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

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 restrictedas in the case of Polish companies once they become publicfinancial decisions may be driven by control motivations. Family firms have strong incentives to use debt as a nondiluting security.