Financing decisions in private family firms : a family firm pecking order

Abstract: Family firms are one of the most ubiquitous forms of business organizations worldwide. Their survival and growth are thus not only crucial for the firms themselves but also for the overall economy. One of the factors that influence their survival and development are their financing decisions. These decisions are generally described through the pecking order theory. However, not much is known about the applicability of this theory in private family firms. Given the shortcomings (both theoretically and empirically) of the current literature, we analyze 1087 incremental financing decisions from 277 family firms to develop and test a specific family firm pecking order. We integrate the elements of the socioemotional wealth perspective to theoretically explain the preferred order and introduce family capital into the pecking order model. Our findings indicate that family firms first prefer internal financing, next debt financing, followed by family capital, and last external capital. We also find that SEW considerations play a role in this financing decision. Especially the retention of control over the firm and the aim to pass the firm to the next generation appear to play an important role in determining this order. These dimensions ensure that family firms try to avoid extra capital. However, when it is needed, they will opt for family capital over external capital. This paper thus provides more insight into the reasoning behind financing decisions in private family firms