The Role of Debt in the Family Business Succession Problem

Abstract

This paper studies the typical succession problem in family businesses with respect to the hiring or not a professional manager once the founder decides to retire. Burkart et al. (2003) show how a legal framework is an important determinant in solving this problem. We extend their model in order to consider the possibility that the founder uses bank debt to alleviate monitoring cost. We find that bank debt plays also an important role in family businesses succession problem and gives an alternative explanation of why family firms in emerging market countries are mostly financed through the banking system and do not float their own shares in the capital markets.