2. Capital structure theories and family-owned ownership

between the owner and the manager occur when the manager manipulates the capital structure decisions to reap wealth through activities that do not lead to value maximization. When other capital structure theories assume that managers always act in the best interests of shareholders, agency theory is focusing on the agency conflict that may arise when managers pursue their selfserving interests at the expense of the value-maximizing activities of the firm [1]. In this case, debt acts as a disciplinary tool to mitigate such agency conflict by curbing manager's self-interest management and investment decisions [2]. Entrenched managers on the other hand, who have discretion over capital structure choice, may opt to lower debt levels to avoid the disciplining role of debt. These are the most common situations investigated and explored on in the literature relating to the agency conflict when examining the impact of ownership structure on capital

Focusing on the emerging market in the East Asian region, these markets were badly hit by the 1997 Asian financial crisis. This turmoil has been frequently documented to be attributed by a very poor corporate governance system [3]. The need for a more strategic and effective corporate governance becomes vital over the years, and ownership structure is one of the crucial mechanisms that need to be scrutinized and studied. As documented by [4], East Asian markets are known with the reputation of having a high level of ownership concentration and family control. In such an environment where high ownership concentration and family control are prevalent, the agency problems may arise between the controlling shareholders and minority shareholders and can consequently give a significant impact on the financial decision

Firms with highly concentrated ownership, particularly family owned, have specific goals and visions comparative to nonfamily or firms with diverse ownership. Value maximization is not the only vision as they also strive for non-economic goals too, like continuous control over the firm without any interference from outside [5]. Undiversified portfolios normally carry exaggerated risks. This then cautions them over unnecessary risks that may come with debt employment in capital structure [6]. Anderson and Reeb [7] on the other hand state that family firms would opt to debt over equity to avoid dilution of control over the firm. These specific characteristics and aims of the family owned will definitely affect the financing decisions and

Therefore, this study sets out to examine the impact of family-owned structure plus firm-level determinants on capital structure of Indonesian firms, being an emerging market to fill the gap in the literature. By using a set of recent data from the year 2000–2014 extracted from the Datastream database and annual reports over 402 firms with the employment of the Generalized Method of Moment (GMM) technique, this study seeks to examine the impact of familyowned structure plus firm-level determinants on the financing decision of the Indonesian firms. Like her other regional neighbors, Indonesia's capital market is featured by higher ownership concentration and family control [3, 4], weaker legal system and investor protection, and weaker disclosure requirements [8] and thus offers a unique case for this study to examine the impact of concentrated ownership on the financing decisions of the firms. Besides that this study also looks at the influence of the commonly cited firm-level determinants on the financing choices of firms in Indonesia. Finally, to analyze which capital structure theories are

thus require further investigation, especially on the emerging market.

structure decision.

4 Financial Management from an Emerging Market Perspective

of the firms.

The most common capital structure theories which are the pecking order theory, the trade-off theory, and the agency theory are mainly originated from the seminal work of [9]. Since then, extensive studies, investigations, and examinations have been carried out throughout the decades as to determine the capability of the theories in explaining the financing decisions of firms regardless of the economic landscapes. The pecking order theory [10] explains that firm adopts a hierarchical order of financing where internal resources are the most preferred source and follows by debt then outside equity as the last resort if an external financing is required. Information asymmetry issues that occur between managers and potential outside financiers can well explain this financing preference and thus limit the firm's choice to external financing. In the context of family-owned firms, this type of ownership concentration is often characterized by informational opacity [11]; thus, asymmetric information problems are more serious. Another distinctive characteristic of family-owned firms is that they have full control over the firm's asset portfolio and thus are able to channel funds to themselves and the family [12]. In this scenario, the financing decisions of these family-owned firms will be solely motivated by the interest to preserve this privilege and minimize any possible interferences from outside via external sources of financing. The preference of internal financing with regard to the information asymmetry issues reinforces the importance of the pecking order theory in this particular framework. Moreover, Thiele and Wendt [13] state that succession is the priority of concerns in family-owned firms. Therefore, dilution of control is very much a worry and seeking external financing is not the main agenda in the financing decision [11]. The concern over the dilution of control over the firms leads managers to focus on internal financing, and should they need external financing debt will be the option comparative to outside equity since debt means a minimum level of intrusion which is then translated into lower risk of dilution of power over the firm.

