (2003) find that family firms
use similar levels of debt than non-family ones. As US family shareholders do not use
devices to exercise their power, this result suggests that US family shareholders are less
concerned about the extraction of private benefits of control. The French context is also
different from that of both Sweden and Canadian environment. Compared to Sweden and
Canadian family firms, French controlling shareholders use mainly pyramids as a mean
to gain control rights in excess of cash flow rights. Dual class shares are less used by
French family controlling shareholders2 (1.01%) compared by Sweden ones (67.12%).
Thus, unlike Sweden family shareholders who control firm through dual class shares,
pyramids appear the most important mechanism used by French family controlling
shareholders. The separation between ownership and control is more important through
pyramids than through dual class shares (La Porta et al., 1999). Hagelin et al. (2006)
investigate the use of debt by Swedish family firms controlled through dual class shares.
Their results show that Swedish family firms use no less no more debt than non-family
firms. King and Santor (2008) find that Canadian family firms have higher financial
leverage than other firms. In contrast to these results, we find that French family firms
have lower debt ratios than their counterparts. As French firms increase their power
mainly through pyramiding, then they use less debt to control more resources. Leverage
and pyramiding might be substitutes for the French context. Thus, high pyramiding is
associated with less leverage. Unlike recent study by Ellul (2008), we employ firms
sample from only the French market instead of using firms from different countries.
Indeed, firms within one country face the same rules relevant especially for the local
market. Cross-country study on capital structure of family firms cannot give a definitive
conclusion for one country in particular. Using a sample form 36 different countries,
Ellul (2008) show that family firms use more debt financing than non-family ones.
Nevertheless, within country study for France and Sweden document contrasting results.
This study provides insights into the relation between family control and debt within a
unique corporate governance context. We find that family controlling shareholders, as
large undiversified blockholders, seek to reduce firm risk by influencing capital structure
decisions.
In line with recent research supporting that family blockhodlers can further influence
agency conflicts by placing one of their members in the CEO position, we find evidence
that family management could be detrimental to minority shareholders (Anderson and
Reeb, 2003). Our findings show that family firms having family member as CEO employ
more debt than family firms with an outside CEO. Nevertheless, minority shareholders
who fear expropriation by family controlling shareholders may prefer a low level of
leverage.
Our paper also complements recent studies on the endogeneity of ownership structure
and addresses the endogeneity problem of family ownership and firm debt levels.
Especially, the issue is whether family ownership leads to a low debt levels or little use of
debt prompt families to maintain their holdings. Thus, debt and family ownership can be
used as substitute or complementary mechanism. Our findings show an inverse causal
relation from debt to family ownership which suggests that debt may serve as substitute
mechanism for family ownership. Less cash flow rights owned by family controlling
shareholders increase their willingness to expropriate outside shareholders. This result are
somewhat at odds with Anderson and Reeb (2003) who find that US family firms use
similar debt levels than non-family firms.
The remainder of this paper is organised as follows. Section 2 reviews the related
literature and presents our hypothesis. Section 3 describes research design, sample and
data. Section 4 presents the empirical results on French firm data and Section 5 concludes
this paper.
2 Prior literature and hypothesis development
2.1 Family control and debt financing

The relationship between corporate ownership structure and capital structure has been
mainly investigated in widely-held firms (Jensen and Meckling; 1976, Leland and Pyle,
1977; Jensen, 1986). In such corporations, the major agency conflict is between managers
and small shareholders (Agency problem 1) that arises from divergent interests and
asymmetric information (Jensen and Meckling, 1976). Unlike small shareholders,
controlling investors have enough power to monitor firm management. Nevertheless,
shareholders holding a large control stake in controlled firm are more prone to extract
private benefits at the expense of non-controlling shareholders. Thus, a second type of
agency problem appears opposing controlling shareholders to outside shareholders
(Agency problem 2). Hence, on the one hand, findings of several studies on the impact of
firm’s ownership structure on financial policy for firms with diffuse ownership may be
different from that of firms with a dominant shareholder. On the other hand, not all type
of large shareholders has the same preference. In particular, family firms are a special
class of shareholders with different characteristics than large institutional investors. Thus,
family ownership could affect firm’s financing choices in one of competing ways: the
alignment effect and the entrenchment effect.
The alignment effect is based on the argument that agency problems (Agency
problem 1) between managers and shareholders are fewer in family firms than non-family
ones (Anderson et al., 2003). The alignment effect implies that debt financing is no more
used as disciplinary device to reduce managerial opportunism through pressure to
generate cash flows to service debt (Jensen, 1986). Thus, family firms should be less
indebted than non-family firms. Moreover, relative to other shareholders, family owners
have a longer investment horizon (Anderson et al., 2003), large concentrated equity
holdings and are less diversified. Furthermore, family controlling shareholders want to
pass the firm to subsequent generations. Thus, they are more concerned about the firm’s
long-term survival and family’s reputation than the other shareholders (Casson, 1999;
Chami, 1999). Therefore, they have strong incentives to minimise firm risk by reducing
debt usage. By doing so, family owners should reduce the risk of their undiversified
financial and human capital investments (Friend and Lang, 1988). Family members
should also use low debt ratios to preserve their private benefits of control from the threat
of liquidation. For US firms, Mishra and McConaughy (1999) show that family firms
tend to avoid debt financing to reduce the loss of family control. Family controlling
shareholders prefer also employing less debt in order to limit monitoring by creditors
(Harris and Raviv, 1988). Focusing on devices that separate voting rights from control
rights, Hagelin et al. (2006) study the impact of the use of dual class shares on the capital
structure of family controlled Swedish firms. They find that family firms using shares
with differential voting rights use less debt. They suggest that family controlled firms use
dual class shares instead of debt in order to reduce corporate risk and to maintain control.
According to the alignment effect, family firms are less likely to engage in opportunistic
behaviour through debt financing because it could damage family owners’ wealth and
reputation. Hence, family firms have incentives to use less debt than non-family firms.
A competing view is the entrenchment effect which motivates families to extract
valuable private benefits of control at the expense of minority shareholders (Faccio et al.,
2001b). Johnson et al. (2000) referred to this case as tunnelling which is defined as the
transfer of assets and profits out of firms for the benefit of their controlling shareholders.
It is consistent with the view that family firms are less efficient than non-family firms.
Cronqvist and Nilson (2001) analyse the impact of controlling minority shareholders on
firm value and firm performance in a sample of 309 publicly traded Swedish firms. They
show that family controlling minority shareholders are associated with the largest
discount on firm value. They also document that private benefits of control are relatively
important when controlling minority shareholders are families. Such situation is
associated with an over-reliance on debt due to large shareholders being unwilling to
dilute their ownership (Faccio et al., 2010; Ellul, 2008; Stulz, 1988). Instead of
maximising firm value, entrenched families might have incentives to use higher leverage
to control more resources without diluting his control over the firm. Higher leverage
gives family controlling shareholders more assets to expropriate at the expense of
minority shareholders. In addition, families are usually highly involved in management
and hold important position on board directors. Thus, family firms may have
inferior corporate governance because board directors play limited role in controlling
agency problems, particularly monitoring executive management. Another source of
entrenchment is potentially the disproportional ownership structure in family firms,
which makes it easier for opportunistic family shareholders to expropriate minority
shareholders relying on more debt financing. Other studies suggest that high debt level of
family firms is related to a lower cost of debt financing. They argue that the divergence
of interests between shareholders and bondholders is potentially less severe in family
firms than in non-family firms (Anderson et al., 2003). Using a sample of 252 US
industrial firms, Anderson et al. (2003) find that family ownership is associated with a
lower agency cost of debt. Setia-Atmaja (2010) find, for a sample of Australian publicly
listed firms, that family controlled firms tend to use higher debt than non-family
controlled firms. They also show that board independence has no effect on the
relationship between family control and debt. Using a panel data comprising 3,608 firms
from 36 different countries, Ellul (2008) document that family firms have higher leverage
ratios relative to non-family firms. Specifically, family firms in countries where minority
shareholders rights are less protected tend to use more debt than those in countries that
provide high protection to minority shareholders. King and Santor (2008) report that
Canadian family firms with single share class have higher financial leverage than other
firms. Holmen et al. (2004) study confirms King and Santor (2008) results for a sample
of Swedish family firms. Furthermore, using a sample of Thai firms, Wiwattanakantang
(1999) explores the determinants of firm capital structure and finds a high debt level of
family firms relative to non-family ones. These findings corroborate that the control
motivation is an important factor influencing firm’s capital structure decisions. As a
result, family members can use capital structure to gain voting power and thereby
expropriate minority shareholders. Therefore, the entrenchment effect predicts that family
firms are associated with higher leverage.
Overall, the two competing theories of the effect of family ownership on leverage
indicate that this relation remains ultimately an empirical issue. Indeed, ex ante, it is
unclear whether family firms use more or less debt than non-family firms. Therefore, our
hypothesis is non-directional and we address this issue empirically to establish which of
the two competing hypothesis is empirically valid.
H1 Financial leverage is systematically different between family and non-family firms.
2.2 Family involvement in management and leverage

