The Influence of Entrepreneurial Founder Ownership on External Financing Costs in Emerging Economies

Ceding ownership to outside investors provides a control dilemma for entrepreneurial founders. In emerging capital markets with weaker formal institutions, we argue that retained founder ownership will lower the funding costs when accessing external capital. Our argument rests on incomplete contracting theory, particularly highlighting the elevated status of the entrepreneur. Based on a longitudinal study of 146 listed firms based in eight Caribbean offshore markets, we find that, for these firms, retained founder ownership reduces transaction costs vis-à-vis outside minority investors and results in lower funding costs. The reduced information asymmetry and funding cost is even stronger for firms with a related party/subsidiary within an offshore tax jurisdiction, and for firms with strong shareholder rights.