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Capital Structure in the Family Firm: Exploring the Relationship Between Financial Sources and Family Dynamics Diego G

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Capital Structure in the Family Firm: Exploring the Relationship Between Financial Sources and Family Dynamics Diego G Kennesaw State University DigitalCommons@Kennesaw State University Doctor of Business Administration Dissertations Coles College of Business Fall 11-16-2016 Capital Structure in the Family Firm: Exploring the Relationship Between Financial Sources and Family Dynamics Diego G. Velez Kennesaw State University Follow this and additional works at: http://digitalcommons.kennesaw.edu/dba_etd Part of the Business Administration, Management, and Operations Commons, Corporate Finance Commons, and the Finance and Financial Management Commons Recommended Citation Velez, Diego G., "Capital Structure in the Family Firm: Exploring the Relationship Between Financial Sources and Family Dynamics" (2016). Doctor of Business Administration Dissertations. Paper 27. This Dissertation is brought to you for free and open access by the Coles College of Business at DigitalCommons@Kennesaw State University. It has been accepted for inclusion in Doctor of Business Administration Dissertations by an authorized administrator of DigitalCommons@Kennesaw State University. For more information, please contact [email protected]. Capital Structure in the Family Firm: Exploring the Relationship Between Financial Sources and Family Dynamics Diego Velez Montes A Dissertation Presented in Partial Fulfillment of the Requirements for the Degree of Doctor of Business Administration In the Coles College of Business Kennesaw State University Kennesaw, GA 2016 i ACKNOWLEDGEMENTS To my parents Gabriela and Gabriel who are in heaven, as well as my siblings Ivan and Gloria. To all my professors who had the patience to work with me during these years, but especially Torsten Pieper, Joe Astrachan, and my reader, Thomas Zellweger. To my brothers Javier and Hugo who always gave me the courage to keep me on going through this “winding road.” To Rafael and Christian, who were of special help. To Mery and Natalia who had the patience to deal with me during these years of hard work. To Mary, my editor, for her professional work and patience with me. To all the companies and people who gave me their time and their stories. To the good friends who came here to be with me. Last but not least, to my good friend Alberto who is not here with me because he is recovering from a very difficult disease, but I am sure he is very happy to see me at the end of this road. ii ABSTRACT How a company structures its capital greatly affects its strategic options and its strategic decisions according to contemporary thinking. However, while there is ample literature on how publicly held companies’ capital should be structured, less is known about private companies. Additionally, one or more members of a single family typically own the majority of private companies, and unlike public companies, family dynamics influence these firms’ non-financial and financial goals and strategic decisions. This overlap of family dynamics into the business arena complicates conventional approaches or at least makes conventional approaches more difficult to apply. This dissertation focuses on privately held, family-owned companies, and on how family dynamics challenge or make conventional approaches inapplicable or, at least, more complicated to apply. Utilizing a grounded theory-influenced approach on a sample of 11 family companies with different capital structures, the study explores the effects of family influence and family dynamics on capital structure decisions and vice versa in family owned companies. The qualitative inquiry took place in the South American country of Colombia, because this country is a representative capital market in Latin America from the financial development perspective, where the foreign investment growth has been high in the last years. The findings of this study advance the research of family dynamics and its effect on family business, and will be of help to family boards, managers, advisors, and family shareholders when making decisions on capital structure. iii TABLE OF CONTENTS TITLE PAGE……………………………………………………………………………… i ACKNOWLEDGEMENTS……………………………………………………………… ii ABSTRACT……………………………………………………………………………... iii TABLE OF CONTENTS…………………………………………………………………iv LIST OF TABLES……………………………………………………………………… x LIST OF FIGURES……………………………………………………………………. xi CHAPTER 1: INTRODUCTION………………………………………………………… 1 CHAPTER 2: FAMILY BUSINESS DYNAMICS AND CAPITAL STRUCTURE…... 11 2.1 Family business definition………………………………………………………... 12 2.2 Family companies in the world…………………………………………………… 14 2.3 Capital structure of listed companies and family firms…………………………... 