Do Families Reduce or Raise Agency Conflicts? The Ratio of Board Control to Ownership

Abstract

Large family owners monitor managers, which attenuates principal-agent conflicts and improves firm performance. However, these owners can also appropriate resources, which creates principal-principal conflicts and harms firm performance. Although the two performance effects occur simultaneously, research does not explain when positive effects outweigh the negative. We theorize that family members must be involved to minimize principal-agent problems, but too much involvement creates principal-principal problems. Consistent with our theory, evidence from a panel of 667 publicly listed French firms from 2003 to 2007 shows an inverted U-shaped relationship between firm performance and the amount of family involvement relative to the family’s ownership stake. Our theory and findings help explain the heterogeneity of performance effects among family firms.