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Does owner management necessarily eliminate the agency costs of ownership? Drawing on agency literature and on the economic theory of the household, we argue that private ownership and owner management expose privately held, owner-managed firms to agency threats ignored by Jensen's and Meckling's (1976) agency model. Private ownership and owner management not only reduce the effectiveness of external control mechanisms, they also expose firms to a "self-control" problem created by incentives that cause owners to take actions which "harm themselves as well as those around them" (Jensen 1994, p. 43). Thus, shareholders have incentive to invest resources in curbing both managerial and owner opportunism. We extend this thesis to the domain of the family firm. After developing hypotheses which describe how family dynamics and, specifically, altruism, exacerbate agency problems experienced by these privately held, owner-managed firms, we use data obtained from a large-scale survey of family businesses to field test our hypotheses and find evidence which suggests support for our proposed theory. Finally, we discuss the implications of our theory for research on family and other types of privately held, owner-managed firms.
(Agency Theory, Altruism; Privately-Owned Firms; Family Business)
The authors have conducted the kind of research here that we all reach for but too often fail to grasp. That is, this study of the governance of family firms is theoretically rich and practically relevant. Our colleagues have pressed the limits of agency theory to explore the control of owners' opportunistic behavior, behavior that interestingly just might be rooted in an altruistic impulse. They have done this by empirically examining privately-held, family-managed firms. While such firms embody the dominant form of organization in the world today, they are very underrepresented in our study of organization and management. This research simultaneously advances our understanding of agency theory and draws much needed attention to these kinds of firms. Spend some time with this paper. I think you will be glad that you did.
James Walsh
Must privately held, family-managed firms (henceforth, family firms) offer pay incentives and use other formal governance mechanisms to mitigate agency threats to their performance? There are no clear empirical or theoretical answers to this question, largely because family firms have been virtually overlooked in the mainstream economic and management journals.1...