A common characteristic of family firms is that family members often have a managerial
role (La Porta et al., 1999; Faccio and Lang, 2002; Claessens et al., 2000). Indeed, they
usually serve as the firm’s CEO or fill other top management positions. This can have
two implications. First, by holding the role of CEO, families can more easily align the
firm’s interest with those of the family, thus they can reduce the traditional
owner-manager conflict. However, choosing the CEO among family members can harm
firm performance by excluding more qualified and talented outside professional
managers. Furthermore, outside managers may have skills and experiences that family
members may not have. Family members serving as CEOs may influence firm policies to
meet their interests. Burkart et al. (2002) argue that family management, especially by
descendants is associated with poor decision-making. Thus, family controlled firms are
more exposed to managerial entrenchment. Gomes and Novaes (2001) agree with this
argument and suggest that family CEO are likely less accountable to shareholders and
directors than hired managers. The evidence on this topic is mixed. On the one hand,
Adams et al. (2005) show that firms with founder-CEO trade at premium, indicating
that this type of CEO reduces agency conflicts inside the firm. On the other hand,
Perez-Gonzalez (2002) find a negative stock market reaction for firms that have founding
members as CEO. Furthermore, Morck et al. (1988) show a low performance for firms
with founder CEO. Villalonga and Amit (2006) find a non-monotonic effect of
generation on firm value. They show that family ownership only creates value when the
founder is still active in the firm either as CEO or as chairman with a hired CEO.
Nevertheless, descendant-CEOs destroy value, especially second generation family firms.
The effect of the third generation descendant-CEOs on firm value is non-significant. But,
the fourth generation CEOs affects positively the firm value. Anderson et al. (2003)
investigate the impact of founding family ownership structure on the agency cost of debt.
They find that having a family member in management lead to more severe debt agency
costs. Thus, bondholders view placing family members as CEO as detrimental to their
wealth and, consequently they require a higher cost of debt. The presence of family CEO
can then exacerbate agency conflicts with outside shareholders and creditors. Families
can exert the greatest influence on the firm by placing one of their members in the
position of CEO. Indeed, family members acting as CEO possess sufficient power to
meet family interests. However, these interests need not necessarily be in the interests of
the firm or outside shareholders. Family CEOs may engage in non-profit maximising
objectives, self dealing transactions, excessive compensation or special dividends. Thus,

they are able to derive important private benefits of control to the detriment of outside
shareholders and thereby result in minority shareholder wealth expropriation. Thus, we
posit that families CEOs prefer use more debt due to its non-dilutive effect. Debt allows
family CEOs to inflate their power and further entrench themselves with more resources
under their control (Faccio et al., 2010).
H2 We expect that family firms use more debt than non-family firms, in particular
when family member is serving as CEO.
3 Research design
3.1 Sample
Our data consists of listed firms on the French stock exchange for the period 1998 to
2002. Financial companies are excluded from the sample because such companies have
to comply with very stringent legal requirements. Those firms that were subject to
mergers or acquisitions, or those that were not listed on the stock exchange for a given
year, were also eliminated. We also removed firms with negative book equity values
(Kremp et al., 1999). Our sample is trimmed by applying a methodology similar to that of
Kremp et al. (1999). This yields 553 firm-year observations on 118 firms for the period
1998 through 2002. Firm-level accounting data and market equity value data are
extracted from Thomson Financial database. We collected ownership structure and voting
rights data from financial reports. Different measures of leverage were considered.
3.2 Leverage measures

We consider three measures of leverage according to whether book value or market value
is used. First, we look at total debt divided by total assets (L1). The second measure is the
total debt scaled by the book value of total invested capital of the firm (book value of
total debt plus book value of equity) (L2) (Frank and Goyal, 2003). Finally, we use the
ratio of total debt to market value of total capital of the firm (book value of total debt plus
market value of equity) (L3). Data limitations confine us to measure debt only on book
value.
3.3 Family firm definitions

