Financial Distress of Family-Owned Firms

Abstract

We study family ownership under financial distress. Our analyses cover 13,127 firm-year observations of 728 publicly listed S&P 500 firms, consisting of 185 family-owned and 543 non-family-owned firms, from 1995 to 2019. Firstly, our paper shows that publicly listed family-owned firms are less likely to be in financial distress in the first place. Secondly, our results show that for firms in distress, family-owned firms are associated with a more conservative liquidity position and capitalization. Family-owned firms in financial distress have significantly higher cash reserves, a higher equity capitalization, higher stock issuance, and higher cashflows from investing activities compared to non-family-owned firms. Our findings are in line with the Socioemotional Wealth (SEW) theory of family owners protecting their socioemotional wealth, which could be threatened by payment defaults to creditors and the associated risk of chapter 11 bankruptcy.