Family Control and the Cost of Debt: Evidence from the Great Recession

Abstract

The purpose of the paper is to examine the effect of founding-family control on the cost of bank debt. We examine the cost of accessing the syndicated market, and we use the financial crisis and the unexpected nature of Lehman Brother's collapse as a laboratory in order to tease out the effect of family ownership. We find the increase in loan spreads around the Lehman crisis was at least 24 basis points lower for family firms. Furthermore, the gap in spreads among family and non-family firms becomes wider among firms that had pre-crisis relationships with lenders with higher exposure to the shock. The evidence is consistent with family ownership lowering the cost of accessing debt financing, especially when lenders are constrained. We further investigate potential channels that drive the effect of family ownership. We provide novel evidence that for 17% of the family firms, creditors impose explicit restrictions in private credit agreements that require the founding family to maintain a minimum percentage of ownership or voting power. Thus, creditors value the presence of the family. Furthermore, the impact of family control on lowering the cost of bank debt is higher when family CEOs run the firms and among firms with higher ex-ante agency conflicts.