One of our primary concerns is the identification of family firms. Various studies use the
term ‘family firm’ differently. Anderson and Reeb (2003b) use the fractional equity
ownership of the founding family and (or) the presence of family members on the board
of directors to identify family firms. Villalonga and Amit (2006) restrict the term ‘family’
to either the founder’s family or to an individual or family that becomes the largest
non-institutional shareholder in the firm through the acquisition of a block of shares.
In this study, the typology of control as proposed by Le Maux (2003) is used.
Therefore, we split up our sample according to whether firms are dominated by
controlling minority shareholders, controlling majority shareholders or are widely held.
Controlling majority shareholder(s) own alone or with other shareholders (family
members or other shareholders involved in shareholder agreements) 40%3 and more of

cash flows or voting rights. Controlling minority shareholders hold less than 40% of cash
flow rights or voting rights but they dominate the board with members who are affiliated
with them. Board members affiliated with a firm’s controlling shareholders are managers,
family members, banks, insurances, employees, government, other shareholders involved
with the controlling shareholders in a shareholder agreement. Thus, controlling
shareholders may form with several allies a controlling coalition. According to Le Maux
(2003), shareholder agreements are very common in France. In fact, in 45% of firms
belonging to the CAC 40 and in 29% of firms belonging to the SBF 120, there are one or
more agreements between shareholders. A firm is regarded as being widely held when it
is not dominated either by controlling majority shareholders or by controlling minority
shareholders.
According to this typology of control, we consider two definitions of a family firm.
First, we define family firm when the largest shareholder is an individual or members of
the same family4 and holding 40% and more of cash flows or voting rights. In this case,
family is controlling majority shareholders. On the other hand, a firm is classified as
family controlled when there is an individual or family members who hold less than 40%
of cash flow rights or voting rights but they dominate the board with members who are
affiliated with them. This second definition suggests that some families are able to exert
control with minimal fractional ownership. In these firms, the family is controlling
minority shareholder. Therefore, we use a dummy variable (FamFirm) to denote family
controlled firms. That is
FamFirm = 1, if the firm is family controlled,
= 0, otherwise.
Furthermore, families are usually involved in the operational management of the firm.
Thus, we use a dummy variable FamCEO to measure the family involvement in
management. That is,
FamCEO = 1, if family member serves as CEO,
= 0, otherwise.
3.4 Control variables

We also refer to control variables that are usually considered in the literature as
influencing the firm’s capital structure, such as growth opportunities, firm size, the nature
of assets, profitability, the operational risk, non-debt tax shields (NDTS) and industry
classification.
In line with Rajan and Zingales (1995), we use the market to book ratio to proxy for
growth opportunities. Rajan and Zingales (1995) find a negative relation between debt
and market to book ratio (Q) for a sample of large US, German, French, British and
Canadian firms. Titman and Wessels (1988) found a negative relation between leverage
and other proxies of growth opportunities. Myers’ (1977) underinvestment problem
suggests a negative relationship between growth and debt. Indeed, Myers (1977) shows
that firms with growth opportunities may invest sub-optimally, and thus creditors will be
more unwilling to lend for long-term.
We measure firm size by the logarithm of total assets (T) (Faccio et al., 2001a). Rajan
and Zingales (1995) propose that the firm size may proxy for the probability of
bankruptcy, which is high for small firms. Large firms are more transparent, suffer less
from informational asymmetry and have easier access to financial markets. So, large
firms should use more debt financing. Several empirical studies find ambiguous results
on the relationship between leverage and firm size (Kim and Sorensen, 1986; Rajan and
Zingales, 1995).
We use the ratio of tangible assets to total assets for the tangibility attribute (S)
(Kremp et al., 1999). Rajan and Zingales (1995) assert that tangible assets can be
pledged as collateral for loans, and therefore reduce debt agency costs. Myers (1977)
suggests that underinvestment problem due to debt financing is weaker for the firms with
more tangible assets. We then expect a positive relation between leverage and tangible
assets.
Firm profitability is measured by the ratio of earnings before interest, taxes and
depreciation to total assets (RO) (Fontaine and Nijokou, 1996). Myers and Majluf (1984)
suggest that more profitable firms use less debt because they have sufficient internal
funds. Firms will turn to debt only after they exhaust internal funds. Several empirical
studies find negative relationship between profitability and leverage (Friend and Lang,
1988; Jensen et al., 1992).
Another possible explanatory variable is net income volatility (R). This measure was
used in a number of empirical papers (Titman and Wessels, 1988; Friend and Lang,
1988). An increase in income volatility is considered as a serious threat for the creditors.
Therefore, higher income variability may lead to a lower credit supply (Bradley et al.,
1984). Then, income volatility should be negatively related to leverage. We calculate
income volatility by the standard deviation of firm’s accounting profitability. We use the
previous ten years when estimating standard deviation.
The NDTS variable is used to capture the NDTS argument put forward by De Angelo
and Masulis (1980). They state that firms with a high level of NDTS are expected to
receive lower tax benefits associated with leverage and hence will use less debt financing.
According to De Angelo and Masulis (1980), NDTS are negatively associated with
leverage. We calculate NDTS variable as the ratio of annual depreciation scaled by total
assets.
The industry feature is also seen as important in explaining corporate leverage. Firms
belonging to the same industry face similar market conditions and have the same risk
characteristics. Titman and Wessels (1988) suggest that industrial companies use less
debt because they are exposed to high liquidation costs. They use a zero-one dummy
variable for industry classification. Based on the FTSE classification, we created dummy
variables to control for the effect of industrial classification on the level of debt ratios.
We use four dummy variables to control whether the company belongs to industry,
consumer goods, services and new technologies sectors.
3.5 Testing methodology

First, we test whether leverage of family controlled firms differs from that of non-family
firms. We use the following specification to test the relation between family control and
corporate debt levels.
L(k )it = β 0 + β1 FamFirm + β 2Tit + β 3 Sit + β 4 ROit + β 5 Rit + β 6 Qit + β 7 NDTSit

(1)
+ β 8 (industry dummy variablesit ) + εit
where i denotes the cross-sections and t denotes time-period with i = 1, …, 118 and
t = 1, …, 5. We have yearly observations from 1998 to 2002. L(k) represent different
leverage measures (L1, L2 and L3) with k = 1, 2 and 3. Finally, εit is the ‘normal’ error
term.
And:
FamFirm family firm variable
T firm size variable
S tangibility variable
RO firm profitability variable
R firm risk variable
Q growth opportunity variable
NDTS non-debt tax shields.
We use panel data regression analysis. The fixed effect regression cannot be used in our
first specification equation (1).5 Indeed, the fixed effect estimator cannot estimate the
effect of any time invariant variable like FamFirm variable (Baltagi, 1995). Thus, the
pooled regression estimation technique is employed.
To investigate the impact of placing family members as CEO, we repeat the testing in
equation (1) by adding FamCEO dummy variable.
L(k )it = β 0 + β1 FamFirmit + β 2 FamCEOit + β 3Tit + β 4 Sit + β 5 ROit + β 6 Rit
(2)
+ β 7 Qit + β 8 NDTSit + β 9 (industry dummy variable) + εit
FamFirm family firm variable

