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Family firms and the agency cost of debt: The role of soft information during a crisis

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  • Leandro D’Aurizio
  • Tommaso Oliviero
  • Livio Romano

Abstract

In this paper we study how access to bank lending during the recent financial crisis differed between family and non-family firms. Our theoretical prediction is that the presence of a family block-holder in the company attenuated the agency conflict in the borrower-lender relation, because of the higher non-monetary cost of default entailed in this type of corporate ownership structure. Because this information is to a large extent soft, we further investigate the interaction between the family firm status and the screening technology adopted by banks. Using highly detailed data referred to Italy, we exploit the change in the credit allocation following Lehman Brothers’ bankruptcy. We find that family firms experienced a contraction in granted credit lower than non-family firms. Results are robust to ex-ante differences between the two types of firms and to bank-specific shocks. In line with our prior, banks that increased the role of soft information in their lending practices reallocated credit towards family firms.

Suggested Citation

  • Leandro D’Aurizio & Tommaso Oliviero & Livio Romano, 2012. "Family firms and the agency cost of debt: The role of soft information during a crisis," Economics Working Papers ECO2012/22, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2012/22
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    References listed on IDEAS

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    Cited by:

    1. Valentina Peruzzi, 2017. "Does family ownership structure affect investment-cash flow sensitivity? Evidence from Italian SMEs," Applied Economics, Taylor & Francis Journals, vol. 49(43), pages 4378-4393, September.

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    More about this item

    Keywords

    Family Firms; Financial crisis; Relationship lending; Soft information; Credit supply;
    All these keywords.

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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