The agency theory [1] states that an optimal capital structure can be achieved when the agency conflicts between shareholders, managers, and debt holders are mitigated by using debt as disciplinary mechanism. Looking in the context of family-owned firms, the conflict between shareholders and managers can be regarded as minimal since family owned can naturally align both shareholders' and managers' interests with regard to growth opportunities and risks [1] for the sake of the family as the large shareholders as well as the managers are normally among the family members. In this case, the alignment of interest between shareholders and managers makes issuing debts as manager's disciplinary tool less crucial for family-owned firms. It is expected that family-owned firms do not suffer from agency cost considering that the owner and the management of firms are the same people, and hence no issue of diverging interests is between the two parties [7]. However, expropriation of wealth at the expense of the minority shareholders still exists which literature considers it as the great disadvantage of concentrated ownership, particularly in family-owned firms [6]. Although debt does not act so much as disciplinary tool in a family-owned firm, it does help to discipline the expropriation of wealth in the firm itself [14].

Looking at the trade-off theory, its main aspect is that firms will strive for optimal debt equity ratio by maximizing benefits that come with debt employment but at the same time minimizing the cost of debt which includes bankruptcy risk and insolvency. The balanced and the equilibrium between benefits of debt and the cost of debts will ensure optimum performance of firms which will then increase firm value. From the lens of family-owned firms by controlling the firms, family gains private benefits. As documented in the body of knowledge, family owned normally pursues lower investment or undiversified due to limited use of debt to finance their operations and investment [15]. The bankruptcy risk and insolvency will also be high due to the lower investment and thus may jeopardize the private benefits. Being undiversified, bankruptcy in the firm means bankruptcy for the family too; thus, familyowned firm would try to lessen the risk by lessening the engagement of debt in their capital structure even though that means that they may sacrifice profitable projects [15]. Familyowned firms are expected to employ less debt in their capital structure. Nevertheless, being a family owned with several particular characteristics like undiversified portfolios, concern with firm and family reputation, longer investment horizons, and desire to pass the firm onto their descendent may modify the negative effect of family owned on the employment of debt. These characteristics of family owned may be translated into a reduction of monitoring cost, thus adding to a more favorable lending condition which then leads to higher level of debt use in the financing decision [11]. This notion is confirmed by [16] with evidence that family ownership is associated with greater availability of credit and a lower cost of debt financing for family firms. The concern over power dilution and control of the firm with the intrusion of outsiders drive these family-owned to engage with higher level of debt if they need to employ external financing over equity and thus follow strategies that are focusing on the survival of the company in the long run rather than pursuing value maximization [13].

#### 3. Past studies on capital structure and ownership concentration

Margaritis and Psillaki [17] investigate the connection between capital structure and ownership structure of a firm. They anticipate that family-owned firms can affect leverage either positively or negatively, depending on the firm's risk level. A more risky firm will employ less debt, whereas a less risky firm will engage on more debt to act as monitoring measure. Anderson and Reeb [7] confirm this argument. Nevertheless, [17] document a significant positive relationship between family firm and debt ratio, indicating that the benefit of debt outweighs the cost of debt. Anderson et al. [18] postulate that family firm focuses more on long-term firm survival rather than value maximization as their main concerns are family reputation and long-term survival. As discussed earlier, debt financing is very much avoided as family-owned firms tend to be risk averse as confirmed by [19]. Family firms are argued to have a long-term commitment where succession is a vital aim and thus influences their capital structure. All the findings above illustrate the influence of the pecking order theory of capital structure in family-owned firms.

managers makes issuing debts as manager's disciplinary tool less crucial for family-owned firms. It is expected that family-owned firms do not suffer from agency cost considering that the owner and the management of firms are the same people, and hence no issue of diverging interests is between the two parties [7]. However, expropriation of wealth at the expense of the minority shareholders still exists which literature considers it as the great disadvantage of concentrated ownership, particularly in family-owned firms [6]. Although debt does not act so much as disciplinary tool in a family-owned firm, it does help to discipline the expropriation of wealth

Looking at the trade-off theory, its main aspect is that firms will strive for optimal debt equity ratio by maximizing benefits that come with debt employment but at the same time minimizing the cost of debt which includes bankruptcy risk and insolvency. The balanced and the equilibrium between benefits of debt and the cost of debts will ensure optimum performance of firms which will then increase firm value. From the lens of family-owned firms by controlling the firms, family gains private benefits. As documented in the body of knowledge, family owned normally pursues lower investment or undiversified due to limited use of debt to finance their operations and investment [15]. The bankruptcy risk and insolvency will also be high due to the lower investment and thus may jeopardize the private benefits. Being undiversified, bankruptcy in the firm means bankruptcy for the family too; thus, familyowned firm would try to lessen the risk by lessening the engagement of debt in their capital structure even though that means that they may sacrifice profitable projects [15]. Familyowned firms are expected to employ less debt in their capital structure. Nevertheless, being a family owned with several particular characteristics like undiversified portfolios, concern with firm and family reputation, longer investment horizons, and desire to pass the firm onto their descendent may modify the negative effect of family owned on the employment of debt. These characteristics of family owned may be translated into a reduction of monitoring cost, thus adding to a more favorable lending condition which then leads to higher level of debt use in the financing decision [11]. This notion is confirmed by [16] with evidence that family ownership is associated with greater availability of credit and a lower cost of debt financing for family firms. The concern over power dilution and control of the firm with the intrusion of outsiders drive these family-owned to engage with higher level of debt if they need to employ external financing over equity and thus follow strategies that are focusing on the survival of

the company in the long run rather than pursuing value maximization [13].

