*4.1. Leverage*

Tables 3 and 4 summarize the panel regression outcomes for the leverage variable used in the study. We executed five regressions for each of the two dependent variables (debts/EBITDA and interest coverage ratio). This analysis helps us to prove whether a family firm has a different level of leverage than a similar non-family firm. For both analyses, we controlled for other possible proxy variables such as profitability measure (return of equity, return on assets, EBITDA margin, and net income margin), size measure (number of employees, total revenues, and logarithm of total assets), and age of firm based on the date of establishment



"The variables for the analyzed sample of 888 firms and 7104 firm-year observations of unlisted small and medium size firms over the period 2007 to 2014, includes leverage is measured using the Debt/EBITDA and Interest Coverage Ratio. Profitability measure refers to return of equity, return on assets, EBITDA margin, and net income margin. Size measure refers to number of employees, total revenues, and total assets. Age calculate based on the company date of establishment. Also, family firm denotes a dummy taking the value 1 if the firm has a family or individual with 25% or more voting rights, and zero otherwise (SABI of the Bureau Van Dijk).\*\*\*, \*\*, \* illustrate the significance at the 1%, 5%, and 10% level respectively". Source: Authors elaboration.


**Table 4.** Interest Coverage Ratio Regression.

"The variables for the analyzed sample of 888 firms and 7104 firm-year observations of unlisted small and medium size firms over the period 2007 to 2014, includes leverage is measured using the Debt/EBITDA and Interest Coverage Ratio. Profitability measure refers to return of equity, return on assets, EBITDA margin, and net income margin. Size measure refers to number of employees, total revenues, and total assets. Age calculated based on the company's date of establishment. Also, family firm denotes a dummy taking the value 1 if the firm has a family or individual with 25% or more voting rights and zero otherwise (SABI of the Bureau Van Dijk). \*\*\*, \*\*, \* illustrate the significance at the 1%, 5%, and 10% level respectively". Source: Authors elaboration.

With respect to debts/EBITDA as a dependent variable for leverage, our results from Table 3 show negative significance at the debt level for the first regression. This indicates that most family firms use less debt financing than non-family firms, and as such maintain a lower level of debt.Regarding the profitability measure, the result from regression 1 illustrates a negative and statistically significant relationship between level of debt and profitability at the 5% level. These results suggest that most families tend to increase their reserves during the profitable circle of their firms and later reinvest this surplus profit when there is a need for expansion. They employ equity finance rather than debt finance for investment.

Further, to examine the cross-influence of family business age and size on debt, we execute regression 2 with interactive terms of two controlling variables and the family dummy. Specifically, the cross-influence of family business age and size on debt is positive and statistically significantly at the 5% level. The average age of most family examined in this study is 28, indicating that most of the firms are first generation. This result suggests that most family firms in their earlier developmentdepend on equity finance;however, as years go by, they more fully depend on debt finance for their activities. This is consistent with a positive and statistically significant correlation with the interactive term of

family and size. Early in their development, most family firms depend on equity finance, but as they grow bigger, huge debt finance is needed to finance their activities.

In addition, regressions 3, 4, and 5 exclude some of the controlling variables and include some combination of interaction variables between size and family, profitability and family, and age and family, and are negative and statistically significant at the 5% level. These regressions using different combinations of variables indicate positive coefficients for the family dummy on debt. The results of these regressions illustrate that family firms actually have lower levels of debt than non-family firms. This result is consistent with several prior research papers which have examined the characteristics of family-controlled business. One possible reason for this could be that family ownership and control is responsible for most family businesses adopting a more risk averse structure and the tendency to avoid high risk activities. These results support the hypothesis that family owned companies have lower leverage than non-family firms (See Table 3).

With respect to the interest coverage ratio as a dependent variable for leverage, our results from Table 4 show a similar result in Table 3, with negative significance at the debt level for the first regression. This indicates that most family firms use less of debt financing than non-family firms, as such maintain a lower level of debt. Regarding the profitability measure, the result from regression 1 illustrates a negative and statistically significant relationship between the level of debt and profitability at the 5% level. These results suggest that most family firms tend to increase their reserves during the profitable cycle of their firms and later reinvest this profit when there is a need for expansion. They employ equity finance rather than debt finance for investment.

Further, to examine the cross-influence of family business age and size on debt, we execute regression 2 with interactive terms of two controlling variables and the family dummy. Specifically, the cross-influence of family business age and size on debt is positive and statistically significantly at the 5% level. The average age of most family firms examined in this study is 28, indicating that most of the firms are first generation. This result suggests that most family firms in their earlier developmentdepend on equity finance, however, as years go by, they come to fully depend on debt finance for their activities. This is consistent with a positive and statistically significant correlation for the interactive terms of family and size. During their earlier development, most family firms depend on equity finance, but as they grow bigger, huge debt finance is needed to finance their activities.

In addition, regressions 3, 4, and 5 exclude some of the controlling variables and include some combination of interaction variables between size and family, profitability and family, and age and family, and are negative and statistically significant at the 5% level. These regressions, using different combinations of variables, indicate positive coefficients for the family dummy in the case of debt. The results of these regressions illustrate that family firms actually have lower levels of debt than non-family firms. This result is consistent with several prior research papers that examined the characteristics of family-controlled businesses. One possible reason for this could be that family ownership and control is responsible for most family business adopting a more risks adverse structure and the tendency to avoid high risk activities. These results support the hypothesis that family owned companies have lower leverage than non-family firms (see Table 4).
