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Founding Family Ownership and the Agency Cost of Debt

29 Pages Posted: 22 Mar 2002  

Ronald C. Anderson

Temple University - Department of Finance

Sattar Mansi

Virginia Tech

David M. Reeb

National University of Singapore

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Abstract

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.

Keywords: Ownership Structure; Agency Costs of Debt; Corporate Governance; Blockholders

JEL Classification: G3

Suggested Citation

Anderson, Ronald C. and Mansi, Sattar and Reeb, David M., Founding Family Ownership and the Agency Cost of Debt. Available at SSRN: https://ssrn.com/abstract=303864 or http://dx.doi.org/10.2139/ssrn.303864

Ronald Craig Anderson

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

David M. Reeb

National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://www.davidreeb.net

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