Founding Family Firms, CEO Incentive Pay, and Dual Agency Problems

27 Pages Posted: 26 Sep 2016

See all articles by Mieszko Mazur

Mieszko Mazur

Catholic University of Lille - IESEG School of Management

Betty H.T. Wu

University of Glasgow Adam Smith Business School

Date Written: October 2016

Abstract

This paper contributes to the literature on agency theory by examining relations between family involvement and CEO compensation. Using a panel of 362 small U.S. listed firms, we analyze how founding families influence firm performance through option portfolio price sensitivity. Consistent with the dual agency framework, we find that family firms have lower CEO incentive pay, which is further reduced by higher executive ownership. Interestingly, such incentive pay offsets the positive impact that families have on firm valuation. Collectively, our results show that, compared with nonfamily firms, lower incentive pay adopted by family firms due to lower agency costs mitigates the direct effect of family involvement on firm performance. Once accounting for CEO incentive pay, we do not observe performance differences between family and nonfamily firms.

Suggested Citation

Mazur, Mieszko and Wu, Betty H.T., Founding Family Firms, CEO Incentive Pay, and Dual Agency Problems (October 2016). Journal of Small Business Management, Vol. 54, Issue 4, pp. 1099-1125, 2016. Available at SSRN: https://ssrn.com/abstract=2842870 or http://dx.doi.org/10.1111/jsbm.12237

Mieszko Mazur (Contact Author)

Catholic University of Lille - IESEG School of Management ( email )

3 Rue de la Digue
Office: A321
Puteaux, 92800
France

Betty H.T. Wu

University of Glasgow Adam Smith Business School ( email )

Glasgow, Scotland
United Kingdom

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