scholarly journals Pound of Flesh? Debt Contract Strictness and Family Firms

2017 ◽  
Vol 42 (2) ◽  
pp. 259-282 ◽  
Author(s):  
David Hillier ◽  
Beatriz Martínez ◽  
Pankaj C. Patel ◽  
Julio Pindado ◽  
Ignacio Requejo
Keyword(s):  
Firm Value ◽  
Lower Risk ◽  
Family Firms ◽  
Lower Cost ◽  
Cost Of Debt ◽  
Agency Conflicts ◽  
Publicly Traded ◽  
Debt Contracts ◽  
Value Maximization ◽  
Debt Contract

While past work finds support for both higher and lower cost of debt among family firms, whether lower shareholder–creditor agency conflicts in family firms translate into greater ex-ante contracting efficiency (i.e., lower debt contract strictness) remains unexplored. Drawing on a shareholder–creditor agency framework and costly contracting theory, creditors, expecting firm value maximization rather than shareholder value maximization from family firms, may offer less strict debt contracts to increase contracting efficiency. We find in a sample of 716 publicly traded U.S. firms (2001–2010) that family firms have less strict debt contracts, which are even less strict when family firms have higher asset tangibility. Although increases in R&D investments could lead to more pronounced shareholder–creditor agency conflicts, given family firms' preferences for lower risk and growth, debt contract strictness among family firms is not positively associated with higher R&D intensity.

Tough Love: The Effects of Debt Contract Design on Firms’ Performance

2019 ◽  
Vol 9 (1) ◽  
pp. 44-80
Author(s):  
Ioannis Spyridopoulos
Keyword(s):  
Firm Value ◽  
Agency Conflicts ◽  
Oxford University ◽  
Debt Contract ◽  
Positive Externalities ◽  
Managerial Agency ◽  
Editorial Decision ◽  
Loan Covenants ◽  
Instrumental Variables Approach ◽  
Published Paper

Abstract I investigate whether restrictive loan covenants disrupt or improve firms’ operating performance. Using an instrumental variables approach to address the endogenous relationship between covenant strictness and firms’ efficiency, I find that stricter loan covenants lead to an increase in profitability and firm value even when firms do not violate a covenant. Stricter covenants improve performance only in firms with managerial agency conflicts: those without large shareholder ownership, facing softer competition in their product market, or with weaker shareholder rights. The evidence suggests that by designing stringent contracts ex ante, creditors create positive externalities in poorly governed firms through managerial incentives. Received December 7, 2018; editorial decision May 31, 2019 by Editor Uday Rajan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Insiders ownership and firm value in southern Europe

2012 ◽  
Vol 9 (2) ◽  
pp. 498-510
Author(s):  
Rebeca García-Ramos ◽  
Myriam García Olalla
Keyword(s):  
Firm Value ◽  
Family Firms ◽  
Governance Mechanism ◽  
Publicly Traded ◽  
Internal Governance ◽  
Insider Ownership ◽  
Large Shareholder ◽  
Cross Country ◽  
Data Design ◽  
New Evidence

The effectiveness of the insider ownership as an internal governance mechanism is addressed in the Southern European context using a sample of publicly traded firms during the 2001-2007 periods. A cross country and panel data design is used, taking into account the endogeneity problem arising in studies of corporate governance. The results provide new evidence of the influence of the insider ownership on firm value by testing a non-linear relationship. Our study supports both the convergence of interests and the entrenchment effect. It also shows whether there are significant differences in the estimated relationship between family and non-family firms. We find that when the large shareholder has not a family nature, firm value initially declines with insider ownership, then increases, and, finally, increases again. However, when the large shareholder has a family nature, firm value initially increases with insider ownership and then decreases

scholarly journals Listing status, family firm and the cost of bank loan financing.

2012 ◽  
Vol 9 (2) ◽  
pp. 56-66
Author(s):  
Wan-Ying Lin
Keyword(s):  
Corporate Governance ◽  
Family Firms ◽  
Lower Cost ◽  
Good Governance ◽  
Bank Loans ◽  
Bank Loan ◽  
Cost Of Debt ◽  
Private Firms ◽  
Financing Cost ◽  
The Impact

This research examines the impact of firm’s listing status on the relationship between corporate governance and cost of bank loans. The analysis yields four major findings after controlling for firm characteristics and prime interest rate. First, the financing cost of debt is higher for private firms. This result confirms that information risk is higher for private firms. Second, family firms enjoy lower cost of debt. The result found is consistent with the literature that family firms are related to a lower cost of debt financing. Third, that family firms having lower cost of debt is only found in listed firms. This evidence supports the prediction based on the lack of market perspective which suggests that the family effect requires a capital market to make it substantiate. Finally, strong corporate governance helps reduce financing cost of debt. However, these governance effects are not affected by the listing status. In other words, commercial lenders in this study price indifferently for good governance mechanisms regardless of public or private firms.

