Family Control and the Cost of Debt: Evidence from the Great Recession

56 Pages Posted: 17 Jun 2015

See all articles by Spyridon Lagaras

Spyridon Lagaras

University of Pittsburgh, Katz Graduate Business School

Margarita Tsoutsoura

Cornell University; National Bureau of Economic Research (NBER)

Date Written: June 12, 2015

Abstract

The purpose of the paper is to examine the effect of founding-family control on the cost of bank debt. We examine the cost of accessing the syndicated market, and we use the financial crisis and the unexpected nature of Lehman Brother's collapse as a laboratory in order to tease out the effect of family ownership. We find the increase in loan spreads around the Lehman crisis was at least 24 basis points lower for family firms. Furthermore, the gap in spreads among family and non-family firms becomes wider among firms that had pre-crisis relationships with lenders with higher exposure to the shock. The evidence is consistent with family ownership lowering the cost of accessing debt financing, especially when lenders are constrained. We further investigate potential channels that drive the effect of family ownership. We provide novel evidence that for 17% of the family firms, creditors impose explicit restrictions in private credit agreements that require the founding family to maintain a minimum percentage of ownership or voting power. Thus, creditors value the presence of the family. Furthermore, the impact of family control on lowering the cost of bank debt is higher when family CEOs run the firms and among firms with higher ex-ante agency conflicts.

Suggested Citation

Lagaras, Spyridon and Tsoutsoura, Margarita, Family Control and the Cost of Debt: Evidence from the Great Recession (June 12, 2015). Fama-Miller Working Paper ; Chicago Booth Research Paper No. 15-14. Available at SSRN: https://ssrn.com/abstract=2618560 or http://dx.doi.org/10.2139/ssrn.2618560

Spyridon Lagaras

University of Pittsburgh, Katz Graduate Business School ( email )

3950 Roberto Clemente Dr
334 Mervis Hall
Pittsburgh, PA Allegheny 15260
United States

Margarita Tsoutsoura (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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