Principal-principal Conflicts Research Articles

Blockholder heterogeneity and conflicts in cross-border acquisitions

We investigate the principal-principal (PP) conflicts between large blockholders in the context of cross-border acquisitions (CBAs). We focus on the conflicts between family blockholders and two groups of financial institutional investors – banks and mutual funds. We hypothesize that different types of blockholders have heterogeneous preferences with respect to the CBA decision and outcomes. We suggest that the PP conflicts in CBA differ across the blockholders. Banks are pressure sensitive and cooperative with the management because of their clientele relationship with firms, while mutual funds are subject to more financial scrutiny and independent from the management, making them pressure resistant. When in conflict with more powerful family blockholders, mutual funds will choose to exit after a CBA decision, whereas banks are more likely to stay. With an equally distributed voting power, family and mutual fund blockholders will be more motivated to monitor over each other and jointly discipline the management, leading to more careful selection of CBAs and higher overall shareholder value. However, such effects are weak in the case of family and banks. We find support for these conjectures using data on CBAs undertaken by US public firms over the period 2003–2016.

Family firm and analyst forecasts in an emerging economy

PurposeThe purpose of this paper is to examine how family firms affect analyst forecast dispersion, accuracy and optimism and how earnings smoothness as the moderating factor, affects these relationships in an emerging market context.Design/methodology/approachThis paper uses the population sample of firms listed on the Taiwan Stock Exchange from 2009 to 2010 as the research sample, which includes 963 firm-year observations.FindingsThe findings show that analysts following family firms are more likely to have more dispersed, less accurate and more optimism biased forecasts than those following nonfamily firms. Earning smoothness is mainly used by nonfamily firms as a signaling strategy to improve analyst forecast quality. In contrast, earnings smoothness is mainly used by families as a garbling strategy, stimulating forecast optimism. Only earnings smoothness in family firms with a high level of family ownership concentration is likely to be signaling-oriented to improve analyst forecast accuracy and mitigate analyst optimism biases.Originality/valueEmerging markets are not only featured by prevailing principal-principal conflicts but also have multiple levels of agency conflicts among large shareholders, minority shareholders and professionally hired managers. This research reveals the multiple governance roles of family owners in affecting analyst forecast quality, including their entrenchment role in extracting private benefits of control through opaque environments and market discipline distortion role in aligning interests between managers and families without prioritizing meeting or beating analyst forecasts, both at the cost of minority shareholders. This research further disentangles the intertwined signaling oriented and garbiling oriented incentives associated with earnings smoothness under family governance.

Principal-principal conflicts and family firm growth

PurposeDrawing on the principal-principal conflict and identity literatures, the purpose of this paper is to investigate the Agency Problem Type II-bis in the context of family business. Specifically, the authors hypothesize that the size of the family owner group is related to firm growth and that this relationship is moderated by the extent to which the family identifies with the firm.Design/methodology/approachThe hypotheses are tested on a sample of 265 medium and large German family firms (FFs) via moderated hierarchical regression analysis.FindingsThe main findings suggest that business family identity moderates the inverted U-shaped relationship between the size of the family owner group and firm growth in such a way that FFs with medium-sized family owner groups and high levels of business family identity reach higher firm growth.Practical implicationsIn the context of FFs fully owned by one family, family owners might have different strategic preferences, goals, and identities, thus potentially making them subject to the conflict that could arise among the different family owners in relation to growth expectations. Recognizing this problem could help family owners find potential solutions to ensure the well-being of both the family and the business.Originality/valueThe combination of family ownership structure and family ownership dynamics affects firm growth. Challenging the homogeneity of the family owner group, the authors highlight the role of Agency Problem Type II-bis in hindering growth of FFs. A finer-grained view of principal-principal conflicts in FFs is thus discussed.

The transformation of ownership structure and changes in principal-principal conflicts: evidence from corporate governance reforms in South Korea

The transformation of ownership structure and changes in principal-principal conflicts: evidence from corporate governance reforms in South Korea

The transformation of ownership structure and changes in principal-principal conflicts: evidence from corporate governance reforms in South Korea

The transformation of ownership structure and changes in principal-principal conflicts: evidence from corporate governance reforms in South Korea

Divergence or convergence: paradoxes in corporate governance?

Purpose– This review paper aims to compare the various dimensions in the finance literature pertaining to the Anglo-Saxon Model (Stockholder Model) prevalent in the USA and the UK with the German Model (Stakeholder Model) of corporate governance prevalent in Germany and continental Europe. The present study identifies different strands of research on the various dimensions of these models, along with aspects of governance in emerging economies and the phenomenon of the convergence of these governance mechanisms.Design/methodology/approach– The literature review on corporate governance models has been carried out on the themes of internal and external governance mechanisms. The review considers agency theory along with principal–principal (PP) conflicts as the fundamental blocks explaining the need for governance structures.Findings– The traditional models of governance, along with the incorporation of PP conflicts, will result in a hybrid model inculcating the best of both the traditional models. However, convergence in the true sense may not be possible owing to fundamental differences pertaining to cultural, economic, legal and socio-economic aspects of the firm.Originality/value– This paper proposes a framework incorporating the interplay of managerial talent and controlling shareholders to understand the governance system that may be applicable for firms in emerging economies.

