Private Family Ownership and the Agency Costs of Debt

This article presents empirical evidence on the agency costs of debt in private family firms by examining the explicit (interest rate) as well as implicit (business and personal collateral) bank loan price simultaneously. Using a cross sectional sample of lines-of-credit of the NSSBF database, family firms appear to be more likely to pledge personal collateral which suggests that agency costs of debt are higher in family firms. Hence, personal collateral seems to be a better instrument than interest rates or business collateral for financial institutions to cope with the specific agency problems (e.g. self-control problems and negative effects of parental altruism) in family firms.