Financial Interlocks and the Cost of Debt in a Setting with Concentrated Family Ownership

Abstract

We investigate the role of board directors from financial institutions (financial interlocks) on the relationship between ownership structure and the cost of debt. In Italy, ownership is largely concentrated often in families, and financial institutions are the primary source of funding for firms. These characteristics offer a context to examine debt-equity agency conflicts and whether having direct internal monitoring channels such as financial interlocks reduces a firm’s cost of debt. We show that while concentrated ownership has an increasing effect on the cost of debt, financial interlocks moderate this relationship. Further, we find that financial interlocks act as an even more important tool in mitigating the agency cost of debt in cases of family ownership. Our results are robust to a set of firm-specific characteristics and support the idea that financial interlocks provide firms with a monitoring device that could resolve some of the debt-equity agency conflicts.