How Board Faultlines Affect Board Effectiveness In Monitoring

Emerging economies suffer from severe principal-principal conflicts. Past studies usually focus on independent directors, and argue that the board of directors only plays negligible monitoring role...

Agent or structure for principal–principal conflicts? Audit firms versus foreign ownership in the Asian context

Drawing on Asian contexts of principal–principal (PP) conflicts, for example, influence from controlling families and low dividends, this study examines whether external audit is an effective disciplining agent in a firm’s tax avoidance, compared with foreign-ownership contexts. An analysis of 450 Korean firms indicates that the regulatory role of the ‘Big-4’ audit firms is negatively moderated by the controlling family, consequently increasing tax avoidance. In contrast, foreign ownership decreases tax avoidance, unaffected by the controlling family. It is therefore suggested that to control PP conflicts in Asian contexts, more attention should be paid to a firm’s ownership structure.

OWNERSHIP STRUCTURE AND DEBT AS CORPORATE GOVERNANCE MECHANISMS: AN EMPIRICAL ANALYSIS FOR SPANISH SMES

The purpose of this paper is to analyze the relationship between ownership structure and indebtedness for a sample of 2,544 Spanish small and medium enterprises. A System Generalized Method of Moments methodology is applied to control for the heterogeneity and endogeneity problems. The finding shows a negative effect of several measures of ownership on debt ratio. Therefore, the presence of an individual as main shareholder has a positive effect on debt, while the presence of a corporation as main shareholder exerts a negative influence. As research implications, this paper includes the agency problem based on principal-principal conflicts to explain the capital structure of small and medium enterprises, going beyond traditional principal-agent conflicts. The main practical implications of the paper is that owners who seek equity financing can use the results of this study for understanding better why investors are reluctant to invest in their small and medium enterprises. Policymakers can use the results of this study to develop better policies and to promote better provision of information for all stakeholders. About the contribution of this study, we are not aware of any paper that uses a panel of small and medium enterprises operating in a French-civil law country to examine the relationship between indebtedness and three different proxies of the ownership structure.

CEO duality, board independence, corporate governance and firm performance in family firms: Evidence from the manufacturing industry in Malaysia

In this study, we use the contestability exercised by non-dominant large shareholders to measure how internal governance mechanisms influence firm monitoring in a structure with multiple large shareholders. This extends knowledge of principal-principal conflicts and family business by introducing the moderating effects of Chief Executive Officer (CEO) duality and board independence. Using a sample of Malaysian manufacturing family firms, we find that non-dominant large shareholders rely on board independence to strengthen firm monitoring. However, family owners do not utilise CEO duality to weaken the monitoring of non-dominant large shareholders, even though they prioritise firm control to safeguard family interests.

Corporate Governance, Principal-Principal Agency Conflicts, And Disclosure

<p>This study investigates the relation between corporate governance and disclosure quality in a context of principal-principal conflicts and poor investor protection. Overall, the empirical results suggest that minority expropriation risk harms disclosure quality. Specifically, we find that disclosure quality is negatively associated with ownership concentration, major shareholder voting rights, the existence of double voting rights, and family control. The results obtained also evidence a positive relationship between disclosure quality and the existence of executive stock option plans giving support that this mechanism plays a key role in corporate transparency.</p>

Untangling Board Composition in Family Firms: Main Effects on Firm Performance

This article aims to clarify the still cryptic nexus existing between family involvement in the board of directors and firm performance. According to prior literature, it is not clear yet if a high family representation in the board is a counter-productive factor for organizational performance or not. Stemming from principal-principal conflict and faultline arguments, we try to shed new light on this aspect, bringing in the debate an unconventional classification of family board members (distinguishing between family directors working and not- working in the firm), in addition to the traditional dichotomous classification between family directors and non-family directors. Results coming from a unique sample of 421 Spanish privately- held family firms, suggest that while using conventional measures of family representation in boards (family directors versus non-family directors) there is an inverted U-shaped relationship between the presence of the family in the board and firm performance, when adopting a new standpoint (i.e., the ratio of family directors that also work in the firm) there is a U- shaped relationship between the level of this ratio and firm performance. We observed that the lowest performance is reached in presence of boards characterized by an equal representation of the two family sub-groups suggesting that principal-principal conflicts and factional faultlines are detrimental to firm performance.

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.

