Reference Point-Dependent Investment Decisions of Family and Non-family Owners

Studies examining leverage levels of family firms report a rather uniform picture: be they large or small, publicly quoted or privately held, family firms exhibit lower leverage levels than their non-family counterparts (e.g., Agrawal & Nagarajan, 1990; Villalonga & Amit, 2006; Mishra & McConaughy, 1999; Gallo & Vilaseca, 1996). While these findings are consistent with the stereotype of the financially conservative and risk-adverse family firm, they also suggest that the majority of these firms have a suboptimal capital structure that relies heavily on internally generated capital. This has the effect of not only inflating these firms' average cost of capital and suppressing their value, but also limiting the rate of firm growth to the growth of internally generated assets (Schulze & Dino, 1998). These preconditions seem to make family firms ripe candidates for underinvestment; which undermines their competitive position and, ultimately, threatens their very survival. However, the predominant role of family firms in the economic landscape stands in strong contrast to these predictions. In fact, family firms are at the forefront of many industries, challenging the assumption that these firms should be permanently risk-adverse. In reality, risk taking and funding of risky investments, such as R&D, are necessary for a firm's long-term survival (Gedajlovic, Lubatkin, & Schulze, 2004). In this context, our study sets out to shed some light on the risk-taking propensity of family firm owners. The study focuses on the control risk propensity of family firm owners, measured in terms of the leverage levels of the firms they control (Mishra & cConaughy,
1999).