Pound of Flesh? Debt Contract Strictness and Family Firms

Abstract

While past work finds support for both higher and lower cost of debt among family firms, whether lower shareholder-creditor agency conflicts in family firms translate into greater exante contracting efficiency (i.e., lower debt contract strictness) remains unexplored. Drawing on a shareholder-creditor agency framework and costly contracting theory, creditors, expecting firm value maximization rather than shareholder value maximization from family firms, may offer less strict debt contracts to increase contracting efficiency. We find in a sample of 716 publicly traded US firms (2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)) that family firms have less strict debt contracts, which are even less strict when family firms have higher asset tangibility. Although increases in R&D investments could lead to more pronounced shareholder-creditor agency conflicts, given family firms' preferences for lower risk and growth, debt contract strictness among family firms is not positively associated with higher R&D intensity.

Governance Mechanisms and Family Firms

“…Second, family firms are controlled by owner-managers rather than professional managers who do not have significant ownership (Stewart & Hitt, 2012). This source of control can sometimes reduce agency problems between owners and managers (Pollak, 1985) and between owner-managers and lenders (Hillier, Martinez, Patel, Pindado, & Requejo, 2018) but at the price of sometimes creating agency problems among owners (Peng, Sun, Vlas, Minichilli, & Corbetta, 2018; Villalonga & Amit, 2006) and between family owner-managers and family members who do not directly participate in the governance of the firm (Villalonga, Amit, & Guzman, 2015). 4 Third, sometimes the pursuit of solutions to these problems can generate unique double-agency costs through the creation of intermediary governance mechanisms (Zellweger & Kammerlander, 2015).…”

“…(2018) study situations where the responses of internal governance are more discretionary and selective. By contrast, Hillier et al. 's (2018) article on debt financing deals with the collision of formal internal and external governance mechanisms.…”

Entitled to Embezzlement? The Case of Successful Executives Working for Rich Heirs

“…In a principal-agent perspective, where the family is the principal and nonfamily executives are agents, a number of relational problems can occur: different preferences, knowledge asymmetry and risk discrepancy (Bosse and Phillips 2016). For example, Hillier et al (2018) found that family firms have less strict debt contracts, which are even less strict when family firms have higher asset tangibility. Mazzelli et al (2018) found that family firms align with their closest peers to avoid social losses.…”

Information asymmetries in intrafamily business succession

“…The socialization in families shapes the rules, values, and norms of individuals and the next generation. Hillier et al (2018) proposed that agency conflicts between shareholders and creditors are lower in family firms than in non-family firms. Yuan and Wu (2018) placed this study into a wider context and proposed to include values when studying family firms, emphasizing values as the "key determinant of family heterogeneity and family firm behavior" (Yuan & Wu, 2018, p. 284).…”