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The Effects of Ownership Structure and Intra-Group Loans on Leverage: Evidence from Family Firms in Chile

ISI: The Effects of Ownership Structure and Intra-Group Loans on Leverage: Evidence from Family Firms in Chile

CRISTIAN PINTO G., MAURICIO JARA B., PAULA NUÑEZ.

2017 - Forthcoming - Emerging Markets Finance and Trade

Abstract

This paper examines the effects of family control and pyramidal ownership on firms’ capital structure decisions. After studying a sample of listed family and non-family firms in Chile, we find that families take a conservative approach to debt and financial risk exposure. We test the hypothesis that family firms restrict the use of debt in order to avoid the monitoring role of creditors, which could limit their enjoyment of the private benefits of control. In keeping with this hypothesis, we find a U-shaped relationship between leverage and the degree of pyramidal ownership that is more pronounced among family firms than non-family firms. We do not find any evidence that is consistent with the hypothesis that family-controlled firms have low leverage ratios due to their access to internal capital markets. In fact, conversely, we find that listed family firms provide more loans to related companies than comparable non-family firms.

Keywords

Business groups, capital structure, family firms, internal capital markets, ownership structure, pyramidal structure

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