Founding Family Ownership and the Agency Cost of Debt
Ronald C. Anderson
American University - Kogod School of Business
Virginia Polytechnic Institute & State University
David M. Reeb
National University of Singapore
We investigate the impact of founding-family ownership structure on the agency cost of debt. We find that founding-family ownership is common in large, publicly traded firms and is related, both statistically and economically, to a lower cost of debt financing. The evidence also indicates that the relation between founding-family holdings and debt costs is non-monotonic; debt costs first decrease as family ownership increases but then increase with increasing family ownership. However, irrespective of the level of family holdings, we find that family firms enjoy a lower cost of debt than non-family firms. These results are consistent with the hypothesis that continued founding-family ownership in publicly traded firms reduces the agency costs of debt. Additional analysis reveals that when a family member serves as the firm's CEO, the cost of debt financing is higher than if an outsider is CEO, but still lower than in non-family firms. Overall, the results are consistent with the idea that founding-family firms have incentive structures that result in fewer agency conflicts between equity and debt claimants, suggesting that bond investors view founding-family ownership as an organizational structure that better protects their interests.
Number of Pages in PDF File: 29
Keywords: Ownership Structure; Agency Costs of Debt; Corporate Governance; Blockholders
JEL Classification: G3
Date posted: March 22, 2002
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