Effects of Concentrated Ownership and Owner Management on Small Business Debt Financing

By Wu, Zhenyu; Hedges, Peggy L. et al. | Journal of Small Business Management, October 2007 | Go to article overview

Effects of Concentrated Ownership and Owner Management on Small Business Debt Financing


Wu, Zhenyu, Hedges, Peggy L., Zhang, Shali, Journal of Small Business Management


Using unique data and a new powerful Monte Carlo-based statistical tool, we examine the effects of concentrated ownership and owner-management (CO-OM) on the creditor-shareholder agency conflicts in small firms. A significant CO-OM effect from the small business owner's view, but insignificant from the commercial lenders' perspective, is found. Special features of informational asymmetry problems in small firms with CO-OM are also highlighted. Theoretical and empirical contributions are made to the small business management and corporate governance literature. Findings obtained from this research have important implications for small business practitioners as well as researchers, and this study can serve as a reference for policymakers and institutional lenders to assist small firms in successfully raising money through debt financing. In addition, a new powerful methodology is introduced to deal with various potential statistical biases and can be further applied to this line of research.

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Agency issues related to firms with concentrated ownership are enjoying increased attention in corporate governance literature (Bartholomeusz and Tanewski 2006; Mishra, Randoy, and Jenssen 2001; Shleifer and Vishny 1997). As well, the role of organizational issues, such as concentrated ownership and owner-management, in debt financing has been recognized as an important factor determining debt financing in the agency framework (Anderson, Mansi, and Reeb 2003). Small business management and finance literature (for example, Ang, Cole, and Lin 2000; Shleifer and Vishny 1997; Jensen and Meckling 1976) has indicated that both concentrated ownership and owner-management mitigate the owner-manager agency conflict. However, whether mitigating owner-manager agency conflict also alleviates the creditor-shareholder conflict in debt financing, especially for small firms, has not been well addressed, though they are of interest in corporate governance (Harris and Raviv 1991). These two types of agency conflicts in small business debt financing are connected through ownership concentration and owner-management as they affect the ownership-management separation within a firm and influence the information asymmetry between creditors and shareholders (Diamond 1984).

Using data collected by the Federal Reserve Board's National Survey of Small Business Finances, Brau (2002) studies the agency connection in the context of small business debt financing and finds that tools dealing with owner-manager agency conflicts do not have significant effects on the creditor-shareholder conflicts in small firms. Brau's (2002) work is a pioneer study, in both corporate governance and small business literature, which contributes to establishing an empirical link between the two different types of agency problems in debt financing. From this, further studies can be developed to deal with a number of other empirical problems that have not been fully considered in the literature.

Using survey data collected by Industry Canada in 2001 and a new Monte Carlo-based statistical tool Boosting for classifications and regressions, we attempt to further address this connection between the owner-manager and creditor-shareholder agency conflicts through concentrated ownership and owner-management (CO-OM). We examine the CO-OM effects, which have been shown to be effective solutions to the owner-manager agency conflict, on the shareholder-creditor agency conflict for different facets of debt financing in Canadian small and medium-sized enterprises (SMEs). We find significant CO-OM effect from the view of SME owners, but an insignificant one in the view of commercial lenders, and therefore, highlight special features of the agency effect generated by CO-OM in small business debt financing which is different from that in U.S. large public firms shown by Anderson, Mansi, and Reeb (2003).

Both theoretical and empirical contributions are made to the small business management and corporate governance literature. …

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