Primary and Secondary Agency Conflicts in Family Firms: An Empirical Investigation
Saptarshi Purkayastha and Rajaram Veliyath Coles Working Paper Series, SPRING16-03, March 2016
Overview Dominant family ownership is expected to reduce the extent of Primary (Principal-Agent) Agency problems because of added monitoring efficiencies, while increasing Secondary (Principal-Principal) Agency problems because of the voting power and influence arising from concentrated family ownership. Separately, the extent of family’s management control of the firm could increase Primary Agency conflicts when family agents manage for the family’s benefit while ignoring the interests of other owners (principals). However, in this situation, Secondary Agency conflicts arising from the family’s ownership would not arise since the family has no dominant ownership position. The four governance contexts where these two types of Agency problems would vary were examined during the ten-year period from 2003 to 2012 in a sample of 1004 public Indian family businesses. Tentative support was found for the propositions that dominant family ownership reduced Primary Agency conflicts while concurrently increasing Secondary Agency conflicts. Likewise, dominant management control by family members could increase Primary Agency conflicts while not materially impacting Secondary Agency conflicts. Some of the counter-intuitive results may be because the paper isolated and examined only the family’s influence in the four identified governance contexts, without controlling for the potentially confounding influences of other dominant ownership blocks types.
26 | Coles Working Paper
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