Comparing the Agency Costs of Family and Non–Family Firms: Conceptual Issues and Exploratory Evidence

Abstract

Family involvement in a business has the potential to both increase and decrease financial performance due to agency costs. In this article we discuss the different nature of agency costs in family firms and specify the combination of conditions necessary to determine the relative levels of agency costs in family and non-family firms through the impacts of agency cost control mechanisms on performance. We also present exploratory results based on a study of 1,141 small privately held U.S. family and non-family firms that suggest the overall agency problem in family firms could be less serious than that in non-family firms.

Audit Quality: The Role of Board Structure in Family Firms

“…Concentrated ownership and owner-management would lead to a minimum or even zero level of agency costs between owners and managers (Jensen and Meckling, 1976;Fama and Jensen, 1983). Some studies by, e.g., Chrisman, Chua, and Litz (2004) suggest that agency problems are less severe in family firms than in non-family firms. The reasoning behind this argument is that family firms focus more on the firm's long-term survival, wishing to pass the firm onto their heirs, and good reputation, which is likely to promote trust in other stakeholders (James, 1999;Sirmon and Hitt, 2003).…”

The Benefits of Family Ownership, Control and Management on Financial Performance of Firms

“…Although there is a recent trend towards the micro-foundation of family firms (Carney 2005;Chrisman, Chua & Litz, 2004;Chua, Chrisman & Bergiel, 2009;Schulze, Lubatkin, Dino & Buchholtz, 2001;Schulze, Lubatkin, Dino, 2003a, b) our study cannot contribute to the discussion of how and why special forms of family agency create, maintain or destroy efficient monitoring behavior in family firms. While our research design has to treat this as a black box other researchers might use the essential component of family control as a lever to open this box.…”

“…What is the essence of 'essence'? This question is the basis of a relative recent research stream investigating family specific micro-foundation of agency and altruism at the interface of agency theory, strategic management and the resource based view (Carney 2005;Chrisman, Chua & Litz, 2004;Chua, Chrisman & Bergiel, 2009;Schulze, Lubatkin, Dino & Buchholtz, 2001;Schulze, Lubatkin, Dino, 2003a, b). Regarding the second question one could easily fall prey to the logical fallacy that empirical family business research has exactly done that.…”

“…Chaganti & Demanpour, 1991;Lauterbach & Vaninsky, 1999;McConaughy, Matthews & Fialko, 2001;Yammeesri & Lodh, 2004, Lehmann & Weigand, 2000. Other studies use ownership as a proxy for family involvement and are concerned with different types of management involvement and familiness like founder-and descendant CEOs, family members in (one-tier) board of directors and second level management, generational transfer, succession intention and self-perception as family firm (Athanassiou, Crittenden, Kelly & Marquéz, 2002;Chrisman, Chua & Litz, 2004;Chrisman, Chua & Steier, 2002;Daily & Near, 2000;Lee 2004Lee , 2006McConaughy, Walker, Henderson & Mishra, 1998;Zahra, 2003). While some studies fail to confirm the benefits of the separation of ownership and management (Coles, McWilliams & Sen, 2001) others like Anderson and Reeb (2003) found a positive impact.…”

Internationalisation of publicly traded family firms: a transaction cost theory perspective and longitudinal analysis

“…Third, rather than following a simplistic approach by investigating whether family firms internationalise more or less than non-family firms, we illustrate that the impact of family's involvement on internationalisation is a complex one with differential non-linear effects of family ownership and management/board involvement. In summary, we contribute to the literature by providing a TCT perspective into the emerging theory of the family firm (Chrisman, Chua and Litz, 2004;Chrisman Chua and Sharma, 2005;Chua, Chrisman and Sharma 1999).…”