The Debt Agency Costs of Family Ownership: Firm Level Evidence on Small and Micro Firms

Abstract

This study investigates the impact that family ownership has on loan availability and credit terms. Our study differs from existing literature by investigating the impacts of family ownership on loan availability and credit terms in a sample of small and micro Finnish firms. Our results suggest that loan availability becomes weaker when family ownership increases. Collateral requirements increase with management ownership, but contrary to previous studies on large, listed firms we find no effect on interest rates. These results suggest that there are agency costs involved with family ownership and that banks take this into account when lending to these firms. We also find that the impact of other attributes that affect loan availability of credit terms is different for family firms as opposed to non-family firms. Our results suggest that an increase in firm age improves loan availability and reduces collateral requirements only for the non-family firms. We also find that while an increase in profitability improves loan availability for all firms, it reduces interest rates and collateral requirements only for family firms. The results on relationship lending effects suggest that there are no differences in non-family and family firms. When it comes to bank market concentration, it seems that an increase in the number of local banks improves loan availability only for the non-family firms.