FamCEO family member as CEO
NDTS non-debt tax shields.
4 Empirical results
4.1 Descriptive and univariate statistics

Table 1 (Panel A) shows the percentage of firms with controlling shareholders and
reports (Panel B) the identity of controlling shareholders. Interestingly, we find that
64.7% of firms are dominated by controlling majority shareholders and 19.9% of firms
are dominated by controlling minority shareholders, at the 40% cut-off level. Only 15.4%
of firms are widely held. We note that firms dominated by controlling majority
shareholders are strongly present in our sample. Panel B of Table 1 shows that the family
control represents 57.1% of the firms. Another frequent controlling shareholders category
is ownership by corporations, which is corresponds to 35.9% of the total number of firms.
The other ownership categories are state (2.8%) and financial institutions (4.3%)
ownerships. Therefore, Panel B shows the predominance of family control in the French
context. This corroborates the findings of Faccio and Lang (2002) and La Porta et al.
(1999). For instance, Faccio and Lang (2002) find that 70.9% of French firms of their
sample are controlled by families. La Porta et al. (1999) show that 50% of French
medium-sized firms are family-controlled. In Panel C, we can observe that in 92% of
family firms the CEO is a member of the family shareholders.
Table 1 Sample description
N (firm-year observations) Proportion (%)

Panel A: Type of control
Widely held 85 15.4
Controlling minority shareholders 110 19.9
Controlling majority shareholders 358 64.7
Total 553 100
Panel B: type of controlling shareholders
Financial institutions 20 4.3
State 13 2.8
Corporations 168 35.9
Family 267 57.1
Total 468 100
Panel C: Family involvement in management
FamCEO 246 92
OutsideCO 21 8
Total 267 100
Notes: Characteristics of firms over the period 1998 to 2002.
The sample consists of 118 French listed firm SBF 250 index.
In sum, Table 1 shows that, for French listed firms:
1 controlling majority shareholders are predominant
2 family control of firms appears to be common
3 families are strongly involved in management.
The Panel A of Table 2 shows that family controlling shareholders hold on average
55.5% of cash flow rights. This result highlights the prevalence of ownership
concentration for French family firms. Furthermore, Panels A and B show that the firms
dominated by families have, on average, a lower leverage, than non-family firms (20.7%
versus 25.2% for L1, 36.6% versus 41.8% for L2, 24.1% versus 30.6% for L3). This
finding suggests that family controlling shareholders use less debt in order to limit the
risk of their undiversified capital and human investments.
Table 2 Descriptive statistics
N (firm-year Standard
Minimum Maximum Mean
observations) deviation
Panel A: family firms
L1, book leverage 260 0 0.583 0.207 0.130
L2, book leverage 260 0 0.813 0.366 0.209
L3, market leverage 255 0 0.87 0.241 0.192
ParAc, controlling 258 0.128 0.898 0.555 0.166
shareholders ownership
NDTS, non-debt tax 265 0 0.361 0.05 0.03
shield
RO, profitability 265 –0.259 0.484 0.087 0.075
R, risk 266 0 0.216 0.032 0.029
T, size 265 0.75 4.448 2.649 0.635
S, collateral 265 0 0.534 0.175 0.124
Q, growth opportunities 264 0.085 7.94 2.177 1.408
Panel B: Non-family firms
L1, book leverage 196 0.001 0.584 0.252 0.139
L2, book leverage 196 0.002 0.946 0.418 0.204
L3, market leverage 191 0 0.868 0.306 0.207
ParAc, controlling 185 0.163 0.988 0.536 0.208
shareholders ownership
NDTS, non-debt tax 201 0 0.661 0.057 0.051
shield
RO, profitability 201 –0.638 0.417 0.063 0.083
R, Risk 201 0 0.349 0.0368 0.037
T, size 201 0.654 4.243 2.966 0.624
S, collateral 201 0 0.751 0.261 0.197
Q, growth opportunities 201 0.179 7.935 1.848 1.392
Table 3 provides a univariate analysis between family controlled firms and non-family
firms Table 3 shows that difference in indebtedness (L1, L2 and L3) between the two
controlling owner categories is significant. Moreover, the difference in debt ratio is
significant between firms placing family member as CEO and firms having outside
managers.6
Table 3 Tests of differences in median debt ratios (Z-statistics)
Variables Type of owners Median difference (z-statistics) P (z)

L1 Non-family firms 3.47 0.0005***
Family firms
Family firms
Family firms
L1 FamCEO 0.208 0.83
Outside CEO
L2 FamCEO 2.21 0.026**
Outside CEO
L3 FamCEO 2.38 0.017**
Outside CEO
Notes: *** Significance at 1% level; **significance at 5% level
At last, a correlation analysis of the independent variables was performed.
Cross-correlations are generally low, except for growth opportunities and size. To check
whether these two variables are collinear, we perform a VIF test. Our VIF tests results are
considerably lower than 3. Thus, multicollinearity among the independent variables
should not constitute a problem.
4.2 Multivariate regression results

