Family firms, debtholder-shareholder agency costs and the use of covenants in private debt
Journal
Annals of Finance
Journal Volume
7
Journal Issue
4
Pages
477-509
Date Issued
2011
Author(s)
Abstract
We ask whether the private debt contracts of family firms contain more restrictive covenants tied to accounting numbers than those of non-family firms. Our examination of Dealscan data indicates that credit agreements of Standard and Poor (S&P) 500 family firms are more likely to include accounting-based covenants that limit the lender(s)' risk that managers will divert cash or assets to shareholders than those of S&P 500 non-family firms. The likelihood is further increased by presence of a dual class stock system that includes supervoting shares. Our results suggest that lenders are more willing to rely on accounting-based covenants to solve the shareholder-private lender agency problem in family firms given that the reporting quality is higher due to better alignment of owner and manager interests in such firms. © 2009 Springer-Verlag.
Type
journal article