Abstract
This paper aims to investigate the choice of governance modes in Chinese family firms. For that purpose, we build a principal-agent model to conduct our analyses. There are two modes of governance that the owner of the family firm can choose from, either the relational governance or the professional governance. The choice of governance modes is embodied in managerial compensation under different contractual arrangements. Our theoretical analyses show that under some conditions it is optimal for the owner to choose the relational governance, while under other conditions it is optimal for the owner to adopt the professional governance. That is to say, the choice of governance modes is condition-dependent.
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