Founding Family Ownership and the Agency Cost of Debt

Multiple agency perspective, family control, and private information abuse in an emerging economy

“…It shows that families may play dual governance roles by supporting long-term wealth generation on the one hand, and engaging in an opportunistic wealth distribution in an environment of corporate opacity on the other. This analysis supports theoretical arguments by Coff (1999) and helps to explain conflicting evidence on family control in the agency and strategy literatures (Anderson et al, 2003;Claessens, Djankov, Fan, & Lang, 2002;Holderness & Sheehan, 1988;McConaughy et al, 1998).…”

“…Because owners in the current generation have the tendency and obligation to preserve wealth for the next, family firms often possess longer time horizons compared to non-family firms (Bruton et al, 2003). Anderson, Mansi, and Reeb (2003) suggest that these characteristics can alleviate agency conflicts between the firms' debt and equity claimants and reduce the agency costs of debt. Heugens, van Essen, and van Oosterhout (2009) present a meta-analysis of the relationship between concentrated ownership and firm financial performance in Asia that finds a positive association between both variables.…”

Family firms, debtholder–shareholder agency costs and the use of covenants in private debt

“…See Fan and Wong (2002), Gompers et al (2004), Hauser and Lauterbach (2004), Francis et al (2005) and the references therein for more details regarding dual-class companies. 12 Further, as we noted in the introduction, even if family members have no intention or history of taking such actions (consistent with, for example, their building or maintaining reputation, as argued in Anderson et al 2003), they might still find it beneficial, in net, to "tie their hands" through the use of covenants The restrictive covenants that firms and their lenders might choose protect, albeit in different ways, against the borrowing firm's managers using cash or assets in a way that increases the lender's risk. For example, liquidity covenants (that are based on the firm's current or quick ratio and interest coverage) ensure that the firm's operations generate "sufficient" cash to service the debt.…”

“…The most robust findings from this body of work are that family firms tend to produce higher quality financial statements and warn about forthcoming negative earnings news more often than non-family firms, consistent with their having a less dominant owner-manager agency problem relative to nonfamily firms. Finance researchers generally have focused their efforts on studying the impact of founding family ownership on firm performance (e.g., Anderson and Reeb 2003a;Bennedsen et al 2007;Villalonga and Amit 2006) and the cost of public debt (Anderson et al 2003;Ellul et al 2007). The first set of papers concludes that family firms outperform non-family firms but that the outperformance is reduced in the presence of dual class stock systems and when descendants serve as CEO.…”

“…Unlike prior research (Anderson and Reeb 2003;Ellul et al 2007), we focus on the private loan agreements, as opposed to public debt contracts, of family firms and do so for two reasons. First, private loans dominate the market for corporate debt.…”