4.2.1 Family ownership and firm leverage
The primary variable of interest is FamFirm and its coefficient, which indicates the
difference in debt usage between family and non-family firms. Table 4 gives the
regression results of the effect of family control on debt levels (M1, M2, M3). Each
regression corresponds respectively to the three measures of leverage L1, L2 and L3. For
all models (M1, M2, M3), we find that the coefficient on FamFirm is negative and
significant at 1%, 5% and 10% level for M1, M2 and M3 models, respectively. This
result suggests that family firms have lower leverage than non-family firms. This
negative relation between family control and leverage indicates that family firms use less
debt than non-family firms. Generally, family controlling shareholders invest a large
fraction of their personal wealth in the firm. Thus, they seek to reduce risk through their
financing choices, especially by using less debt in their capital structure. Consistent with
the risk reduction motivations, family controlling shareholders tend to decrease leverage.
Thus, our finding rejects the argument which states that family controlling shareholders
employ more debt for control purposes (Stulz, 1988). Instead of debt use, family
controlling shareholders may employ control enhancing mechanisms such as pyramids,
dual class shares and cross-shareholdings to maintain control. Using a sample of
3,608 firms from 36 different countries, Ellul (2008) find that a difference between
family’s cash flow rights and its voting rights has a negative impact on leverage of family
firm. Moreover, families are strongly concerned with firm’s long-term survival and want
to pass their firm to subsequent generations. Therefore, they have incentives to employ
financing forms with low probabilities of default, suggesting a lower reliance on debt
financing. Our findings also suggest that family controlling shareholders prefer building
their reputation rather than expropriation of outside shareholders.
Table 4 Regression results on the relationship between leverage and family control
Dependant variables
Variables L1 L2 L3
M1 M2 M3
FamFirm –0.04 –0.04 –0.03
(0.003)*** (0.02)** (0.05)*
NDTS 0.18 –0.07 0.089
(0.416) (0.785) (0.746)
RO –0.18 –0.466 –0.27
(0.033)** (0.001)*** (0.023)**
R –0.71 –0.21 –0.76
(0.000)*** (0.000)*** (0.004)***
T 0.02 0.08 0.09
(0.012)** (0.000)*** (0.000)***
S 0.03 –0.08 0.01
(0.493) (0.269) (0.783)
Q –0.019 –0.023 –0.06
(0.000)*** (0.001)*** (0.000)***
R2 0.18 0.24 0.47
N 456 456 446
Notes: The table presents panel estimates of models relating debt ratios to family firm
variable. The sample contains 118 French listed firms over the period 1998 to 2002.
L1: total debt divided by total assets. L2 is the total debt scaled by the book value of
total invested capital of the firm. L3 is the ratio of total debt to market value of total
capital of the firm. FamFirm: family firm variable; NDTS: ratio of depreciation to
total assets; RO: ratio of EBITDA to total assets; S: logarithm of the book value of
total assets; R: standard deviation of firm’s profitability; T: ratio of fixed assets to
total assets; Q: market value of shares divided by equity book value.
*** Significance at 1% level; **significance at 5% level; *significance at 10% level.
Our results are consistent with the findings of Allouche and Amman (2000), Mishra and
McConaughy (1999), Gallo and Vilaseca (1996) and Halegin et al. (2006). Nevertheless,
our results are contrary to Harijono et al. (2004), Wiwattanakantang (1999), King and
Santor (2008), Ellul (2008) and Setia-Atmaja (2010) findings. Allouche and Amman
(2000) show that French family firms of their sample are reluctant to use debt financing.
Gallo and Vilaseca (1996) show that Spanish family firms have lower leverage. On the
other hand, Harijono et al. (2004) and Wiwattanakantang (1999) find a positive relation
between family control and leverage for a sample of Australian firms and a sample of
Thai firms, respectively. This supports the hypothesis that family firms employ more debt
to enhance their power, and is consistent with Bebchuk’s (1999) argument. Indeed,
Bebchuk (1999) argues that private benefits of control are important in family controlled
firms. Thus, family controlling shareholders have incentives to conserve control and
therefore use more debt due to its non-dilutive effect. However, Anderson and Reeb
(2003) show that family firms use no less and no more debt than non-family firms. This
finding suggests that families may maintain holdings in low-risk businesses, thus they
have less need to engage in risk reducing activities.
Turning to the control variables, we find that most of them have statistically
significant explanatory power and their signs are consistent with predictions.7 Indeed, the
estimated coefficient of firm size (T) is positive and statistically significant. This is
consistent with the argument which states that firm size serves as an inverse proxy for the
probability of bankruptcy, which implies that larger firms should be more highly
leveraged. The positive impact of size on leverage is consistent with the results of many
empirical studies (Rajan and Zingales, 1995; Booth et al., 2001; Frank and Goyal, 2003).
The coefficient of the firm risk (R) variable is negative and significant at 1% level. The
result supports the view that firms with higher earning volatility use less debt due to
higher bankruptcy risks. Higher profitability is associated with a lower leverage level.
This finding is consistent with the pecking order hypothesis of Myers and Majluf (1984)
and the empirical results of Titman and Wessels (1988), and Friend and Lang (1988).
Lastly, the coefficient on Q variable, which proxies for growth opportunities, is negative
and significant at 1% level. Therefore, firms with growth opportunities use less debt
financing (Bradley et al., 1984; Titman and Wessel, 1988).
In sum, our results confirm the incentive effect which states that if family controlling
shareholders desire to limit the risk of their undiversified human and financial capital
investments, then they will use less debt than non-family firms. Several studies show that
family firms perform better than non-family firms (Anderson and Reeb, 2003; Barontini
and Caprio, 2005). Thus, family controlling shareholders are more likely concerned with
value maximising objectives rather than extracting private benefits of control. They have
little incentives to employ more debt in order to expropriate outside shareholders.
Moreover, due to the undiversified nature of their holdings and their desire for firm
survival and reputation, family controlling shareholders have strong incentives to reduce
firm risk by limiting debt usage. In addition, as French family controlling shareholders
increase control over resources mainly through pyramiding, then they use less debt to
avoid losing control of the firm under severe financial difficulties. Thus, for the French
family firms, leverage and pyramiding appear to substitutes. Greater pyramiding is
associated with less leverage.
We next investigate the influence that family members serving as CEOs have on firm
debt levels. We include a dummy variable for a family member as CEO into our
regressions. We report the regression results in Table 5. Interestingly, we find that the
coefficient on FamCEO is positive and significant for all regressions (M4, M6, M8) using
either book value or market value of debt leverage. This suggests that having a family
member as CEO is associated with a significantly higher debt levels. It may be easier for
family controlling shareholders to influence leverage decision, especially when family
member is present in management. This finding confirms our univariate analysis
(Table 3). Family firms use more debt when a family member takes the position of CEO.
Family CEOs prefer to contract more debt to limit dilution of their power. Indeed, debt
permits to the family CEOs to protect and enhance their control for future extraction of
private benefits. This result corroborates Ellul (2008) results but rejects those found by
Berger et al. (1997). Furthermore, our findings are consistent with the results of Morck
et al. (1988); Sraer and Thesmar (2004), Villalonga and Amit (2006) and Yeh (2005)
which show that family member CEOs lead to poor performance, relative to outside
CEOs. Furthermore, our results confirm Anderson and Reeb (2003) findings that show
that having family member in management leads to more severe debt agency costs.
Bondholders view placing one or more family members in the position of CEO as
detrimental to their wealth and thus require higher yields. However, our results indicate
that even after controlling for family involvement in management, family firms still have
lower debt levels than non-family firms.
Table 5 Regression results on the relationship between leverage and family involvement in
management
Dependant variables
Variables L1 L2 L3
M4 M5 M6 M7 M8 M9
FamFirm –0.07 –0.05 –0.07 –0.5 –0.05 –0.29
(0.001)*** (0.135) (0.006)*** (0.045)** (0.023)*** (0.016)**
FamCEO 0.06 0.012 0.06 0.29 0.03 0.19
(0.005)*** (0.717) (0.023)** (0.094)* (0.099)* (0.072)*
FamCEO*SdBlock 0.015 –0.241 –0.07
(0.332) (0.003)*** (0.02)**
NDTS 0.17 0.17 –0.06 0.34 0.1 0.84
(0.435) (0.431) (0.815) (0.769) (0.708) (0.33)
RO –0.22 –0.21 –0.52 –0.29 –0.31 –0.56
