Exploring the Agency Consequences of Ownership Dispersion Among the Directors of Private Family Firms.

Abstract

Using an agency-theoretic lens and insights drawn from the behavioral economics and family business literatures, we developed hypotheses concerning the effect of dispersion of ownership on the use of debt by private family-owned and family-managed firms. A field study of 1,464 family firms was conducted. Results suggest that, during periods of market growth, the relationship between the use of debt and the dispersion of ownership among directors at family firms can be graphed as a U-shaped curve. The principal-agent model has had a profound influence on corporate governance theory (Jensen, 1998). A central premise of this theory is that management decisions are strongly influenced by the ownership status of each decision maker who serves on a corporation's board of directors. The agency positions of outside owners and ownermanagers differ. Outside owners prefer growthoriented risk taking because they benefit solely from the appreciation of shareholder value. They are also indifferent to the level of risk that is specific to any particular investment made by a given firm because they can reduce that risk by holding diversified portfolios. Owners who manage a private firm, in contrast, define its value in terms of utility, and so they will undertake risks that are commensurate with their preferences for certain outcomes. These outcomes not only include financial and nonfinancial benefits, but also include the utility generated by the ability to exercise authority, dictate strategy, and choose which investments the firm will undertake.

Capital Structure Determinants in Family Firms: An Empirical Analysis in Context of Crisis

“…Instead, when family owners are not involved in management, they may prefer to increase debt to reduce manager's opportunistic behaviors (Stulz, 1988). However, recent research has shown that family involvement in the business many lead to other kinds of agency problem Chrisman et al, 2004;Schulze et al, 2001Schulze et al, , 2003aSchulze et al, , 2003bVillalonga & Amit, 2006) engendered by self-control and altruism (Lubatkin et al, 2005). In addition, Blanco-Mazagatos et al, (2007) shows that family involvement across generations may determine agency conflicts which may influence family firm's capital structure choices.…”

Traditional Governance and Innovative Strategies in Italian Family SMEs: Evidence from Tuscany

“…Furthermore, all of the choices concerning the governance structure seem to diverge from prescriptions and suggestions expressed by the mainstream theory (Schwartz & Barnes, 1991;Schulze et al, 2003). Although literature emphasizes the role of non-family members in seizing environmental opportunities, developing a better awareness of the company's challenges, and, ultimately, in fostering innovation, our analysis suggests that the different approaches to innovation are not the result of any specific choice as regards the presence of non-family members in the Board.…”

“…Outsiders can promote a better awareness of managerial issues, they can provide alternative information, experience, perspectives, and they can develop a greater ability to interpret changes in the environment (Schulze, Lubatkin, & Dino, 2003;Bammens, Voordeckers &Van Gils, 2011). Moreover, they can contribute to resolving internal conflicts and to achieving consensus within the BoD (Bammens et al, 2011).…”

“…At the same time, a low propensity for and unwillingness to take risks, the overlap of family ownership and control (Schulze et al, 2003), as well as the desire to not open management to non-family members are factors that can exert a braking force on the decision to undertake innovation pathways (Chrisman et al, 2015). By leveraging mainly on internal resources, family SMEs limit their interactions with the outside environment, a source of new knowledge, information, and ideas.…”

Family Firms and Productivity: The Role of Institutional Quality

“…In attempts to understand this rapport, scholars have drawn on a range of theories such as agency theory (Schulze, Lubatkin, Dino, & Buchholtz, 2001;Schulze, Lubatkin, & Dino, 2003), stewardship theory (Miller, Breton-Miller, & Scholnick, 2008) and the resource-based view of the firm (Habbershon & Williams, 1999;Sirmon & Hitt, 2003) and each has revealed evidence of both benefits and costs of family involvement.…”