More than a Fair Share? Principal-Principal Conflicts in Emerging Markets: Evidence from India

The concentrated ownership structure of emerging market firms may help mitigate principal-agent conflicts; however, the presence of two sets of principals, promoters with controlling stake and dispersed shareholders, may give rise to principal-principal conflicts. India, where firms are largely organized as business groups, with stock pyramids and complex cross-ownership structures, presents a distinctive venue to study the presence of such conflicts. This paper tests if the principal-principal conflicts transpire in the form of risk aversion when Indian bidders seek to merge or acquire. We observe that Indian bidders resort to risk-aversion only when promoters have high cash flow rights, that is, when they hold a majority stake in the acquiring firm. We argue that in business group firms this happens due to ‘tunnelling distortion’, whereas in standalone firms, this occurs due to ‘portfolio concentration’.

Beyond External Constraints on Expropriation of Minority Investors: Preference Heterogeneity, Locus of Control and Firm Valuation

Contrary to previous research which focuses largely on external constraints on expropriation of minority investors, this paper investigates how psychological and socio-political factors affect principal-principal conflicts of interest in firms. We rely on preference heterogeneity and locus of control research to hypothesize about the impact of control types on firm valuation. Our empirical analysis shows that market participants perceive large shareholders’ preference heterogeneity and that control types represent discrete governance contexts with a unique set of conditions, each related to a different level of principal-principal conflicts of interest. We discuss the consequences thereof to minority investors. We conclude about the implications of our results for research on principal-principal conflicts of interests particularly from the point of view of contexts with a reasonable level of minority shareholder protection.

Exploring the Performance Implication of Multi-Agency Problems among Public Family Businesses

Despite the increased attention to professional management in family businesses, current research drawing on agency theory has largely focused on the principal-principal conflicts (P-P conflicts) in the study of family business performance. The influence of principal-agent conflicts (P-A conflicts) that arise from the involvement of professional management stays unclear. In this study, we apply a multi-agency perspective and propose that both agency problems are at play in family businesses. P-A conflicts will predominate when a firm has a low level of family ownership, and P-P conflicts will prevail in firms with dominant family ownership. As a result, there is an inverted U-shaped relationship between family ownership and firm performance. In addition, we investigate two major contingencies that moderate the curvilinear relationship: interest alignment mechanism and control mechanism. We propose that the inverted U-shaped relationship will be more salient with a higher level of professional manager owne...

Do market participants perceive blockholders’ power and preferences? Locus of control, preference heterogeneity, and firm valuation in the Swiss context

This study relies on preference heterogeneity and locus of control research to hypothesize about the impact of control types on firm valuation. We investigate whether market participants discriminate between control types when making investment decisions. Our empirical results of Swiss data suggest that control types represent discrete governance contexts with a unique set of conditions each related to a different level of principal-principal agency costs. Specifically, we find that firms with family ownership and professional management are valued more highly relative to other control configurations and that owners can use board and share structures to signal good governance. Our study thus provides support for a psychological and socio-political perspective of principal-principal conflicts of interests and expropriation of minority investors.

Informal institutions, shareholder coalitions, and principal–principal conflicts

How do informal institutions affect conflicts between controlling and minority shareholders, also known as principal–principal (PP) conflicts? The dominant formal institution-based view of corporate governance suggests that legal rules and regulations are crucial for the protection of shareholder rights. While this perspective has significantly advances our understanding of international corporate governance, we suggest that more attention to informal institutions may complement the formal approach. First, we utilize social identity theory to shed light on the formation of shareholder coalitions. Second, we draw on research involving informal institutions such as culture and trust to better understand PP conflicts. Overall, we extend the growing literature on PP conflicts by an explicit focus on informal institutions.

Ownership concentration and product innovation in Chinese private SMEs

Product innovation is extremely important to the growth, success, and ultimate survival of firms. Although its unique features in small and medium-sized enterprises (SMEs) have gained growing attention in the literature, there is limited knowledge as to how ownership concentration moderates the relationship between product innovation and its determinants. Based upon insights from agency and institutional theories, we examine the moderating effects of ownership concentration on the relationship between product innovation and its key determinants in Chinese SMEs, utilizing a large dataset of 43,728 Chinese firms over the period 2005–2006. We focus on examining the differences between single-owner SMEs, where there is dominant control of one family member, and multiple-owner SMEs, where principal-agent conflicts and principal-principal conflicts are more likely to occur. Our findings indicate that single-owned firms tend to convert research and development into product innovation more efficiently than firms with multiple owners, who are typically better at utilizing external sources of knowledge and human capital.

Do Principal-Principal or Principal-Agent Conflicts Impact the Performance of Islamic Banking?

Do principal-principal (PP) conflicts impact the performance of Islamic banking? Using panel data of 37 banks that adopt Islamic banking in ten countries, this paper investigates the existence of PP and PA conflicts to the impact of their performances. Little is known in the literature about these conflicts especially when the issue of PP has been argued as a major conflict and especially prevalent concern in emerging markets but ignored in the Islamic banking research. Results show that PA is the main concern with inconclusive results for PP conflicts.