The Agency Problem And Performance Of Family Firms

The economic landscape of most nations remains dominated by family firms. Therefore, it is fitting that academia has begun to recognize the importance of family business studies. The field has gathered considerable momentum, particularly since 1990'. To avoid re-inventing the wheel, theoretical research in family business has, as it should, concentrated on applying mainstream theories of the firm to explain how the family business may be different from the non-family business. In terms of research output and potential explanatory power, one of the most important methods is agency theory.The idea that a manager who does not own a business is unlikely to be as diligent as an owner can be traced back to Adam Smith (1796). Berle & Means (1932) extend this idea and propose that a manager will pursue his/her own interest rather than that of the owner. Ross (1973) presents a mathematical formulation of this situation and called it the principal-agent problem. Jensen & Meckling (1976) apply this to the capital structure decision of the firm and coin the phrase"agency costs"to include all actions by managers that contravene the interests of the owners plus all activities, incentives, policies, and structures used by the firm to align the interests and actions of the agent with the interests of the owners.To this, La Porta, Claessens, Faccio et al. add the agency problem between the majority and minority shareholders. As they predict, for family firms, the classic owner-manager conflict described by Berle and Means (1932) or Jensen and Meckling (1976) (to which we shall refer as"Agency Problem I") is mitigated due to the large shareholder's greater incentives to monitor the manager. However, a second type of conflict appears ("Agency Problem II"): The large shareholder may use its controlling position in the firm to extract private benefits at the expense of the small shareholders, which are likely to lead Agency Problem II to overshadow Agency Problem I. However, this proposition may not in the same as Chinese family firms mainly for three reasons: first, the agency relationship between family firms and professional managers is severe, due to the failure of market and institution. Secondly, with the profound influence of traditional culture, the agency relationship among family members is more obvious than in other countries. Finally, there have been few years since family firms enter capital market, so the content and degree of Agency Problem II may be different in our country.To settle this problem, the thesis has constructed a general kind of analysis framework for agency problems in family firms. Based on this framework, the thesis examines Agency Problem I (including two levels) and Agency Problem II in terms of 254 family public listed companies. The reason that we choose public listed companies as research objects is that its information is more available and precise than other forms of corporation. At last, the thesis gives conclusions for the whole research, and advises about corporate governance. Furthermore, the thesis mentions some important topics for future research.Compared with present studies, the thesis has four different characters. First, the thesis complements the application of agency theory to family firms, especially in the discussion for the principle-agency relationships among the family, which is the often neglected by mainstream researchers. Moreover, by the means of the theory of behavioral economics and domestic economics, the thesis found that the altruism and founder effect are attribute to this kind of agency problems mostly. Secondly, the thesis analyses the relationship among different kind of agency problems, which is not the same as conclusions dwawn by La Porta et al. (1999). Thirdly, the thesis describes three types of family firms, according to the different influence of family involvement and family controlling pattern. So we can learn more about the heterogeneity of family firms, and get better explanations to causes of agency problems. Finally, the thesis exams family effect on firm performance by using the data of 2006, which has update and expanded the present research.The thesis has applied three kinds of research method, normative study, empirical study, and case study. In normative study, the thesis answers why the agency problems occur and how they influence the performance. In empirical study, the thesis examines hypothesis which are drawn from normative study. In case study, the thesis describes the agency relationships that cannot be computed in empirical study.As the conclusion, the thesis mentions these main points. Firstly, it is not fitting to apply family management in family listed company. The higher the degree that family member involving in management, the lower the performance may be, which means altruism is unfavorable to family firms. However, founder effect can improve firm performance obviously.Secondly, we haven't found enough evidence that the separate of cash flow right and control right will destroy firm value, and the pyramid construction manifests both tunneling and popping function.Thirdly, family firm governance is still to be improved. Compensation incentive and equity incentive are the main mothed to settle the agency problem between shareholders and managers, which have been examed in our research. However, the functions of board governance and independent directors are not obviours.Fourthly, ownership concentration is higher in family firms, which has not inluenced performance indirectly. But family shareholders do little on agency cost controlling. In the meanwhile, the incentive effect of top management owning shareholders is not obvious. The strength balance between the first and the second shareholder is beneficial to firm performance.Finaly, according to whether the founder involves in and whether the family use pyramid construction, family firms can be classified three types. They have obvious difference in performance, governance, and agency problems. On the foundation of this conclusion, the administration departments can make more effective policies.