The Influence of Large Stake Family Control on Performance: Is It Agency or Entrenchment?

Abstract

Agency theory posits that the greater degree of control by those with decisionmaking authority, the greater the overall organizational performance. Conversely, entrenchment theory implies that at extremely high levels of inside control by those with decision authority, organizational performance decreases. Using a nationwide sample of 2,631 privately held and publically traded family businesses, we examined if the relationship of percent family ownership is an agency or entrenchment relationship and found the latter. Specifically, there was a statistically significant negative relationship between percent of family control and sales growth as well as a strong inverse relationship between percent of family controlling the top management team and all measures of financial performance.

The impact of family CEO’s ownership and the moderating effect of the second largest owner in private family firms

“…First, entrenchment describes a situation where insiders (e.g., family CEOs) incur additional costs by implementing strategies that deviate from valueenhancing strategies. The degree of entrenchment is positively associated with the The impact of family CEO's ownership and the moderating… level of ownership (Eddleston et al 2008;Osward et al 2009). A substantial ownership stake of family CEOs is likely to induce entrenchment behavior, which is spurred further by a failing market disciplinary function associated with private ownership.…”

Social networking in family businesses in a local economy

“…A distinct preference for operating in an area where those in control of the day-to-day operation also had decision making authority links to agency theory (Oswald et al, 2009) but was perceived here as a lifestyle choice, which it was assumed would also benefit business performance. Further, there is awareness within the family of issues surrounding the need to resist market control and to build private sources of capital, customers and support (Ng and Keasey, 2010).…”

The Role of Corporate Governance in the Effect Earnings Management Has on Firm Value

“…In the companies with highly concentrated levels of ownership, the agency conflict might occur between the controlling shareholder and the noncontrolling shareholders (Almeida and Wolfenzon 2006;Claessens et al, 1999;Giovannini, 2010;La Porta et al, 1999;Morck and Yeung, 2003;Oswald et al, 2009;Villalonga and Amit, 2006). This agency conflict is known as a Type II agency conflict.…”