Family succession and cost of bank loans: Evidence from China

Abstract

This study examines the effect of family succession on the cost of bank loans and non-price contractual terms. We use a unique dataset from China and find that lending banks are likely to charge higher interest rates and offer tighter contractual terms, such as loan maturity and collateral requirements, for family succession firms. These findings indicate that information asymmetry and default risks may arise after subsequent family successions. We also find that family succession firms can lower the cost of bank loans by hiring top-tier auditors, who can enhance financial reporting credibility. This finding suggests that professional, high-quality auditors can provide extremely valuable services to family succession firms.