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...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. This is one of the first studies examining influences of CO-OM in small business debt financing, especially using Canadian data, and we highlight the difference between CO-OM effects in small businesses and those in large public companies under agency theory. Anderson, Mansi, and Reeb (2003) examine the effects of family ownership and management, which can be considered a special case of CO-OM, on debt financing of large, publicly listed companies, but they do not highlight the difference between family firms and those with CO-OM. As concluded by Chua, Chrisman, and Sharma (1999), intention for succession is one of the critical factors differentiating one from the other. Though Brau (2002) finds no effect in small business borrowing on the agency costs between owners and managers, his analysis does not deal with different kinds of empirical problems. In the current study, we clarify some of the measurement issues in small business debt financing, such as the stepwise relationship among measures for the accessibility and the separation of supply-binding debt financing from demand-binding one. Moreover, a new powerful methodology is introduced to finance research to deal with various potential biases, including sample selection bias, endogeneity and simultaneity problems, which cannot be completely corrected by traditional econometric methods.
This paper is structured as follows: the second section introduces the theory and background supporting the current research, and proposes two hypotheses. Data, variables and methodologies are described in third section, followed by the fourth section, which presents and discusses the results. Conclusions are made in last section.
Theoretical Background and Hypotheses
Two topics relating to this study have been studied extensively. The first, ownership structure and managerial organization have been shown to be of importance to the shareholder-creditor agency conflict in the corporate governance literature (for example, Shleifer and Vishny 1997). As shown by Anderson, Mansi, and Reeb (2003), founding family ownership, which is a type of concentrated ownership, can better assure creditors of getting return from their investments, whereas family management, a type of owner-management, may generate more serious monitoring problems between creditors and shareholders than other organizational structures because of severe informational asymmetry problems. Thus, solving owner-manager agency conflict should be able to mitigate the shareholder-creditor agency conflict, at least in large, publicly traded companies. Second, debt financing has received considerable attention from financial economists (see Harris and Raviv 1991). Agency theory has developed considerably in its application to the borrower-lender relationship since the seminal work by Smith and Warner (1979) and the follow-up by Smith and Weiss (1981), and monitoring, screening and signalling have been proposed by prior research to deal with informational asymmetry problems between lenders and borrowers.
Though how solutions to owner-manager agency conflicts affect the shareholder-creditor agency conflicts in small firms has not been well addressed (Shleifer and Vishny 1997; Harris and Raviv 1991), the literature has identified three significant differences between debt financing of SMEs and that of large public companies. First, though large public companies are able to access various resources for debt financing, SMEs tend to use short-term debt financing from commercial lenders, especially institutional lenders...
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