Work

Higher agency costs in smaller firms? The role of size and reporting requirements in agency conflicts

Year: 2024

Type: article

Abstract: Our paper investigates vertical agency conflicts that result from the separation of ownership and control in privately held firms. Vertical agency conflicts can lead to vertical agency costs resulting from bonding costs, monitoring costs, and residual losses. More specifically, we focus on the roles of firm size and corporate reporting requirements in the level of these costs. We demonstrate that vertical agency costs are higher in smaller, privately held firms because shareholders have less monitoring capacity and limited access to the labor market. Furthermore, vertical agency costs in smaller firms are amplified in countries characterized by relatively weaker reporting requirements because shareholders have less information available to assess managers' actions. We suggest for the first time that firm size and strength of auditing and reporting requirements are essential to understanding agency costs' magnitude in privately held firms. Our analysis also offers a more comprehensive understanding of the factors that explain agency costs in privately held firms. Thus, this study poses important implications for public policy, as disclosure requirements are a major issue for many countries.

Source: European Management Review

DOI: 10.1111/emre.12645

Authors: Pauline Johannes, Vivien Lefebvre

Institutions: EM Strasbourg Business School, Université de Strasbourg

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: hybrid

Estimated APC paid: $3,190