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Family Firms, Debtholder-Shareholder Agency Costs and the Use of Covenants in Private Debt
Mark Bagnoli, Purdue University
Hsin - Tsai Liu, Purdue University
Susan Watts, Purdue University
ABSTRACT. We ask whether the unusually close alignment of manager and shareholder interests in family firms is associated with increased use of restrictive covenants in private debt contracts. Our examination of Dealscan data indicates that S&P 500 family firms are more likely to include accounting-based covenants that limit the lender(s)’ risk that managers will divert cash or assets to shareholders than are S&P 500 non-family firms. The likelihood is further increased by presence of a dual class stock system that includes supervoting shares. This suggests that accounting numbers play an important role in mitigating debtholder-shareholder agency costs in family firms.
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