Essay Sample on Agency Theory and Family Firms

Introduction

Agency theory is applied in businesses to enable people to understand the issues of asymmetric information, uncertainty, incentive usability, as well as identification of risks when making business decisions. The theory emphasizes contractual problems between the owner of a firm and the agents who control how resources are used. Because of the differences in the preferences of consumers, separation of ownership and control can lead to agency costs. In essence, this comes about due to the need to align the interests of different people through contractual solutions (Villalonga et al., 2015). Usually, the management and ownership of family firms are aligned in the same family. The alignment may make family firms to avoid agency costs. However, family-related issues may complicate the structure of preferences of individuals.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

Through agency theory, family firms would understand various aspects of the behavior of actors in the firms. Agency costs tend to moderate the manner in which entrepreneurial attitudes affect the performance of family businesses (Pukall & Calabro, 2014). The relationship between the owners of firms and their managers need to reflect efficient information organization and the costs to deal with threats and risks. The agency theory uses the assumptions that people are always self-interested in acting rationally. As such, individuals aim at avoiding risks when they take particular decisions to promote their businesses. When family firms experience information asymmetries, various other problems may arise. These include moral hazard and adverse selection (Moss, Payne, & Moore, 2014). Moral hazard will arise when the business agent is not in any way directly threatened by the potential losses whereas adverse selection entails sub-optimal agent selection resulting from the limited transparency of interests. Due to agency theory, family businesses would be aggressive towards opportunities in the marketplace and their competitors.

Concisely, agency theory may have some weaknesses when applied to family firms. The major weakness is limited measurability of the theory. In essence, the measuring items used only focus on indirect variables that serve as potential agency cost sources (Villalonga et al., 2015). In the family firms, it is difficult to measure preferences caused by relational motives, as well as to quantify the costs caused. The preferences change based on the situation hence making it challenging to assign to the effects on performance.

Additionally, preferences are related to individual behaviors within families and social groups. As such, the socially oriented family firms may benefit from the agency theory. The opportunities brought forth by this theory can help in the development of incentives and monitoring mechanisms, which will consequently reduce agency costs (Moss et al., 2014). When monitoring mechanisms are incorporated, it would be easy to solve the problem of asymmetric information. In this manner, the financial performance of the family firms.

Conclusion

In conclusion, contractual mechanisms like employment contracts can be improved depending on the usefulness of incentives to the family members. The improvements will enhance the reduction of agency costs and increase the professionalization and efficiency of organizations for the family firms. Agency theory can be used to analyze problems and quantify costs that arise from complex firm structures.

References

Moss, T. W., Payne, G. T., & Moore, C. B. (2014). Strategic consistency of exploration and exploitation in family businesses. Family Business Review, 27(1), 51-71.

Pukall, T. J., & Calabro, A. (2014). The internationalization of family firms: A critical review and integrative model. Family Business Review, 27(2), 103-125.

Villalonga, B., Amit, R., Trujillo, M. A., & Guzman, A. (2015). Governance of family firms. Annual Review of Financial Economics, 7, 635-654.