Family Control and Debt When Dual-Class Shares Are Restricted: The Case of Poland

ABSTRACT

Our research, based on an unbalanced panel of 105 companies listed on the Warsaw Stock Exchange during 2006–10, demonstrates that public family firms are, on average, more levered than nonfamily firms and more extensively use control-enhancing mechanisms (CEMs), resulting in a wedge between control (voting) rights and cash flow rights. We decompose the total wedge for family firms into a standard dual-class shares component and a disproportionate board representation component finding inverse relations between each of them and the debt levels (positive for the former and negative for the latter). When dual-class shares are restricted—as in the case of Polish companies once they become public—financial decisions may be driven by control motivations. Family firms have strong incentives to use debt as a nondiluting security.

KEY WORDS:

• corporate control
• corporate diversification
• debt
• dual-class shares
• family firms

Acknowledgments

The authors thank the editor, Ali M. Kutan, as well as two anonymous referees for their useful comments and suggestions.

Notes

1. In 2004, the Polish Commercial Companies Code allowed the issuing of nonvoting preference shares as bearer shares, enabling them to be listed and traded on the WSE. Nevertheless, no single company has issued such shares so far, with only a few attempts.

2. Regression models of market leverage on control wedge components (not presented in the table) are part of our robustness tests.

3. Alternatively, as a part of our robustness tests, we use logit regression with a dummy variable (DIVERSIF_0/1), defining diversified companies as the dependent variable (not reported). The results are qualitatively unchanged.

4. The results of our robustness checks are available on request.