Do Banks Price Owner-Manager Agency Costs? An Examination of Small Business Borrowing

Posted: 24 Nov 2009

Date Written: 2002

Abstract

This study extends previous research that suggests owner-manager agency costs are higher when an outsider manages the firm and lower when the firm is monitored by banks, by determining whether banks price agency costs, particularly owner-manager agency conflicts, in the firms to which they extend loans. This question is considered in light of the results of a series of difference tests that were used to analyze data from the 1995 National Survey of Small Business Finances (NSSBF) survey of 463 small firms. The difference tests were designed to determine whether banks charge a premium when loaning funds to firms with various ownership structures indicative of varying levels of owner-manager agency costs. Results of the tests suggest that banks do not price agency as it pertains to firm ownership structure. In other words, banks do not reward or punish borrowers through either interest rates or collateral requirements for various agency-cost management and ownership structures. When lending to small businesses, banks are more concerned with banking relationships, the debt position of the borrowing firm, and the size and age of the firm.(SAA)

Keywords: National Survey of Small Business Finances (Federal Reserve Board), Ownership structures, Agency costs, Bank loans, Banking industry, Financing, Lending policies, Operator ownership, Agency theory

Suggested Citation

Brau, James C., Do Banks Price Owner-Manager Agency Costs? An Examination of Small Business Borrowing (2002). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1511048

James C. Brau (Contact Author)

Brigham Young University ( email )

TNRB 640
Marriott School
Provo, UT 84602
United States
801-318-7919 (Phone)
801-422-0108 (Fax)

HOME PAGE: http://marriottschool.byu.edu/emp/brau/

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