Performance Contingencies in CEO Equity Awards and Debt Contracting

2018 ◽  
Vol 94 (5) ◽  
pp. 57-82 ◽  
Author(s):  
John M. Bizjak ◽  
Swaminathan L. Kalpathy ◽  
Vassil T. Mihov
Keyword(s):  
Firm Value ◽  
Stock Price ◽  
Lower Cost ◽  
Incentive Compatibility ◽  
Debt Financing ◽  
Cost Of Debt ◽  
Debt Contracting ◽  
Agency Conflict ◽  
Loan Terms ◽  
The Cost

ABSTRACT We find that firms that grant performance-contingent (p-c) equity awards with accounting-based vesting conditions to their CEOs have lower cost of debt and less restrictive loan terms. The benefits of p-c accounting-based awards on debt financing are greater when the moral hazard problem faced by debtholders is potentially more significant—for example, for firms with poorer credit ratings and lower asset tangibility. We find some evidence that certain types of p-c equity awards with stock price-based conditions increase the cost of debt financing. The adoption of p-c accounting-based awards increases firm value, as indicated by stock and bond event studies. Overall, our findings suggest that the incentive compatibility of accounting-based p-c awards mitigates the potential agency conflict between shareholders and debtholders. JEL Classifications: G32; G34; J33; M12; M52.

Does Captive Insurance Improve Firm Value? Evidence from S&P 500 Companies

2019 ◽  
Vol 14 (1) ◽  
Author(s):  
Mu-Sheng Chang ◽  
Jiun-Lin Chen
Keyword(s):  
New York ◽  
Firm Value ◽  
Lower Cost ◽  
Stock Exchange ◽  
Third Party ◽  
Capital Expenditures ◽  
New York Stock Exchange ◽  
Value Maximization ◽  
York Stock Exchange ◽  
Cash Reserves

Abstract This study investigates whether the use of captive insurers affects firm value for companies included in the S&P 500. Companies may use a captive insurance subsidiary to retain their risks for a lower cost than they would pay in premiums to a third-party insurer. Although captives are present in more than one-third of all firm-years between 2000 and 2016, this study fails to find evidence that owning a captive increases firm value effectively. Additional analysis reveals that firms that are larger, are listed on the New York Stock Exchange (NYSE), and have smaller proportions of capital expenditures and cash reserves tend to use captives. Overall, the results are inconsistent with previous research indicating that the market reacts positively to captive formation around the formation date. This suggests that incentives other than shareholder value maximization may have encouraged the use of captives during the sample period.

scholarly journals Modelling the Relation between Managers, Shadow Cost of External Finance and Corporate Investment

Mathematics ◽  
2019 ◽  
Vol 7 (11) ◽  
pp. 1050
Author(s):  
Alfonsina Iona
Keyword(s):  
Capital Market ◽  
Firm Value ◽  
Relevant Literature ◽  
Adjustment Costs ◽  
Corporate Investment ◽  
Agency Conflicts ◽  
External Finance ◽  
Value Maximization ◽  
Shadow Cost ◽  
The Impact

This paper provides a theoretical framework for studying the impact of self-interested managers on the level of corporate investment. I extend the standard neoclassical model of firm value maximization to incorporate the effect of misaligned managers on corporate investment via a firm’s profit, adjustment costs of capital and shadow cost of external finance. Under some assumptions, commonly made by the relevant literature, the model shows that the intensity of agency conflicts between misaligned managers and outside shareholders affects a firm’s investment decisions generating either under or overinvestment with respect to a perfect capital market and driving a higher cost of external finance.

