OUTSIDERS IN FAMILY FIRMS: A PERSPECTIVE FROM FINANCING DECISION

Abstract

I investigate how the presence of outsiders in the senior management team is related to the financing decision of Chinese listed family firms. For a sample of listed family firms from 2008 to 2017, I find that family firms with more outsiders in their senior management team (including the CEO, vice general manager, CFO, secretary of the board of directors, and other persons specified in the articles of Association) have higher leverage and take on more debt. Further, from the aspect of different financing choices, my empirical analysis shows that family firms with a higher proportion of outsiders take on fewer bank loans but issue more bonds. I use the proportion of outsiders in the firm's senior management team to measure the presence of outsiders in family firms. Besides, for the robustness test, I also use two dummy variables to measure the presence of outsiders in family firms. One indicates whether the family members fully exit from the senior executive team (including board chair, CEO, and CFO), and the other indicates whether the family members fully exit from the senior management team (including CEO, vice general manager, CFO, secretary of the board of directors, and other persons specified in the articles of Association). The results are consistent. To deal with the potential endogeneity issues, I use the outsiders’ full control of the senior executive team of the family firms as an exogenous shock to conduct PSM-DID analysis, and the results still hold. To conduct a heterogeneity analysis, I investigate factors that could moderate the relation between the presence of outsiders and financing policy in family firms from the perspective of family firms’ expropriation risks. The results show that the positive relationship between the presence of outsiders and the issue of bonds are both more pronounced for family firms with a higher amount of related party transactions, and for family firms with higher other receivables. My study shows that the presence of outsiders in family firms has a significant impact on firms’ financing decisions. In specific, the presence of outsiders leads to significantly higher leverage in family firms, fewer bank loans, and a larger amount of bond issuance. Considering the superiority of bonds to bank loans in the issuance procedure, amount, maturity, and cost, the positive impact of the presence of outsiders on bond issuance indicates that outsiders help to alleviate family firms’ financing constraints and improve financing structure. In addition, the strengthening role of expropriation risks in the positive relation of the presence of outsiders and bonds issuance also provides some implication that the introduction of outsiders in family firms helps to improve family firms’ governance structure, alleviate the concerns of creditors, and thus reduce agency conflicts between family shareholders and creditors.