16 2.3.1 Agency costs in family firms………………………………………………… 20 2.3.2. Pecking order approach in family business financing……………………… 24 2.4 Dynamics of family life………………………………………………………….. 25 2.4.1 Conflict in the family firm…………………………………………………… 27 2.4.2 Reputation in the family firm…………………………………………………29 2.4.3 Family firm´s transparency in business……………………………………… 32 iv 2.4.4 Systems models in family business………………………………………….. 33 2.4.5 Family business dynamic typologies………………………………………… 34 2.4.6 Interconnections of family and business capital structures………………….. 35 2.4.6.1 Dynamics of family control and capital structure………………………. 36 2.4.6.2 Dynamics of owners’ characteristics and capital structure……………… 38 2.4.6.3 Dynamics of succession and its influence on capital structure and vice- versa…………………………………………………………………………….. 41 2.5. Family business differences from non-family listed companies………………… 45 2.6 The effects of family dynamics on financial/non-financial goals and vice versa… 48 2.7 The effects of family dynamics on the cost of capital……………………………. 50 2.8 The effects of sources of capital on future outcomes…………………………….. 53 2.8.1 Ownership effects on future outcomes………………………………………. 55 2.8.2 The effects of private equity funds on future outcomes……………………... 57 2.8.3 The effects of Employee Stock Ownership Plans (ESOPs) on future outcomes…………………………………………………………………………… 59 2.8.4 The effects of Initial Public Offering (IPOs) on future outcomes…………… 61 CHAPTER 3: METHODS – QUALITATIVE RESEARCH DESIGN………………… 64 3.1 The grounded-influenced (GT) theory approach…………………………………. 67 3.2 Data collection methods………………………………………………………….. 70 3.2.2 Interviewing………………………………………………………………….. 73 3.2.3 Theoretical saturation…………………………………………………………80 3.2.4 Sampling…………………………………………………………………….. 81 v 3.3 Data analysis and coding…………………………………………………………. 93 3.3.1 Computer-assisted qualitative data analysis software (CAQDAS)………….. 99 CHAPTER 4. ANALYSIS AND RESULTS………………………………………….. 102 4.1 The importance of capital structure in the sample analyzed…………………… 103 4.2 External and Internal factors that influence the different types of financing and vice versa…………………………………………………………………………… 104 4.2.1 External factors……………………………………………………………... 106 4.2.1.1 Global Economy……………………………………………………….. 106 4.2.1.1.1 Global economy and international alliances………………………. 107 4.2.1.1.2 Global economy, bond issues and trade financing………………. 108 4.2.1.2 The Colombian economic crisis and capital structure………………… 109 4.2.1.2.1 Economic crisis and the social aspects of Colombia, and their effect on family dynamics…………………………………………………………. 111 4.2.1.2.2 Colombian legal context and capital structure…………………….. 114 4.2.1.2.3 Colombian stock exchange and capital structure…………………. 115 4.2.2 Internal factors……………………………………………………………… 117 4.2.2.1 Values as an internal factor in the development of the capital structure. 117 4.2.2.1.1The concept of values……………………………………………… 118 4.2.2.1.2 Values that stand out in entrepreneurial families, and how they relate to the different types of financing…………………………………………… 119 4.2.2.2 Family dynamics and capital structure, and vice-versa……………... 125 4.3 Types of financing. Influence of internal factors……………………………… 125 vi 4.3.1 IPOs giving up control……………………………………………………… 125 4.3.1.1 IPO Giving up control and family dynamics………………………….. 127 4.3.1.2 IPO Giving up control and family values……………………………… 134 4.3.1.3 IPO Giving up control and generational aspects………………………. 136 4.3.2 IPOS not giving up control………………………………………………. 137 4.3.2.1 IPOs not giving up control and family dynamics……………………… 138 4.3.2.2 IPOs not giving up control and values…………………………………. 141 4.3.2.3 IPOs not giving up control and generational aspects…………………... 141 4.3.3 Different levels of debt and internal factors……………………………… 142 4.3.3.1 Family dynamics and debt……………………………………………... 144 4.3.3.2 Values and debt………………………………………………………… 149 4.3.3.3 Internal business factors and debt……………………………………… 151 4.3.3.4 External factors specific to debt……………………………………….. 152 4.3.4 Private equity fund giving up control…………………………………….. 153 4.3.4.1 Private Equity Fund giving up control and family dynamics………….. 154 4.3.4.2 Private equity fund giving up control and values……………………… 156 4.3.5 Private equity not giving up control………………………………………. 156 4.3.5.1 Private equity fund not giving up control and family dynamics………. 158 4.3.5.2 Private equity fund not giving up control and values………………….. 162 4.3.5.3 Private equity fund not giving up control and generational aspects…… 163 4.3.6 Partnerships giving up control……………………………………………… 163 4.3.6.1 Partnership giving up control and family dynamics…………………… 164 4.3.6.2 Partnership giving up control and values………………………………. 166 vii 4.3.7 Partnerships not giving up control………………………………………….. 167 4.3.7.1 Partnership not giving up control and values…………………………...168 4.3.7.2 Partnership not giving up control and generational aspects…………….170 4.3.8 ESOPs…………………………………………………………………….. 172 4.3.8.1 ESOPs and family
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