Do Family Firms’ Specific Governance Mechanisms Moderate the Cost of Debt? Antonio Dur ´ endez , Universidad Polit ´ ecnica de Cartagena Antonia Madrid-Guijarro , Universidad Polit ´ ecnica de Cartagena Gin ´ es Hern ´ andez-C ´ anovas , Universidad Polit ´ ecnica de Cartagena This study considers whether the specific governance mechanisms of Spanish family firms decrease their debt cost. We explore the idea of reducing debt costs through specific governance mechanisms of family firms, such as the business succession plan, the family council, as well as other traditional mechanisms like the board of directors. Because most corporate governance research has focused on larger firms, more research on smaller privately held family firms is necessary. For this empirical research, we used a sample of 281 small and medium- sized family firms. The results show that the implementation of a business succession plan not only serves to solve family conflicts and to plan the business succession but also moderates the cost of financing. Our results confirm that credit institutions receive a positive signal when family firms implement business succession plans as governance mechanisms, reducing both family opportunism and asymmetries of information, influencing risk analysts in their decision-making processes. F ew authors doubt that family businesses play a key role in generating wealth and employment, and that they are a type of company with a spe- cial idiosyncrasy (Klein et al. 2005). Awareness of this idiosyncrasy has led to the development of a recent but already well-established research field. Numerous previ- ous studies have shown that family businesses are very different from non-family ones. Family-company rela- tionships are the basis for a specific business culture with unique traits that involve a number of advantages over non-family businesses. Family firms differ from non- family ones in many respects, such as management style, decision-making process, size, chances of survival and profitability. In particular, Mishra et al. (2001) state that founding family controlled firms are more valuable and governed in a different way than firms without a family influence. There is a stream of research dealing with the fea- tures that characterise the financial structure of family businesses (Romano et al. 2000; Randoy and Goel 2003; Koropp et al. 2014; Lin and Shen 2015). Family firms have certain financial characteristics that make them different from non-family firms. In fact, they have their own hier- archy of preferences regarding financing (Hamilton and Fox 1998; Mishra and McConaughy 1999). Evidence has shown that family firms are generally more risk-averse in relation to external financing decisions. Therefore, these firms often choose a more restrictive dividend pol- icy, which promotes the retention of profits in favour of greater financial autonomy (Romano et al. 2000). Fur- thermore, family firms suffer less from agency costs be- cause both ownership and management are in the hands of the family (Howorth et al. 2004; Maury 2006). Anderson et al. (2003) reveal that founding family ownership is common in large, publicly traded firms, which is related to a lower cost of debt financing. These findings are further substantiated by other specific family firm characteristics. According to Chami (1999), found- ing families view their firms as an asset to bequeath to family members or their descendents, rather than as wealth to consume during one’s lifetime. Specifically, families’ interests rely on passing the firm as a going concern to their successors, rather than merely pass- ing on their wealth. Firm survival is thus an important concern for family businesses. Randøy and Goel (2003) and James (1999) identify that family values like trust and paternalism can encourage an atmosphere of com- mitment towards the company. However, as postulated by G ´ omez-Mej´ıa et al. (2001), Schulze et al. (2002) and Lubatkin et al. (2005), family firms are also characterised Correspondence: Antonia Madrid-Guijarro, Department of Ac- counting and Finance, Faculty of Business Studies, Universi- dad Polit ´ ecnica de Cartagena, Calle Real, 3, 30201 Cartagena, Spain. Tel: +34 968 325739; fax. +34 968 325782; email: antonia.madrid@upct.es Accepted for publication 17 October 2017. Australian Accounting Review No. 00 Vol. 00 Issue 0 2018 doi: 10.1111/auar.12217 1