The agency costs of debt in private family firms

Abstract

This paper uses a cross sectional sample of 485 lines of credit from the NSSBF database to investigate the significance of the agency costs of debt at private family firms. Contrary to previous studies, we consider the price of the loan as multidimensional: it mainly consists of the interest rate, business collateral and personal collateral requirements. In order to take into account the jointness in debt terms, we simultaneously estimate the entire model consisting of an interest rate equation, business collateral equation and personal collateral equation using an instrumental variable technique, 2SLS. The results reveal that private family firms are confronted with higher agency costs of debt, reflected in the pledging of personal collateral. No substitution with other debt terms seems to be possible. Personal collateral seems to be an effective tool to cope with self-control problems reducing any possibility of ex post risk shifting behaviour and free riding. In addition, the results show that the interest rate and business collateral can be considered as substitutes while family ownership has no effect on these loan conditions.