The effect of intrafamily agency conflicts on audit demand in private family firms: The moderating role of the board of directors

Abstract

While the value of external audits was long considered to be minimal for private family firms, some exceptional studies indicate that external audits are demanded by these firms to reduce the agency conflicts between family and non-family members. Using a sample of Belgian private family firms, this study empirically shows that (high quality) auditors are also hired to mitigate agency conflicts among family members. Since these intrafamily conflicts are mainly based on emotions instead of economically rational behavior and are therefore difficult to grasp by compositional proxies, they are identified by the level of family cohesion. Moreover, this study shows that the monitoring effectiveness of the board of directors weakens the association between the level of intrafamily agency conflicts and audit (quality) demand, indicating that the audit demand effect of intrafamily agency conflicts decreases when family firms are able to reduce the related agency costs internally.

Tracing the Roots of Constructive Conflict Management in Family Firms

“…On the one hand, high levels of family firm cohesion may evolve into poor-quality decisions because of groupthink (Kidwell et al, 2012). On the other hand, lower levels of cohesion are associated with more conflicts between owners and managers (Corten, Steijvers, & Lybaert, 2017). Hence, the structural dimension of collaborative familiness will be evidenced in moderated levels of cohesion and adaptability (Nos e et al, 2017), which leads to the following proposition.…”

“…On the one hand, high levels of family firm cohesion may evolve into poor‐quality decisions because of groupthink (Kidwell et al., ). On the other hand, lower levels of cohesion are associated with more conflicts between owners and managers (Corten, Steijvers, & Lybaert, ). Hence, the structural dimension of collaborative familiness will be evidenced in moderated levels of cohesion and adaptability (Nosé et al., ), which leads to the following proposition.

Proposition 2: The structural dimension of collaborative familiness leads family members to conceive their relationships as a mutual benefit, and consequently to maintain open‐minded debates to manage their conflicts constructively.

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Did the global financial crisis impact firms' innovation performance? The role of internal and external knowledge capabilities in high and low tech industries

“…This interpretation is further confirmed by Figures 2a and 2c, which graphically represent the marginal effects of R&D intensity on firm innovation performance for the two levels of the financial crisis variable (i.e., pre-crisis and crisis period). This type of graph, usually used to examine interaction effects (e.g., Barasa et al, 2017;Kingsley et al, 2017), allows us to correctly interpret the interaction effect in more detail (Corten et al, 2017). The marginal effects, illustrated by the solid lines, were calculated following Corten et al, (2017) procedure.…”

Monitor or Advise? How Family Involvement Affects Supervisory Board Roles in Family Firms

“…In this line, Desender et al (2013) find a positive relationship between dispersed firm ownership and the monitoring function of boards (measured as external auditing fees contracted by the board). Corten et al (2017) show that, if the level of family cohesion declines (which is the case with an increasing number of owning family branches), auditing demand is lower, when boards of directors are effective in their monitoring tasks. To summarize, a higher number of owning family branches may generally lead to a divergence of interest among owners and provides the breeding ground for multiple conflicts.…”