Capital structure in publicly held family firms: a behavioral agency theory analysis

This dissertation proposes behavioral agency theory as a theoretical approach that, through its family firm variant (socioemotional wealth), can offer an alternative explanation for the capital structure decisions of family firms. Behavioral agency theory states that individuals frame their problems by comparing anticipated outcomes to a reference point: when the framed prospects are positive, decision makers will exhibit risk-averse preferences; and when the framed prospects are negative they will exhibit risk-seeking preferences (Wiseman & Gomez-Mejia, 1998). To accomplish the purpose of the study, this dissertation proposes a conceptual model and presents and tests, using econometric techniques, the derived research hypothesis using a sample constituting publicly held Mexican firms from 2012 to 2017. The conceptual model proposes that, in order to make decisions, family principals take into account both financial and socioemotional wealth, using a mixed gamble perspective (Gomez-Mejia, et al., 2015; Gomez-Mejia, Campbell, Martin, Hoskisson, Makri, and Sirmon, 2013). Under a mixed gamble perspective, firms take their decisions by weighting the preservation of current socioemotional endowment versus future financial wealth. Preserving socioemotional wealth is a high priority for family firms. In terms of capital structure, higher levels of leverage imply preserving current socioemotional endowment, because higher levels of leverage contribute to preserving control in the hands of the family (Ellul, 2009), which is one of the most important objectives of socioemotional wealth (Berrone, et al., 2012). In contrast, preserving future financial wealth means incurring lower levels of leverage, because this reduces the risk of financial distress (Anderson, Mansi, & Reeb, 2003) The results of this dissertation show that family firms are more leveraged than non-family firms, as they want to keep the control in the hands of the family. There is a negative relationship between family ownership and leverage because as family ownership increases, the overlapping between business and family spheres increases, so family firms will be more willing to preserve their financial wealth through lower levels of leverage. Family generation weakens the negative relationship between family ownership and leverage, whereas the variable, family members, strengthens this relationship. Implications for the Mexican context are also discusse