AMP Bridging Finance and Behavioral Scholarship on Agent Risk Sharing and Risk Taking

A large volume of research has examined agent risk taking and the contracting problem of risk sharing – the sharing of performance risk across agent and principal – to advance our knowledge of mechanisms that can align the assumed divergent interests and risk preferences of the managerial-agent and shareholder-principal. This research has been undertaken in two research streams that appear to have operated in silos, utilizing different theoretical frameworks and methodological approaches: financial economics and behavioral science. We review the theoretical paradigms and empirical findings deriving from both fields in order to identify opportunities for cross-fertilization and to advance future research in both streams. We also make an assessment of how the combined research efforts of finance and behavioral scholars has progressed in developing our understanding of agent risk taking and mechanisms for achieving agent-principal incentive alignment. Finally, we discuss how this research has influenced the corporate world for better or for worse

Family Control, Socioemotional Wealth and Earnings Management in Publicly Traded Firms

We examine the unique nature of agency problems within publicly traded family firms by investigating the earnings management decision of dominant family owners relative to non-family. To do so, we draw upon literature demonstrating that family owners are loss averse with respect to the family’s socioemotional wealth (SEW), or the affective endowment derived from firm ownership and control. Our theory and findings suggest that potential reputational consequences of earnings management lead family principals to engage in less of this practice relative to non-family firms, and that founder family firms are less likely than non-founder family firms to use earnings management. Moreover, the family firm effect varies with firm size, the degree of CEO entrenchment, and the firm’s stock structure. We provide important insights regarding differences between family and non-family principals in the use of unethical accounting practices, thereby extending agency theory and advancing an under-developed research area

Conflict Between Controlling Family Owners and Minority Shareholders: Much Ado About Nothing

We examine the unique nature of conflict between controlling family owners and minority shareholders (principal-principal conflict) in publicly traded family controlled firms through examining shareholder proposals. Implicit in prior governance and family business research has been that non-family shareholders are likely to be in conflict with the dominant family owners. In general, we find that much of this fear may be unwarranted except under specific circumstances. Our findings elucidate sources of heterogeneity in family firm principal-principal conflict and add greater nuance to our understanding of this type of agency problem within family firms