Firm leverage, ownership structure, and corporate governance: Evidence from majority-controlled firms

Frank and Goyal (2009) examine the importance of capital structure determinants of US firms from 1950 to 2003 and find that the most reliable factors are: median industry leverage, market-to-book ratio, tangibility, profits, log of assets, and expected inflation. Their survey tests both new variables and variables proposed by previous studies. However, it does not take into account the role played by factors directly related to the agency theory such as ownership structure and corporate governance factors. This gap is rather common in the literature but could represent a serious lack in countries where the ownership structures are concentrated and holding control takes on great relevance. In this scenario, it is arguable that capital structure choices are shaped in response to ownership and governance characteristics. I explore these issues in Italy, a context dominated by pyramidal groups, majority- and family-controlled firms. The results show that (1) family firms are more indebted than non-family counterparts and, within family firms, (2) founding-family-controlled ones are more reliant on debt; (3) family firms exploit control-enhancing devices along with long-term leverage; (4) higher cash flow rights are associated with a lower leverage; (5) institutional investors are more common in firms with a higher dependence on long-term debt; (6) decreasing trends of the long-term leverage over time seem to occur with upward paths of the votes-to-capital ratio.