Do Family Firms have Better Access to External Finance during Crises?

• Date: 01 May 2015
• Author: Alfredo Martín‐Oliver,Rafel Crespí
• Published date: 01 May 2015
• DOI: http://doi.org/10.1111/corg.12100

Do Family Firms have Better Access to External

Finance during Crises?

Rafel Crespí and Alfredo Martín-Oliver*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: We explore whether family f‌irms have easier access to debt during crises than nonfamily f‌irms.

We adapt the leverage equation from the corporate f‌inance literature and estimate the differences in the leverages of family

and nonfamily f‌irms between expansion and crisis periods.

Research Findings/Insights: The capital structure of family f‌irms is based less on external f‌inance than that of nonfamily

f‌irms. Nevertheless, during crisis periods, family f‌irms are less subject to credit restrictions than nonfamily f‌irms and, thus,

the impact of the lack of credit on their capital structure is less severe in the former than in the later.

Theoretical/Academic Implications: We provide a reliable test of the access of family f‌irms to external f‌inance in a market

with severe f‌inancial constraints. A precise empirical def‌inition of family f‌irms contributes to the study of the differential

characteristics of this group of f‌irms.

Practitioner/Policy Implications: This paper shows the relevance of family f‌irms in the economy under diff‌icult f‌inancial

conditions. The f‌inding that lenders can be less reluctant to lend to family f‌irms during a crisis encourages policies

promoting a long-term view of these f‌irms and their control across generations. The results can also be useful at the time of

designing policies related to the access of credit during expansion and crisis periods.

Keywords: Corporate Governance, family f‌irms, f‌inancial constraints, capital structures, crisis

INTRODUCTION

In the context of the global recession and uncertainty,

f‌inancial markets, f‌inance suppliers, and banks have

tightened credit standards to f‌irms or have simply halted the

access to funding. A recent stream of the credit literature

shows how credit constraints affect f‌irms’ access to funds

in different countries (Almeida, Campello, Laranjeira, &

Weisbenner, 2012; Benmelech, Bergman, & Seru, 2011;

Bentolila, Jansen, Jiménez, & Ruano, 2013; Garicano &

Steinwender, 2013). In the context of a f‌irm’s diff‌iculties in

accessing externals funds, we investigate whether family

f‌irms have better access than nonfamily f‌irms to scarce

resources by analyzing both the leverage ratios and the

amount of new activity in debt f‌inancing.

Agency theory provides a framework to analyze whether

family f‌irms have easier access to external funds during

crises. Steijvers and Voordeckers (2009) identify the pros

and cons of the agency problem between debtors and

shareholders in family f‌irms. On the one hand, the agency

costs could be lower in family f‌irms because of their long-

term orientation (Ang, 1992). The argument is that the

typical non-diversif‌ication of a family’s portfolio focuses on

the survival of the f‌irm (Ang, 1992) by reducing the overall

risk and volatility of the f‌irm’s cash f‌low (Bopaiah, 1998;

Diamond, 1989; Kuppuswamy & Villalonga, 2010). On the

other hand, the agency costs could be higher in family f‌irms

if the dominant effect is the “dark side of altruism”(Schulze,

Lubatkin, & Dino, 2003). This negative effect causes agency

costs, such as free riding by familymembers or the entrench-

ment of ineffective and/or predatory managers (Chrisman,

Chua, & Litz, 2004). If this effect is the case, then lenders

become more cautious atthe time of granting funds to family

f‌irms. The literature provides mixed evidence about family

f‌irms’ access to external creditors and has focused on

periods of relatively stable economic conditions. On the one

hand, Anderson and Reeb (2003a) f‌ind evidence that the

long-term commitment and reputation of family f‌irms

results in better price conditions for credit. On the other

hand, Steijvers, Voordeckers, and Vanhoof (2010), studying

the determinants of collateral, f‌ind evidence that the

*Address for correspondence: Alfredo Martín-Oliver, Universitat de les Illes Balears,

Ctra. Valldemossa km. 7.5, 07122 Palma de Mallorca, Islas Baleares, Spain. Tel: +

34-971-25-99-81; E-mail: alfredo.martin@uib.es

© 2015 John Wiley & Sons Ltd

doi:10.1111/corg.12100

Corporate Governance: An International Review,2015, 23(3): 249–265

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dominant effect is the “dark side of altruism” (Schulze et al.,

2003).

For periods of economic crises, to the best of our knowl-

edge, no empirical research to date has addressed this issue.

Attending to the reduction of the credit supply that charac-

terizes crisis periods, the previous arguments from agency

theory on family f‌irms should explain their differential

access to external f‌inance. Additionally, other arguments

related to crisis periods suggest that family f‌irms could have

easier access to external funds because during expansion

periods they create strong connections with outside stake-

holders so as to sustain their business in diff‌icult times (Das

& Teng, 1998; Gomez-Mejía, Nuñez-Nickel, & Gutierrez,

2001; Tsui-Auch, 2004).