(0.012)** (0.014)** (0.000)*** (0.11) (0.005)*** (0.202)
R –0.69 –0.77 –0.25 –0.07 –0.78 –0.42
(0.001)*** (0.000)*** (0.000)*** (0.004)*** (0.005)*** (0.025)**
T 0.03 0.027 0.1 0.62 0.1 0.355
(0.001)*** (0.01)** (0.000)*** (0.000)*** (0.000)*** (0.000)***
S 0.04 0.03 –0.07 –0.46 0.02 –0.001
(0.398) (0.483) (0.329) (0.179) (0.653) (0.994)
Q –0.019 –0.01 –0.02 –0.05 –0.06 –0.14
(0.000)*** (0.000)*** (0.001)*** (0.08)* (0.000)*** (0.000)***
2
R 0.21 0.2 0.26 0.2 0.47 0.3
N 450 451 450 439 440 438
Notes: The table presents panel estimates of models relating debt ratios to family
involvement in management. The sample contains 118 French listed firms over the
period 1998 to 2002. L1: total debt divided by total assets. L2 is the total debt scaled
by the book value of total invested capital of the firm. L3 is the ratio of total debt to
market value of total capital of the firm. FamFirm: family firm variable; FamCEO:
family member as CEO, SdBlok: outside blockholder variable, NDTS: ratio of
depreciation to total assets; RO: ratio of EBITDA to total assets; S: logarithm of the
book value of total assets; R: standard deviation of firm’s profitability; T: ratio of
fixed assets to total assets; Q: market value of shares divided by equity book value.
***Significance at 1% level; **significance at 5% level; *significance at 10% level.
Lastly, we study the effect of the presence of an outside blockholder for firms with family
CEOs. We use a dummy variable SdBlock to indicate outside blockholder, defined as
entities holding 10% and more of the firm’s shares, and having no relationship to family
controlling shareholders. Other large shareholders may have strong incentives to monitor
and discipline firm managers. We repeat the testing in equation (2) by adding the
product of FamCEO and SdBlock (M5, M7, M9). From Table 5, we notice that the
coefficient on FamFirm is negative and significant for models M7 and M9. The
coefficient on FamCEO is positive and significant for models M7 and M9. The
coefficient on the product of FamCEO*SdBlock is negative and significant for models
M7 and M9. This suggests that outside blockholder exerts its influence to limit the
control motivations of family CEO.
To sum up, models M5, M7 and M9 show that family firms have lower leverage than
non-family firms. Furthermore, firms with family member CEOs use more debt than
family firms with outside CEOs. Nevertheless, firms placing a family member as CEO
employ less debt when an outside blockholder is present. Family member CEOs tend to
reduce debt usage for entrenchment objectives after controlling for an outside
blockholder. This is consistent with the argument which states that outside blockholder
plays a monitoring role over family CEOs (Faccio et al., 2001b).
5 Tests of robustness
In this section, we explore whether the results of our primary analysis of the relation
between family ownership and debt financing are robust.
5.1 Non-linearities between debt leverage and family ownership
We test the possibility of non-linearities between family ownership and debt leverage.
Thus, we modify our regression specification by including family ownership (FamOwn)
and its square as continuous variables. The square of family ownership allows testing the
non-linear relationship between capital held by family shareholders and debt. A negative
sign associated with the square of family ownership highlights the quadratic form and
confirm the existence of a maximum.
The Chow test is significant at the 1% level for regressions using book value or
market value of debt ratio and confirms the presence of firm-specific effects. To test the
fixed effects versus random effects, we use the Hausman specification test. The Hausman
test is insignificant for regressions M10, M11 and M12. For these regressions, the
Breuch-Pagan LM test is significant. Thus, the random effects model is applied for all
regressions.
The coefficient on the square of family ownership FamOwn2 is negative and
significant for models M10, M11 and M12. This negative coefficient highlights a
non-linear relation between leverage and family ownership. This finding indicates that
debt leverage first increases as family ownership increases but then decreases with
increasing family ownership.
Table 6 Non-linearities between family ownership and debt leverage
Dependant variables
Variables L1 L2 L3
M10 M11 M12
FamOwn 0.59 0.14 0.63
(0.065)* (0.027)** (0.14)
2
FamOwn –0.73 –0.25 –0.7
(0.009)*** (0.006)*** (0.053)*
NDTS –0.12 –0.17 0.32
(0.575) (0.636) (0.259)
RO –0.23 –0.404 –0.41
(0.004)*** (0.003)*** (0.000)***
R –0.5 –0.913 –0.64
(0.021)** (0.012)** (0.034)**
T 0.05 0.134 0.13
(0.008)*** (0.000)*** (0.000)***
S 0.43 0.43 0.24
(0.000)*** (0.001)*** (0.021)**
Q –0.01 –0.02 –0.04
(0.001)*** (0.006)*** (0.000)***
R2 0.31 0.39 0.51
Chow 11.5 8.88 9.11
(0.000)*** (0.000)*** (0.000)***
Hausman 16.28 17.79 15.92
(0.17) (0.12) (0.19)
Breusch-Pagan LM 0.000*** 0.000*** 0.000***
N 251 251 246
Inflection point (%) 40.4% 28% 45%
Notes: The table presents panel estimates of non-linearities between family ownership and
leverage. The sample contains 118 French listed firms over the period 1998 to 2002.
total invested capital of the firm. L3 is the ratio of total debt to market value of
total capital of the firm. FamOwn: family ownership variable, NDTS: ratio of
depreciation to total assets; RO: ratio of EBITDA to total assets; S: logarithm of the
book value of total assets; R: standard deviation of firm’s profitability; T: ratio of
fixed assets to total assets; Q: market value of shares divided by equity book value.
The Hausman test compares random individual effects to fixed individual effects.
***Significance at 1% level; **significance at 5% level; *significance at 10% level.
The inflection points are 40.4%, 28% and 45% of capital ownership respectively for
models M10, M11 and M12. Thus, when the family shareholders hold a little part of
capital (less than 40.4% for M10, 28% for M11 and 45% for M12), they prefer use more
debt to avoid dilution effect of equity financing. Based on these results, family firms are
more indebted than non-family ones when family controlling shareholders hold less than
40.4% family ownership for M10 (28% for M11 and 45% for M12). However, beyond
40.4% family ownership for M10 (28% for M11 and 45% for M12), family firms use less
debt than non-family firms. In these conditions, family shareholders hold poorly
diversified portfolios and prefer limit default risk by reducing debt level (Friend and
Lang, 1988).
5.2 On the endogeneity of family ownership and debt financing
Our previous empirical analysis explores the impact of family ownership on debt levels
and considers family ownership as exogenous. Demsetz (1983) argues that the ownership
structure is an endogenous variable determined by the decisions taken by shareholders
and transactions on the stock market. Several research focusing on the relationship
between ownership structure and performance consider the endogeneity of firm’s
ownership structure. However, our study ignores a possible interaction between family
ownership and debt financing. Ownership structure could not affect firm debt levels but
also be affected by it. Especially, the issue is whether family ownership leads to a low
debt level or little use of debt prompt families to maintain their holdings.
A large body of literature finds a positive or negative impact of ownership
concentration on the debt level. However, these studies overlook the inverse causality
effect of capital structure on ownership structure. Ignoring this reverse causality may lead
to a simultaneity bias. Debt level can be a determinant of family ownership. According to
Jensen and Meckling (1976), debt financing reduces the use of external equity capital,
thereby increasing the level of managerial ownership. Debt may also negatively affect
family ownership. High indebtedness increases the bankruptcy risk. This may constrains
family shareholders to reduce their holding in order to limit wealth loss in case of
bankruptcy. Debt and family ownership are somehow related in different way. Thus,
whether these mechanisms are substitute or complementary is ultimately an empirical
question.
Here, we model family ownership and leverage as simultaneously determined.
Therefore, we estimate a system of simultaneous equations highlighting the interaction
between capital structure and family ownership. Before estimating the system of
simultaneous equations, we test the endogeneity of family ownership variable FamOwn
using Durbin-Wu-Hausman test as proposed by Davidson and Mckinnon (1993). The null
hypothesis of this test states that an ordinary least squares (OLSs) estimation of the same
equation would give consistent estimates. That is, any endogeneity among the regressors
would not have detrimental effects on OLS estimates. Then, we estimate the
simultaneous equations model using 2SLS and three-stage least squares (3SLS). The
Hausman (1978) test determines which of the estimation method (2SLS and 3SLS) is the
most appropriate to our model.
We develop a simultaneous equations model defined by equations (3) to (4), in which
family ownership (FamOwn) and leverage (L) are endogenous variables. The order and
the rank conditions were satisfied and therefore the equation system was identified.
Lit = β 0 + β1 FamOwnit + β 2 ( FamOwn) 2 + β 3 EM ( s )it + β 4Tit + β 5 Sit

