EuFBC SEMINAR: Financial intermingling in successor-owned family firms: the impact of leveraged equity stakes on firm-level financial debt

Ellen Janssen (presenter), Sigrid Vandemaele, Wim Voordeckers, & Mark Vancauteren

Hasselt University Research Center for Entrepreneurship and Family Firms (Belgium)

This paper integrates insights from the systems theory into the pecking order theory (POT) to explain financial debt changes surrounding an intra-family ownership succession. Ownership successions involve the transfer of a large equity stake, thereby possibly giving rise to a large financial need for the successor that may be covered with (personal-level) debt finance. Given the strong overlap between the family and business systems, we argue that a so-called ‘leveraged equity stake’ affects the availability of firm-level internal funds, since successors withdraw cash (in the form of dividends and management fees) to cover the personal-level succession-related loan. According to the POT, the decrease in internal cash resources is likely to upsurge the firm’s dependence on external (financial) debt. Based on a longitudinal sample of privately-held Belgian firms that recently underwent an intra-family ownership transfer, we show that the presence of a leveraged equity stake results in an increased reliance on firm-level financial debt in the post-succession era, whereas financial leverage remains unchanged when successors hold an unleveraged equity stake. In line with the pecking-order view of financing, our results indicate that high-performance firms, which are less likely to show an internal funds deficit, do not significantly increase their financial debt level, even when the successor holds a leveraged equity stake. By showing that personal-level financial decisions of firm owners may affect firm-level financial decision-making (so-called ‘financial intermingling’), this research offers new valuable insights to the family business and finance research fields.