Altruism as an influence on agency costs and risk-taking in the family business: Some special cases

There is little formal modeling of the family firm in the finance literature. In this study, the family firm is differentiated from the public, non-family firm in the finance literature by five critical attributes: (1) family members own the firm together; (2) family members are involved in the management of the business such that the firm is mainly characterized by a joint production function of the family members' work efforts; (3) the family members may be altruistic toward each other; (4) family members expect to inherit ownership of the firm; and (5) family business owners are risk averse because they are not well-diversified. This research focuses on the influence of altruism on agency cost and risk-taking in family firms. Abstracting from information asymmetry, analytical results were obtained for special cases on how altruism on the part of the parent can cause adverse selection, free riding, and shirking problems. Results also show how altruism on the part of the kids can, in some cases, exacerbate the problems and, in others, mitigate the problems.