Abstract

Using a sample of listed companies in the U.S. between 2007 and 2016, we explore the joint effects of executive inside debt (EID) and family involvement on the cost of bank loans. The empirical results indicate that the mitigating effect of EID on the cost of bank loans is less pronounced in family firms than in their non-family counterparts. We also document that (1) the mitigating effect of EID on the cost of bank loans is strengthened when a firm’s performance is lower than its aspiration level and (2) the moderating effect of family involvement is significant when firm performance is above its aspiration level. Collectively, our findings support the behavioral agency prediction that family involvement shapes firms’ risk-taking preference, which acts as a substitute for EID in decreasing the cost of debt.