Founding Family Control and Capital Structure: The Risk of Loss of Control and the Aversion to Debt

This paper tests the hypothesis that Founding Family Controlled Firms (FFCFs) are more averse to control risk than similar non-FFCFs and therefore avoid debt. Higher levels of debt increase the likelihood of bankruptcy and the level of control risk. We show that FFCFs use less debt; their choice of debt is more sensitive to conditions associated with control risk; and that leverage is not significantly related to managerial ownership in non-FFCFs, indicating that founding family control, not managerial ownership, matters in determining leverage.