Free-Float Liquidity and Trading Constraints: Increasing Informational Efficiency in Family Firms’ Financing Decisions

2020 ◽  
Author(s):  
Daniel Dupuis ◽  
Virginia Bodolica ◽  
Martin Spraggon
Keyword(s):  
Family Firms ◽  
Informational Efficiency ◽  
Financing Decisions ◽  
Trading Constraints

Informational efficiency and governance in restricted share settings: boosting family business leaders' financing decisions

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Daniel Dupuis ◽  
Virginia Bodolica ◽  
Martin Spraggon
Keyword(s):  
Family Firms ◽  
Family Influence ◽  
Informational Efficiency ◽  
Negative Effects ◽  
Potential Measurement ◽  
Content Type ◽  
Financing Decisions ◽  
Restricted Stock ◽  
Information Opacity ◽  
Dual Class

PurposeVolume-based liquidity ratios suffer from potential measurement bias due to share restriction and may misrepresent actual liquidity. To address this issue, the authors develop two modified metrics, the free-float liquidity and the alternative free-float illiquidity ratios. These measures are well suited to estimate liquidity in the presence of trading constraints, as can be found in closely held/state-owned entities, IPOs/SEOs with lockup restrictions, dual-class share structures and family-owned businesses.Design/methodology/approachThe authors modify the turnover illiquidity ratio, where the number of outstanding shares is scaled by the public free float, and use natural log transformation to normalize free-float liquidity. Our dataset is composed of daily observations for US stocks included in the S&P 500 index over the 2015–2018 period. To test the validity of free-float (il)liquidity ratios, the authors perform a correlation analysis for various liquidity metrics. To examine their empirical efficiency, the authors employ pooled OLS regression models for family firms as a subsample of liquidity-constrained entities, relying on five different identifiers of family-owned businesses.FindingsThe authors’ empirical testing indicates that the proposed free-float (il)liquidity ratios compare favorably with other volume-based methods, such as Amihud's ratio, liquidity ratio and turnover ratio. For the subsample of family organizations as a restricted-share setting, the authors report significant coefficients for our free-float measures across all the family firm identifiers used. In particular, as free-float decreases with progressive family influence, the advanced ratios capture an increase (decrease) in perceived liquidity (illiquidity) that is absent in the other benchmarks.Originality/valueThis study allows the authors to inform the ongoing debate on the management and governance of publicly listed companies with various impediments to trade. Traditional measures understate illiquidity (overstate liquidity) as the fraction of free trading shares is limited by design or circumstances. The authors’ proposed free-float metrics offer informational gains for family leaders to aid in their financing decisions and for non-family outsiders to guide their investment choice. As a constrained free float inhibits price discovery processes, the authors discuss how restricted stock issuers may alleviate the attendant negative effects on governance and information opacity.

scholarly journals Western-style capital market reforms in Russia: Implications for market efficiency and firms’ financing decisions

2020 ◽  
Vol 10 (3) ◽  
pp. 62-74
Author(s):  
Oksana Kim
Keyword(s):  
Financial Reporting ◽  
Capital Market ◽  
Weak Form ◽  
Foreign Direct Investments ◽  
Informational Efficiency ◽  
Russian Government ◽  
Public Firms ◽  
Financing Decisions ◽  
Russian Stock Market ◽  
Over Time

Over the past decade, the Russian government implemented numerous reforms aimed at attracting investor capital and improving the capital market conditions. These reforms included adoption of stringent listing regulations and governance norms, revisions in the tax and ownership laws, restructuring of the major stock exchanges, and more importantly, adoption of International Financial Reporting Standards (IFRS) in 2011. We employ an adaptive market hypothesis (AMH) perspective formulated by Lo (2004, 2005) to examine whether the informational efficiency of the market changed over time as a result of these reforms. While we report that the Russian stock market is still not weak-form efficient, as it was before the reforms, we find the evidence of improvement in efficiency over time. Next, we find that financing decisions of Russian public firms changed following adoption of IFRS when financial statements became more transparent and better aligned with informational needs of local and foreign investors. Particularly, Russian companies that adopted IFRS were more likely to raise finance via issuance of equity rather than debt instruments, whereas for non-adopters there was no change in the firm capital structure. Finally, we report that there was an increase in the inflow of foreign direct investments (FDI) in the post-reform period, suggesting that the above noted reforms conferred significant benefits to the entire Russian economy.

scholarly journals Financing Decisions in Family Businesses: A Review and Suggestions for Developing the Field

2017 ◽  
Vol 30 (4) ◽  
pp. 369-399 ◽  
Author(s):  
Anneleen Michiels ◽  
Vincent Molly
Keyword(s):  
Family Business ◽  
Family Firms ◽  
Family Businesses ◽  
Future Research ◽  
Financing Decisions ◽  
Research Fields ◽  
Theoretical Perspectives ◽  
Specific Factors ◽  
Context Specific ◽  
Business Financing

Motivated by the growing attention to the financing decisions of family firms, this review brings together the two highly relevant research fields of family business and finance. This study critically reviews 131 articles on financing decisions in family businesses, published between 1977 and 2016 in 64 finance and management journals. We develop a state of the art on family business financing literature and present a model to guide extant and future research by identifying gaps across the theoretical perspectives and across context-specific elements such as family business heterogeneity and country-specific factors.

