Title: Closely held family business agency costs between owners

Authors: Nirosha Hewa Wellalage; Stuart Locke

Addresses: Department of Finance, Waikato Management School, The University of Waikato, Private Bag 3105, Hamilton 3240, New Zealand ' Department of Finance, Waikato Management School, The University of Waikato, Private Bag 3105, Hamilton 3240, New Zealand

Abstract: This paper investigates the relationship between corporate governance mechanisms and principal-principal (PP) agency conflict in Sri Lankan listed family firms. In many countries, the family business sector is seen as a means of rejuvenating the economy and developing sustainable growth. A dynamic modelling framework, which controls for potential endogeneity, is used to investigate 120 family firms and 90 non-family firms from 2006 to 2014. Similar to prior studies, this study reflects deeply on the idea of PP agency conflict between majority and minority shareholders for family firms in emerging economies. This study employed four board characteristics and found large boards with non-executive directors and family leadership increase PP conflict in Sri Lankan listed family firms. Overall results indicate that traditional corporate governance mechanisms cannot mitigate PP agency conflict in family firms in emerging markets. There is strong evidence supporting a need for promulgating and streamlining of corporate laws, in emerging markets, to reduce the possibility of expropriation of minority shareholders by owners of politically powered family firms.

Keywords: corporate governance; emerging markets; family firms; principal-principal agency costs; family business; Sri Lanka; dynamic modelling; agency conflict; majority shareholders; minority shareholders; board characteristics; non-executive directors; family leadership.

DOI: 10.1504/IJCG.2016.082347

International Journal of Corporate Governance, 2016 Vol.7 No.4, pp.287 - 305

Received: 04 Jul 2016
Accepted: 17 Nov 2016

Published online: 17 Feb 2017 *

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