How do family and non-family firms react to the dynamic capital structure? Evidence from pre-COVID-19 and COVID-19 crises

Purpose The study aims to investigate the impact of the pre-COVID-19 and COVID-19 crises on the speed of adjustment (SOA) towards target leverage among Malaysian family and non-family firms. Design/methodology/approach The two-step system generalized method of moment (SysGMM) on panel data is used to examine the impact of the COVID-19 crisis on the SOA towards target leverage for family and non-family firms. The analysis was based on a sample of 419 Malaysian firms segregated into 221 family and 198 non-family firms using the difference-in-difference method. Findings The dynamic capital structure theory explains that family and non-family firms required more time to adjust during the COVID-19 crisis compared to pre-COVID-19. Furthermore, during both the pre-COVID-19 and COVID-19 periods, family firms incurred higher adjustment costs than non-family firms. This is consistent with the agency theory, which suggests that the severity of the agency conflict among family members reduces the SOA. Family firms are also more resilient and recover faster to optimal leverage during the COVID-19 crisis. The agency theory and dynamic capital structure align with the findings on family and non-family firms during pre-COVID-19 and COVID-19. The socioemotional wealth theory is also consistent with family firms in removing the deviation from actual towards target leverage during the pandemic. Originality/value This study provides empirical evidence of the COVID-19 impact on the speed of adjustment toward target leverage for family and non-family firms in Malaysia. It highlights the need to embrace the resiliency and strategies of the family business when encountering crises or comparable events.