(3)
+ β 6 ROit + β 7 Qit + εit
FamOwnit = α 0 + α1 L(k )it + α 2 EM ( s )it + α 3Tit + α 4 Rit + α 5 R & Dit + vit (4)
FamOwn family ownership variable
EM expropriation risk of outside shareholders
R&D research and development (R&D) variable
Intg ratio of intangible assets to total assets.
In equation (3), EM variable detects the expropriation risk of outside shareholders by

controlling shareholders. This variable was included in order to capture if debt is used to
expropriate outside shareholders by family controlling shareholders. Others variables are
as defined earlier. The second equation (4) describes a reverse causation in the
relationship between leverage and ownership structure where family ownership was
treated as dependant variable. As most of the previous papers related to ownership
structure, we include risk, debt, firm size, R&D as determinants of ownership structure.
Other variable like the risk of insider expropriation (EM) can be argued to affect family
ownership. Bebchuk (1999) shows that a firm tends to have dominant shareholders when
private benefits of control are large. We expect negative relationship between firm size
and family ownership (Demsetz, 1983). Indeed, large firms tend to issue more shares than
smaller ones. We predict that family ownership to be a negative function of risk. Indeed,
high levels of risk may lead family controlling shareholders to diversify their portfolio.
Mahrt-Smith (2005) suggests that firms that need to invest for the long-term should have
more dispersed ownership. R&D expenditures show the presence of long-term firm
investment which is negatively related to ownership structure. Villalonga and Amit
(2006) show that family firms invest slightly in R&D expenditures relatively to capital
expenditures. Therefore, family firms do not need to diversify their activities in order to
overcome their lack of personal diversification. Therefore, the variable R&D is expected
to produce a negative indication.
Before estimating the model of simultaneous equations specified in equations (3) and
(4), we test the endogeneity using the Durbin-Wu-Hausman test. Table 7 shows that the
Durbin-Wu-Hausman test is significant which suggests the presence of the endogeneity
problem. In the case that the regressors are endogenous, the use of OLS analysis results
in estimates which are biased and inconsistent. Thus, we employ the 2SLS and 3SLS
econometric techniques. Hausman (1978) test is used to discriminate between these two
econometric methods.
Table 7 On the endogeneity of family ownership and debt leverage
L1 FamOwn L2 FamOwn L3 FamOwn