3. Past studies on capital structure and ownership concentration

Margaritis and Psillaki [17] investigate the connection between capital structure and ownership structure of a firm. They anticipate that family-owned firms can affect leverage either positively or negatively, depending on the firm's risk level. A more risky firm will employ less debt, whereas a less risky firm will engage on more debt to act as monitoring measure. Anderson and Reeb [7] confirm this argument. Nevertheless, [17] document a significant positive relationship between family firm and debt ratio, indicating that the benefit of debt outweighs the cost of debt. Anderson et al. [18] postulate that family firm focuses more on

in the firm itself [14].

6 Financial Management from an Emerging Market Perspective

Thiele and Wendt [13] state that family-owned firms tend to use their voting power to monitor the management of the firm as they have sufficient rights to interfere in the decision making. This active monitoring can avoid managerial opportunism and can exercise their power to replace underperforming managers and cut unnecessary managers' self-interest expenditure [6]. A strong controlling power in family-owned firm acts as a signal of good performance of the firm and thus elevates value of the firm. Consequently, as explained by the signaling theory, debt is then seen as a less reliable signaling tool and hence, rationalizes the negative relationship between family-owned and capital structure as reported by [19]. On another strand, [20] in his study on publicly listed firms in Indonesia find that agency problem is very minimal in family-controlled firms, state-owned firms, or institutional-controlled firms comparative to publicly controlled firms or firms without controlling shareholders. This is according to [11] due to the lesser conflict between shareholders and managers. Nevertheless, with the presence of minority shareholders in a family-owned firm, a conflict between the two is likely to occur.

Anderson et al. [18] in their study on the debt policy of family-owned firms in the US with a sample of 252 firms from 1993 to 1998 find that the cost of debt in family-owned firms is comparatively low and thus encourages higher level of debt employment in the capital structure, a positive relationship. This findings support the notion that family-owned firms have fewer agency cost issues due to the incentive structure of family-owned firms in the US. The rationale behind this is that perhaps the main concern of the family-owned firms is their longterm relation with the lender; thus, their reputation is their vital care. Since these family-owned firms' investments are generally undiversified investments, they fear of losing the firms as it means the loss for the family as well. Croci et al. [16] also confirm that family-owned firms' main concern is to maintain good rapport with the lenders for the purpose of long-term orientation. However, on the other hand, as argued by [13], family-owned firms are more worried about preserving their control over the firm rather than worrying about bankruptcy risk and insolvency and thus engage more debt in their capital structure. Other example of positive relationship between capital structure and family-owned firms is by [14] where family-owned firms employ high level of debts in their capital structure. They postulate that those family-owned firms use debts as a replacement for independent directors. They also conclude that family-owned firms in their study employ higher debt level to discipline the managers.

Anderson and Reeb [7] investigate the variation of capital structure practice between familyowned firms and non-family owned in the US industrial sector using 2018 firms between the years 1993 and 1999. They categorize family-owned firms are those with 5% of stake, and the founder is part of the director. They find no distinctive difference between family owned and non-family owned, and the founder does not influence debt level of the US industrial firms. Ampenberger et al. [21] discovered that family-owned firms in Germany have a negative impact on the capital structure and this is perhaps due to the involvement of the founder CEO in the management.

Based on what have been reviewed above, literature has been documenting mixed results pertaining to the impact of family owned on firms' debt financing in various countries regardless of the economic landscapes. For instance, [19, 21] find family-owned firms are considerably underleveraged comparative to the non-family-owned firms. In contrast, there are studies that reveal positive relationships, indicating that family-owned firms are more leveraged than the non-family-owned firms [14, 22, 23]. Looking at the financial behavior of the firms, [21] depict family management as the main determinant of lower debt level of family-owned firms. Gottardo and Moisello [22] on the other hand report active family management as the major determinant of high debt level. Other determinants like maintenance of control and influence, growth opportunities, and risk aversion do play a part in the debt financing decisions of family-owned firms [13].
