Bank loan analysis of family firms: evidence from S&P 500 firms

Abstract

Drawn upon agency problem II with the conflict between shareholders and debtholders (Villalonga and Amit, 2006), our study empirically examines whether bank loan provisions of family firms are more restrictive than those of their non-family counterparts. Our empirical results from S&P 500 firms show bank loans of family firms have higher annual fees, but there is no similar pattern with higher loan spread. A further robustness analysis finds that the result is driven by those firms changing status from family firms to non-family firms. In addition, we also find bank loan contracts of family firms are more restrictive than those of non-family firms in terms of financial and general covenants. Finally, our robustness checks provide additional support to these findings. Overall, our results are consistent with prior research, which indicates restrictive covenants are effective monitoring devices in private debt contracting, and may be used to mitigate agency problem II between shareholders and debtholders.