FamOwn 0.651 0.71 1.03
(0.019)* (0.084)* (0.001)*
2
FamOwn –0.66 –0.63 –1.04
(0.005)*** (0.092)* (0.000)*
T 0.021 –0.008 0.1 –0.017 0.09 –0.001
(0.097)* (0.63) (0.000)* (0.362) (0.000)* (0.954)
RO –0.26 –0.64 –0.47
(0.014)** (0.000)*** (0.000)*
S 0.375 0.29 0.21
(0.000)*** (0.008)*** (0.013)**
Q –0.014 –0.009 –0.04
(0.017)** (0.337) (0.000)*
EM 0.004 –0.001 0.003 –0.0009 –0.0002 –0.0027
(0.861) (0.724) (0.374) (0.797) (0.948) (0.464)
R –1.01 –1.05 –1.006
(0.005)*** (0.005)*** (0.005)***
Intg –0.016 –0.01 –0.016
(0.000)*** (0.000)*** (0.000)***
L1 –0.17
(0.05)*
L2 –0.009
(0.874)
L3 –0.15
(0.027)**
Hausman 137.18 116.26 141.83
(0.000)* (0.000)* (0.000)*
N 383 383 383 383 383 383
Inflection 46.5% 56.3% 49.5%
point
Notes: The table presents panel estimates of the endogeneity of family ownership and
leverage. The sample contains 118 French listed firms over the period 1998 to 2002.
total invested capital of the firm. L3 is the ratio of total debt to market value of total
capital of the firm. FamOwn: family ownership variable, EM: expropriation risk of
outside shareholders; RO: ratio of EBITDA to total assets; S: logarithm of the book
value of total assets; R: standard deviation of firm’s profitability; T: ratio of fixed
assets to total assets; Q: market value of shares divided by equity book value, Intg:
ratio of intangible assets to total assets. The Hausman test compares random
individual effects to fixed individual effects.
***Significance at 1% level, **significance at 5% level, *significance at 10% level.
We address endogeneity problem by estimating a 3SLS model. The results of the 3SLS
regressions suggest that firm’s debt level appears to have a negative impact on family
controlling shareholders (Table 7). Thus, they prefer reduce their equity stakes when debt
levels are increased. Family controlling shareholders expect a high probability of
bankruptcy due to excessive use of debt. They choose to reduce their share capital in
order to protect their wealth that is highly invested in controlled firm. This inverse causal
relation from debt to family ownership suggests also that debt may serve as substitute
mechanism for family ownership. Less cash flow rights owned by family controlling
shareholders increase their willingness to expropriate outside shareholders. Indeed, this
exacerbates the conflict between family controlling shareholders and outside investors.
Debt financing appears as a mean of enhancing family control, and thereby exchange
profits for private rents (Ellul, 2008).
Of the exogenous variables in family ownership equation, the risk (R) and R&D are
each significant. The negative parameter estimate for risk variable suggests that as risk
increases, family controlling shareholders became more risk averse and thus family
ownership is reduced. The parameter estimate on R&D carries a negative sign and
corroborates earlier arguments by Villalonga and Amit (2006). However, the risk of
expropriation variable (EM) and size (T) variable are not statistically significant.
In the debt equation, the results from 3SLS regressions are consistent with our prior
OLS results. Indeed, the relation between family ownership and debt levels is non-linear
when we employ a model of simultaneous equations. All of exogenous variables (at the
exception of the risk of expropriation variable) are significant and have the expected
signs as argued by previous researchers.
6 Conclusions
This paper explores whether leverage of family controlled firms differs from that of
non-family ones. There are two competing hypotheses about the relationship between
family control and debt levels. If family controlling shareholders desire to limit the risk
of their poorly diversified human and financial investments, we expect consequently that
family firms will use less debt than non-family firms. In contrast, if family controlling
shareholders need to conserve control and to entrench themselves further, we expect that
family firms will have higher levels of debt than their counterparts. We also study the
effect of the family involvement in management on firm leverage. Finally, our paper
addresses the endogeneity problem of family ownership and firm debt levels.
Using a sample of 118 firms listed on the French stock market over the period 1998 to
2002, our results show that the use of debt by family firms is significantly lower than that
of non-family firms. This significant negative association between debt and family
control rejects the hypothesis which states that family controlling shareholders have
incentives to expropriate minority shareholders wealth, and should use more debt to
enhance their power. However, our findings corroborate the alignment effect which is
based on the argument that family controlling shareholders are more concerned about the
firm’s long-term survival and family’s reputation than the other shareholders. Therefore,
they have strong incentives to minimise firm risk by reducing debt usage. In addition,
French family controlling shareholders use pyramids to increase their control over
resources, and then they use less leverage to avoid losing control in case of bankruptcy.
Furthermore, our results show that family firms having a family member as CEO use
more debt than family firms with outside CEOs. When family member serves as CEO,
the conflict of interest between shareholders and managers became less relevant. On the
other hand, by dominating the management, family shareholders are able to take
decisions according to their objectives which may harm firm performance. They have
incentives to satisfy family interests which are always different to those of the external
shareholders. Family member CEOs prefer to use more debt in order to increase their
control and extract more private benefits of control. Nevertheless, family member CEOs
tend to reduce debt usage for entrenchment objectives after controlling for an outside
blockholder. Lastly, our findings show an inverse causal relation from debt to family
ownership which suggests that debt may serve as substitute mechanism for family
ownership. Less cash flow rights owned by family controlling shareholders increase their
willingness to expropriate outside shareholders.
Acknowledgements
The authors would like to thank an anonymous referee and participants in 2008
Netherlands IFERA Conference and 2008 ASAC Conference in Halifax for the helpful
comments.
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Notes
1 See Bloch and Kremp (2001) for more details.
2 French regulations allow multiple voting shares and most shareholders may hold two votes for
each ordinary share, as long as they have been held for at least two consecutive years. For
listed firms, this minimum holding period can be longer up to four years.
3 French regulations require 40% of voting rights as cut-off level for presumed control.
4 Family members having the same last name.
5 For all our specifications.
6 With the exception of L1.
7 Except for variable measuring the tangibility of assets (S) and NDTS.

Do Family Firms Use More or Less Debt?: Imen Latrous

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182 Int. J. Corporate Governance, Vol. 3, Nos.

Do family firms use more or less debt?

Abstract: This paper investigates whether the identity of controlling

Keywords: family firms; debt leverage; controlling shareholders; incentive

Reference to this paper should be made as follows: Latrous, I. and Trabelsi, S.

Biographical notes: Imen Latrous is an Assistant Professor of Finance at

Samir Trabelsi is an Associate Professor of Accounting, joined the Faculty

Copyright © 2012 Inderscience Enterprises Ltd.

2 Prior literature and hypothesis development

2.1 Family control and debt financing

2.2 Family involvement in management and leverage

objectives, self dealing transactions, excessive compensation or special dividends. Thus,

3.2 Leverage measures

3.3 Family firm definitions

members or other shareholders involved in shareholder agreements) 40%3 and more of

3.4 Control variables

3.5 Testing methodology

L(k )it = β 0 + β1 FamFirm + β 2Tit + β 3 Sit + β 4 ROit + β 5 Rit + β 6 Qit + β 7 NDTSit

FamFirm family firm variable

4.1 Descriptive and univariate statistics

N (firm-year observations) Proportion (%)

Table 2 Descriptive statistics

Table 3 Tests of differences in median debt ratios (Z-statistics)

Variables Type of owners Median difference (z-statistics) P (z)

4.2 Multivariate regression results

5.1 Non-linearities between debt leverage and family ownership

Table 6 Non-linearities between family ownership and debt leverage

5.2 On the endogeneity of family ownership and debt financing

Lit = β 0 + β1 FamOwnit + β 2 ( FamOwn) 2 + β 3 EM ( s )it + β 4Tit + β 5 Sit

FamOwn family ownership variable

EM expropriation risk of outside shareholders

T firm size variable

RO firm profitability variable

R firm risk variable

Q growth opportunity variable

R&D research and development (R&D) variable

Intg ratio of intangible assets to total assets.

In equation (3), EM variable detects the expropriation risk of outside shareholders by

Table 7 On the endogeneity of family ownership and debt leverage

L1 FamOwn L2 FamOwn L3 FamOwn

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