Effect of family control on corporate financing decisions of firms: evidence from Pakistan

2019 ◽  
Vol 37 (3) ◽  
pp. 155
Author(s):  
Imran Yousaf ◽  
Shoaib Ali ◽  
Arshad Hasan
Keyword(s):  
Family Firms ◽  
Univariate Analysis ◽  
Corporate Financing ◽  
Family Control ◽  
Financing Decisions ◽  
Panel Data Estimation ◽  
Tax Shield ◽  
Financial Characteristics ◽  
Relationship Of ◽  
The Impact

This study examines the effect of family control on corporate financing of the firms in Pakistan over the period 2005 to 2017. Moreover, this study also investigates, whether family control moderates the impact of firm specific factors on corporate financing of the firms. This study  is employed the GMM model for panel data estimation. The results of mean difference univariate analysis show that family firms are different from non-family firms based on different financial characteristics. Multivariate analysis results reveal that family control significantly impacts the corporate financing decisions of the firms. In addition, firm size, tangibility, profitability, non-debt tax shield, dividends and liquidity are found to be the important determinants of corporate financing decision of the firms. The moderation analysis reports that family control plays a significant moderating role between the relationship of firm’s characteristics (i.e. size, tangibility and probability) and debt ratios of the firms in Pakistan. These findings reveal useful insights for investors, banks, regulator and business families of the Pakistan.

Is the Cost of Capital Different for Family Firms?

1999 ◽  
Vol 12 (4) ◽  
pp. 353-360 ◽  
Author(s):  
Daniel L. McConaughy
Keyword(s):  
Family Firms ◽  
Cost Of Capital ◽  
Relevant Literature ◽  
Family Firm ◽  
Family Effect ◽  
Financing Decisions ◽  
The Family ◽  
Investment And Financing ◽  
The Cost

It has been suggested that the cost of capital for a family firm depends on, among other things, a “family effect,” which deals with the family's relation to its business. Financial theory regarding the cost of capital states that the cost of capital is a market-based function of the characteristics of the investment, not the investor. This theory suggests that a firm's cost of capital does not depend on a family effect. However, not all financial economists' assumptions regarding the cost of capital hold for the family firm. This paper reviews the relevant literature regarding the cost of capital and applies it to the family firm. Knowing the correct cost of capital will enable family owner-managers to make better investment and financing decisions, evaluate performance, and structure rewards for performance.

scholarly journals When do family firms consider issuing external equity? Understanding the contingent role of families’ need for control

2019 ◽  
Vol 9 (3) ◽  
pp. 271-296
Author(s):  
Martin Kupp ◽  
Bianca Schmitz ◽  
Johannes Habel
Keyword(s):  
Decision Making ◽  
Empirical Research ◽  
Family Firms ◽  
Family Firm ◽  
Equity Financing ◽  
Content Type ◽  
Financing Decisions ◽  
Firm Owners ◽  
Insight Into ◽  
External Equity

Purpose Prior research has argued that family firms are reluctant to consider external equity as a source of financing because they fear a loss of control, which would limit their socioemotional wealth. However, prior empirical research has neglected potential contingencies that determine whether family firms’ need for control affects their equity financing decisions. The purpose of this paper is to provide first insight into this research void. Design/methodology/approach The paper builds on rational choice theory and a logit regression using secondary data. Findings The study shows that the effect of family firm owners’ need for control on their consideration of external equity depends on the extent to which owners expect investors to interfere with management and the extent to which decision making is affected by emotions. Hereby, the present study provides evidence that family firm owners’ decisions to use external equity are more complex than previously presumed. Research limitations/implications This study has several limitations that provide fruitful avenues for further research. Overall, the authors list and detail seven different limitations in the paper, e.g. the narrow focus on equity financing, the use of a partial model, the fact that the authors did not conceptualize differences between different types of investors (such as high net worth individuals, private equity firms and venture capital firms) in the model and further more. Practical implications The study shows that investors need to understand the complex interplay among family firms’ need for control, expected investor interference and emotional decision making, to correctly assess their chances of success when approaching family firms for equity. Originality/value Prior empirical research has neglected potential contingencies that determine whether family firms’ need for control affects their equity financing decisions. The present paper provides first insight into this research void.

Financing family firms in the Middle East: the choice between Islamic and conventional finance

2018 ◽  
Vol 24 (4) ◽  
pp. 842-865 ◽  
Author(s):  
Rima Bizri ◽  
Rayan Jardali ◽  
Marwa F. Bizri
Keyword(s):  
Middle East ◽  
Significant Influence ◽  
Family Firms ◽  
Economic Factor ◽  
Family Firm ◽  
Motivational Factors ◽  
Structured Interviews ◽  
Content Type ◽  
Financing Decisions ◽  
Personal Attitude

Purpose The purpose of this paper is to investigate the role of non-economic factors on the financing decisions of family firms in the Middle East. To contextualize the study, the authors steer away from the traditional capital structure debate toward the choice of financing paradigm: conventional vs Islamic. Design/methodology/approach This study uses Ajzen’s theory of planned behavior due to its ability to delineate the influence of non-economic motivational factors on the financing decisions of family firms. This study also examines the influence of “familial stewardship (FS),” another non-economic factor which is highly relevant in a collectivistic context. The authors initially use SEM with Amos to analyze 115 surveys of family firm owner-managers. For deeper probing, the authors undertook an additional post hoc qualitative analysis of six case studies using semi-structured interviews. Findings The findings of this study suggest that owner-managers’ attitude toward Islamic finance plays a primary motivational role in influencing their intentions to use it. More importantly, the findings depict a significant influence of “FS” and subjective norm on the attitudes of owner-managers. This implies that financing decisions which involve religious beliefs are directly influenced by the decision maker’s personal attitude, which, in turn, is significantly influenced by familial and social pressures. Originality/value This study fills a gap in the family-firm financing literature by suggesting that when choosing religion-related financial products, attitude plays a far more significant role than other motivational factors. This study also contributes to the “familiness” area of research by empirically demonstrating that FS has a significant influence on owner-managers’ attitude toward financing choices.

Sign in / Sign up

Export Citation Format

Share Document