Founding Family Control, Pyramid Structure And Debt Cost

Family firms exist worldwide; family control is a common enterprise control form even in listed companies with decentralized equity. In the undeveloped financial markets, family firms are facing serious financing constraints, and equity financing is very difficult for them. Thus, debt financing, especially credit financing, becomes a main financing channel for family firm. In order to relieve the financing difficulties, family firms often form internal capital markets by constructing a pyramid equity structure, but a lot of literatures show that pyramid structures worsen the agency problems among the firms' shareholders. In emerging markets, the legal system is imperfect, and there is no cure for the problem of big shareholder occupying small shareholders through pyramid structure. Does this mean that family firms must pay a high price for the debt financing?The abroad researches about founding family find that founding family firms have three characteristics which are scattered investment risks, long-term continuous operation and paying attention to reputation, and they are likely to have lower debt costs. The domestic researches often take the private enterprises as the research object, and the founding family firms in the abroad study are parts of China's private enterprises. they are listed private companies which are initial public offerings (IPO), have unchanged control rights and the firms are controlled by the members of the family. Therefore, this article divides the enterprises into founding family firms and non-founding family firms creatively; the latter include state-owned enterprises and private non-founding family firms. Based on the three characteristics of the founding family, this paper proves that founding family firms have lower debt costs theoretically by establishing credit games between the bank and the firm, and analyses the following problems from the perspective of transaction cost:(1) the influence of founding family on the debt cost;(2) the influence of pyramid structure on the debt cost;(3) the interactive affection of founding family and pyramid structure on the debt cost.The results indicate that:(1) Compared to the non-founding family businesses, the founding family firms have lower debt cost, this means founding family plays a positive role in debt contract;(2)The pyramid structure increases the debt cost, and it is consistent with the previous literature conclusions;(3) In the founding family firms, the sensitivity of the debt cost to the pyramid structures is going down, that means the pyramid structure's "tunneling effect" is abate, and the equity nature of founding family is an important variables affecting debt cost. Therefore, the relevant departments should focus on the family founder firms'development, and increase their supports; establish enterprise reputation evaluation mechanism and pay attention to the enterprise intergenerational inheritance; establish enterprise risk control mechanism and make the internal capital markets formed by the pyramid structure effective; strengthening the legal system and investor protection.The innovation points are summed up as follows:Firstly, a new debt cost index system. The index system is more perfect using eight debt cost measurement index; Secondly, a new classification method, the sample classification is more rational when the enterprises are divided into founding family enterprises and non-founding family firms. Thirdly, a creative study angle, this paper accomplishes a cross-disciplinary research by combining the game theory, transaction cost economics and finance theory. Fourthly, a new idea, in founding family firms the debt cost is lower, and the pyramid structure's "tunneling effect" is abate, which enriches the family firms pyramid structure and debt financing theory.