Abstract
ABSTRACT Small and medium-sized enterprises play important roles in modern business society but face difficulties in debt financing. The literature suggests that family involvement and external auditing can help small firms mitigate agency problems that impede access to loans. Our research examines how family involvement influences the effects of the cost of debt on different external auditing choices and how sending credible signals helps resolve the agency conflict between lenders and borrowers in small business financing. We find that when external auditing is used, family involvement does not significantly reduce the cost of debt for small firms. However, when external auditing is not used, family involvement has a significantly positive influence.
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