Agency Costs in Small Firms

Abstract

We explore how the separation between ownership and control affects firm productivity. Using administrative panel data on the universe of limited liability firms in Finland, we document a substantial increase in productivity when the CEO obtains majority ownership or when the majority owner becomes the CEO. We exploit plausibly exogenous variations to CEO turnover, induced by shocks to the CEO spouse's health. Extending the analysis beyond typical samples of large public firms, we show that our effects are stronger in medium-sized private firms. We also investigate possible mechanisms and provide suggestive evidence that increased ownership boosts CEO's effort at work.

Keywords: agency costs, firm productivity, CEO ownership

JEL Classification: G30, M12, D24, E23, L25