Founding Family Firms,CEO Incentive Pay,and Dual Agency Problems |
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| Authors: | Betty H.T. Wu |
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| Affiliation: | The authors thank George T. Solomon (the Editor), Marco Cucculelli (the Associate Editor), and in particular two anonymous referees for insightful comments and suggestions that substantially improved the article.Betty H.T. Wu is a lecturer in Accounting and Finance at the University of Glasgow Adam Smith Business School. |
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| 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. |
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