A Single Period Stochastic Model for Maximising Firms Value

GIS Business ◽  
2016 ◽  
Vol 11 (6) ◽  
pp. 39-45
Author(s):  
J. P. Singh
Keyword(s):  
Capital Market ◽  
Firm Value ◽  
Capital Asset Pricing ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
Value Maximization ◽  
Risk Return ◽  
Bankruptcy Costs ◽  
Single Period ◽  
Debt Capacity

This article sets up a single period value maximization model for the firm based on stochastic end-of-period cash inflows, stochastic bankruptcy costs and taxes based on income rather than wealth. The risk-return trade-off is captured in the Capital Asset Pricing Model. Thus, the model also assumes a perfect capital market and market equilibrium. The model establishes the existence of a unique optimal financial leverage at which the firm value is maximized, this leverage being less than the maximum debt capacity of the firm.

Corporate cash holdings and their implications on firm value in family and founder firms

2012 ◽  
Vol 9 (2) ◽  
pp. 257-273 ◽  
Author(s):  
James Lau ◽  
Joern H. Block
Keyword(s):  
Adverse Selection ◽  
Interaction Effect ◽  
Firm Value ◽  
Family Firms ◽  
Cash Holdings ◽  
Agency Cost ◽  
Economic Incentives ◽  
Positive Interaction ◽  
Superior Knowledge ◽  
Corporate Cash Holdings

This research investigates whether the presence of controlling founders and families has significant impact on the level of cash holdings, and their implications on firm value. The agency cost of cash holdings in founder firms is arguably less severe than family firms, due to founders’ economic incentives, strong psychological commitment and superior knowledge, whereas family firms are exposed to adverse selection and moral hazard as a result of altruism. Results indicate that founder firms hold a significantly higher level of cash holdings than family firms. In addition, there is a positive interaction effect between founder management and cash holdings on firm value, suggesting the presence of founders as managers helps to mitigate the agency costs of cash holdings.

The effects of goals attainment on CEO-owner satisfaction and the role of family involvement

2019 ◽  
Vol 10 (2) ◽  
pp. 116-127
Author(s):  
Ondřej Machek ◽  
Jiří Hnilica
Keyword(s):  
Family Involvement ◽  
Family Business ◽  
Firm Value ◽  
Family Firms ◽  
Hierarchical Regression ◽  
Content Type ◽  
Business Goals ◽  
Growth Increase ◽  
The Family ◽  
Owner Satisfaction

Purpose The purpose of this paper is to examine how the satisfaction with economic and non-economic goals achievement is related to the overall satisfaction with the business of the CEO-owner, and whether family involvement moderates this relationship. Design/methodology/approach Based on a survey among 323 CEO-owners of family and non-family businesses operating in the Czech Republic, the authors employ the OLS hierarchical regression analysis and test the moderating effects of family involvement on the relationship between the satisfaction with different goals attainment and the overall satisfaction with the business. Findings The main finding is that family and non-family CEO-owner’s satisfaction does not differ significantly when economic goals (profit maximisation, sales growth, increase in market share or firm value) and firm-oriented non-economic goals (satisfaction of employees, corporate reputation) are being achieved; both classes of goals increase the overall satisfaction with the firm and the family involvement does not strengthen this relationship. However, when it comes to external non-economic goals related to the society or environment, there is a significant and positive moderating effect of family involvement. Originality/value The study contributes to the family business literature. First, to date, most of the studies focused on family business goals have been qualitative, thus not allowing for generalisation of findings. Second, there is a lack of evidence on the ways in which family firms integrate their financial and non-financial goals. Third, the authors contribute to the literature on the determinants of personal satisfaction with the business for CEOs, which has been the focus on a relatively scarce number of studies.

scholarly journals Asset Specificity and the Secondary Market for Productive Assets

2020 ◽  
Author(s):  
Simone Boccaletti
Keyword(s):  
Theoretical Model ◽  
Financial Distress ◽  
Financial Constraints ◽  
Secondary Market ◽  
Asset Specificity ◽  
Cost Of Debt ◽  
Debt Contracts ◽  
Trade Off ◽  
Distressed Firms ◽  
Productive Assets

AbstractThe aim of this paper is to explore how debt contracts are affected by investment in asset specialization and by the dynamics of the secondary market for collateralized productive assets. Before applying for a loan, financially constrained firms face a specificity trade-off: asset specialization increases firms’ project returns, but decreases the liquidation value of assets in the secondary market if the firm is in financial distress. To study this trade-off, the paper uses a theoretical model in which the choice of asset specificity and the outcome of the secondary market for distressed firms’ assets are endogenous. High redeployability costs and a small number of participants in the secondary market are associated to low recovery values and to a high cost of debt. The paper shows the conditions under which financial constraints reduce firms’ incentive to invest in asset specificity.

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