To test all of these hypotheses, we posit a strategy to

assess whether the conditions to raise new funds are easier

or more diff‌icult for family f‌irms than for nonfamily f‌irms

during periods of expansion and economic crises. The f‌irst

step is to identify changes in the target capital structure of

the f‌irms during the crises. To do so, we borrow the tradi-

tional leverage equation from the corporate f‌inance litera-

ture (Flannery & Rangan, 2006; Frank & Goyal, 2009;

Hovakimian, Hovakimian, & Tehranian, 2004; Rajan &

Zingales, 1995; for a survey of this literature, see Frank &

Goyal, 2009). The leverage equation relates the capital struc-

ture of f‌irms with the f‌irms’ f‌inancial and economic char-

acteristics. The estimation of the leverage during pre-crisis

periods provides the target capital structure of every f‌irm

(Flannery & Rangan, 2006; Hovakimian et al., 2004) under a

stable economic environment. Next, we estimate whether

there is a statistically signif‌icant difference between the

leverage of the f‌irms before and after the crises. Our

hypothesis is that the f‌irms’ leverage ratios fall during

crises due to credit constraints suffered by the f‌irms and/or

asset restructuring. Because our target is to explore the lack

of f‌inancing during crises, we focus only on the impact of

the reduction in the credit supply on leverage and avoid the

asset restructuring cases (which could be explained by a

lack of credit demand). To this end, we focus on (i) the

f‌irms with a positive growth in assets and thus a positive

demand for external funds to f‌inance their new operations,

and (ii) the f‌irms that are unlikely to go bankrupt according

to the Altman Z-score. In doing so, we expect to exclude

poor performing f‌irms that are reducing their leverage

because of re-structuring processes and/or are selling

assets. (Turbulence during the crisis period might affect the

f‌irms’ debt decisions in a noisy environment, which causes

adjustments to the assets and the liabilities sides of the

balance sheet.)

Second, we test whether the impact of the crisis on lever-

age is different for familyand nonfamily f‌irms. Our assump-

tion is that, for healthy f‌irms, any signif‌icant decrease in

leverage that separates it from its target level (determined by

the leverage equation) during crisis periods can be attrib-

uted to a reduction in the credit supply. To test the hypoth-

eses, we use the difference-in-differences technique.

We apply our estimation strategy to data for Spanish non-

listed f‌irms as a result of several considerations. First, the

economic crisis has been especially severe in Spain: the sov-

ereign risk of the country reduced the supply of credit and

increased the interest rates that then affected the ability of

f‌irms to access credit. Second, the crisis in Spain affected the

banking system heavily and the external funds of Spanish

nonf‌inancial f‌irms depended mainly on bank loans. In 2006,

the loans from credit institutions to the f‌irms represented 86

percent of the GDP, compared to an average of 62 percent

among EU countries (European Central Bank, 2010). This

high reliance on bank credit has increased f‌irms’ f‌inancing

problems during the Spanish banking crisis because several

Spanish banks have been nationalized or have received

public funds. Moreover, one of the two main types of credit

institutions in Spain (savings banks) have practically disap-

peared, and the banks have been forced to (further) reduce

the credit granted to fulf‌ill the new regulations on their

capital requirements. All of these factors make the Spanish

case a unique framework in which to analyze credit con-

straints that affect private nonf‌inancial f‌irms.

This paper makes several contributions to the literature.

First, we provide evidence that the organizational structure

(i.e., family vs. nonfamily f‌irms) has an effect at the time of

asking for f‌inancing during f‌inancial crises. The empirical

application is based on one country, Spain, in which the

crisis severely impacted the main creditor of nonf‌inancial

f‌irms, that is, the banking sector. Therefore,Spain constitutes

an ideal framework to study credit restrictions. Second, our

results also contribute to the literature on the capital struc-

tures of family and nonfamily f‌irms (Ampenberger, Schmid,

Achleitner, & Kaserer, 2013; Anderson & Reeb, 2003b;

Mishra & McConaughy, 1999; Villalonga & Amit, 2006)

because we extend the evidence from an economic expan-

sion to a period of crisis. Ampenberger et al. (2013) and

Mishra and McConaughy (1999) f‌ind that family f‌irms are

less leveraged than nonfamily f‌irms, whereas Anderson and

Reeb (2003b) f‌ind no signif‌icant difference between the two

types of f‌irms. We show that the capital structures of family

f‌irms are more stable through the cycle than those of

nonfamily f‌irms. However, they are more severely affected

by credit restrictions during economic crises, and are forced

to reduce their activity to a greater extent than family f‌irms.

Third, from an empirical standpoint, we build a representa-

tive database of Spanish private f‌irms through a rigorous

def‌inition of family business to classify f‌irms as family or

nonfamily f‌irms, which is consistent with the def‌initions

used in the literature (Miller, Le Breton-Miller, Lester, &

Cannella, 2007).

The rest of the paper is organized as follows. In the next

section, we present our hypotheses regarding the effects of

the crisis on the leverage of family and nonfamily f‌irms. We

then describe the data and the empirical strategy. This is

followed by the presentation of our results. We conclude in

the f‌inal section.

HYPOTHESES ON LEVERAGE FOR FAMILY

AND NONFAMILY FIRMS DURING

EXPANSION AND CRISIS PERIODS

Leverage and the Financial Crisis

The f‌irst step in our study is to explore what is the expected

impact of the crisis on the f‌inancing conditions of the f‌irms

in the economy. The onset of the recent crisis brought about

CORPORATE GOVERNANCE

© 2015 John Wiley & Sons Ltd

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