Are They All Alike? Heterogeneity of family owners’ goals and P-P agency costs in private firms

Agency theory suggests that ownership structure is a consistent predictor of principal-principal conflicts of interests, but the sole consideration of ownership concentration in predetermined classes of owners is not sufficient to capture the heterogeneity of incentives and goals that exists among individual firm owners. Thus, it is critical to take owners’ individual differences into consideration in order to understand how ownership structure shapes agency conflicts. We extend this thesis to the case of family owners, a widespread class of owners in private firms. Drawing on agency theory and the family business literature, we advocate that ownership gives families the power and discretion to dispose of firm resources, but such ability may result into different agency relationships depending on diverse family owners’ interests and goals. Accordingly, we formulate hypotheses that relate the level of family ownership, the saliency of economic or noneconomic goals to family owners, and principal-principal agency problems in the context of allocation of financial slack resources. Findings from Italian private firms show that financial slack has an inverted U- shaped relationship with firm profitability, and the moderation effect of family ownership is not significant. However, the relationship is moderated positively by the overlap between family and firm wealth, and negatively by the overlap between family and firm identity. Our results suggest that considering both the power and goals of owners is crucial to enhancing our understanding of principal-principal agency problems.