Vertical and Horizontal Agency Problems in Private Firms: Ownership Structure and Operating Performance

Journal of Financial and Quantitative Analysis (Forthcoming)

49 Pages Posted: 20 Mar 2012 Last revised: 16 Apr 2021

See all articles by Sridhar Gogineni

Sridhar Gogineni

The University of Tampa - John H. Sykes College of Business

Scott C. Linn

University of Oklahoma - Michael F. Price College of Business

Pradeep K. Yadav

University of Oklahoma Price College of Business

Date Written: October 31, 2020

Abstract


We investigate how ownership structure influences operating performance and implied agency costs using multi-year data on over 42,000 firms, covering the full spectrum of ownership and management arrangements ranging from owner or non-owner managed single or multiple-owner private firms, through to widely held publicly traded corporations. We document several new results of considerable economic significance. First, overall horizontal agency costs arising from unequal ownership within private firms dominate vertical agency costs arising from separation of ownership and control. Second, the joint presence of both horizontal and vertical agency problems in the same firm amplifies these costs. Third, the presence of a second large shareholder greatly mitigates horizontal agency costs. Fourth, complexity in ownership structure created by corporate co-ownership increases agency costs. Fifth, publicly traded firms have higher agency costs relative to comparable private firms. Finally, back-of-the-envelope estimates of the annual loss of aggregate earnings and incremental operating expenses potentially associated with agency problems across the overall economy are over 3% and 5% of GDP respectively.

Keywords: Agency problems, Control, Horizontal agency costs, Management structure, Ownership structure, Private companies, Vertical agency costs

JEL Classification: G34, L25

Suggested Citation

Gogineni, Sridhar and Linn, Scott C. and Yadav, Pradeep K., Vertical and Horizontal Agency Problems in Private Firms: Ownership Structure and Operating Performance (October 31, 2020). Journal of Financial and Quantitative Analysis (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2024597 or http://dx.doi.org/10.2139/ssrn.2024597

Sridhar Gogineni

The University of Tampa - John H. Sykes College of Business ( email )

401 W. Kennedy Blvd.
Tampa, FL 33606-1490
United States
8132533163 (Phone)

Scott C. Linn

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States
405-325-3444 (Phone)
405-325-1957 (Fax)

Pradeep K. Yadav (Contact Author)

University of Oklahoma Price College of Business ( email )

307 W.Brooks, Room 205A Division of Finance
Norman, OK 73019
United States
4053256640 (Phone)
4053255491 (Fax)

HOME PAGE: http://www.ou.edu/price/finance/faculty/pradeep_yadav.html

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