Family Control, Foreign Investors, and the Cost of Corporate Borrowing

Abstract

This paper examines whether family CEOs in Korea have an effect on the cost of borrowing. Specifically, we aim to see whether or not the excess control rights that many of these family members hold has an adverse effect on the cost of borrowing, thus lowering shareholder firm value. We compare this to the effect of foreign ownership both as a direct effect on the price of debt and as an interacting variable between family CEOs and interest rates. We obtained loan data for 385 syndicated loan contracts in South Korea issued between 1996 and 2011. The results turned out marginally significant for the positive effect of family CEOs on the cost of borrowing, and significant for the negative effect for foreign ownership on the cost of borrowing. The interacting effect was not supported.