Interactions between family ownership and racial effects in small business debt financing: evidence from the U.S.
Date
2011-05
Authors
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Journal ISSN
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ORCID
Type
Degree Level
Masters
Abstract
This study examines the interactive effects of family and minority ownership on small business debt financing. On one hand, family involvement in ownership has an influence on small firm’s financial decision. On the other hand, racial disparities in small business ownership make these firms experience differently in credit markets. In the context of family and minority involvements, this study measures two dimensions of small business debt financing, one for its use, a financing issue directly related to the capital structure, and the other for its cost, an agency issue related to the firms’ ability to borrowing and repayment.
By using the unique data from the 1993, 1998, and 2003 Survey of Small Business Finances, our empirical results show significant evidence that family involvement has an impact on both the use of debt and the cost of debt financing in small businesses. That is, family ownership are negatively related to both the use of debt and the cost of debt financing, and when the firms are all non-visible minority owned, family firms have a lower level of debt and pay a lower interest rate than non-family firms. The results also show that the firm owner’s visible minority are positively related to the cost of debt financing, and when these firms are all family owned, visible minority owned firms pay a higher interest rate than non-visible minority owned firms.
These results of our study also have important implications for both small business and family business research. For small business owners, it is important to understand the advantages and disadvantages of family as well as minority involvements to finance their businesses. And for policymakers and institutional lenders, understanding the family and minority effects also assists small businesses in obtaining debt financing.
Description
Keywords
family ownership, racial effects, debt financing, small firms
Citation
Degree
Master of Science (M.Sc.)
Department
Finance and Management Science
Program
Finance and Management Science