Journal of Business Research 153 (2022) 285–299

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Journal of Business Research

journal homepage: www.elsevier.com/locate/jbusres

Type I and type II agency conflicts in family firms: An

empirical investigation☆
Saptarshi Purkayastha a, Rajaram Veliyath b, *, Rejie George c
a
Indian Institute of Management Calcutta, India
b
Kennesaw State University, United States
c
Indian Institute of Management Bangalore, India

A R T I C L E I N F O A B S T R A C T

Keywords: Dominant family control reduces Type I agency conflicts because of monitoring efficiencies, while increasing
Family business Type II agency conflicts because of the family’s voting power. Additionally, Type II agency conflicts could be
Type I agency conflicts exacerbated if the family agents managed the firm solely for the family’s benefit. The two different types of
Type II agency conflicts
agency conflicts were examined in a sample of 499 public Indian family businesses during the years 2006 to
2015. Family-controlled and non-family-managed firms appeared to be optimally configured to minimize both
types of agency conflicts. The absence of management control appeared to alleviate some of the dissipative
agency conflict effects of dominant family ownership.

1. Introduction
Type I (i.e., principal-agent) and type II (i.e., principal-principal)1
are the two most common types of agency conflicts discussed in the
literature. Left uncontrolled, both these types of conflicts harm firm
performance. Their presence increases the cost of capital for the firm,
thereby negatively affecting firm performance and decreasing overall
returns for shareholders. These two types of agency conflict are
interlinked and co-dependent. Sometimes, remedial measures adopted
to reduce type I agency conflicts—such as increasing the extent of
concentrated (or block) shareholding in the firm, vesting management
with more stock (in the form of grants or options) to motivate them to
think and act like shareholders, and some other governance measures
for directors intended to ensure board independence (Sauerwald,
Ooosterhout, & Van Essen, 2016)—occasionally have the unintended
concurrent effect of increasing type II agency conflicts. Therefore, it is
imperative that we consider both types of agency conflicts together
when investigating the methods to ameliorate their combined
dissipative impacts. For academic researchers, it is critically important
to comprehensively consider all the variables that might affect a
phenomenon of interest (such as the combined effects of changes on
both types of agency conflicts together, and their respective impacts on
shareholder returns, in this case) in order to preemptively avoid an
incomplete or mis-specified model and erroneous conclusions. Work­
ing with incomplete or flawed research models can lead to spurious
findings. Likewise, from a managerial viewpoint, the consequence of
omitted variables might lead to erroneous inferences that when
employed to make decisions about governance structures, might be
counterproductive (or even harmful) to the firm when implemented.
Barring limited exceptions (Renders & Gaeremynck, 2012; Sutton,
Veliyath, Pieper, Hair, & Caylor, 2018; Villalonga & Amit, 2006), no
previous studies have systematically attempted to directly measure
the extent of both Type I and Type II conflicts prevalent in different
types of family-owned and -controlled firms. Prior research (Barclay
& Holderness, 1989; Barclay, Holderness, & Pontiff, 1993; Filatotchev
& Wright, 2011; Harford, Jenter, & Li, 2007; Sauerwald, Heugens,
Turtureac, & Van Essen, 2019) has also not adequately examined the
existence of both these types of conflicts simultaneously under the
varying governance combinations of ownership and management
control using validated measures. Earlier, Purkayastha, Veliyath and
George (2019) examined the performance implications (i.e., effects on
firm valuations) of Type I and Type II (i.e., PA and PP) agency

☆
The authors gratefully acknowledge the helpful comments of the Handling Editor and multiple anonymous referees on earlier drafts. Rejie George thanks the IIMB
Chair of Excellence for funding.
* Corresponding author.
E-mail addresses: saptarshi@iimcal.ac.in (S. Purkayastha), rveliyat@kennesaw.edu (R. Veliyath), rejieg@iimb.ernet.in (R. George).
1
We use Type I Agency or Principal Agent or PA conflicts and Type II Agency or Principal-Principal or PP conflicts interchangeably in this paper as the extant
literature has referred to these agency issues using these terminologies while describing the same underlying phenomena.

https://doi.org/10.1016/j.jbusres.2022.07.054
Received 13 October 2019; Received in revised form 21 July 2022; Accepted 25 July 2022
Available online 29 August 2022
0148-2963/© 2022 Elsevier Inc. All rights reserved.
S. Purkayastha et al.
conflicts in family firms, with different configurations of family
ownership and family management. In comparison, the present work
directly assesses the presence/extent of these two types of agency
conflicts prevalent in these family firms. It therefore provides more
direct insights on how the governance mechanisms of firms operating
in underdeveloped institutional contexts can be configured to
simultaneously minimize the dissipative effects of both these two
types of agency conflicts. Additionally, by assessing the relative
degrees of Type I and Type II agency conflicts engendered by each of
these sub-categories of governance mechanisms, we provide novel
insights into the optimal configurations of ownership and
management structures that could be adopted by family firms under
different circumstances.
Prior research has not exhaustively examined the consequences of
heterogeneity in internal governance mechanisms and their implications
for the existence and covariation of both types of agency conflicts (Type
I and Type II). We propose that in emerging market contexts where the
external institutional environment is characterized by the presence of
institutional voids, internal governance mechanisms serve as substitutes
to enable the establishment of the ‘rules of the game’, and thereby help
guide and motivate managerial behavior. Research conducted in
developing country contexts has uncovered those differences in
ownership types (like public sector government ownership,
multinational ownership, family ownership and institutional
ownership) may differently impact both Type I as well as Type II agency
conflicts (Dharwadkar, Goranova, Brandes, & Khan, 2008; Purkayastha
et al., 2019). More specifically, in the case of family firms, which are the
focus of our paper, the combination of a family’s concentrated
ownership position along with the family’s management control of the
firm could have important and different resulting impacts on Type I and
Type II agency conflicts (e.g., Singla, Veliyath, & George, 2014;
Villalonga & Amit, 2006). The nature of the differential impacts of these
governance mechanisms acting in concert and their implications for
optimally minimizing the negative impacts of both types of agency
conflicts have been inadequately examined (Purkayastha et al., 2019;
Villalonga & Amit, 2006). Our theoretical formulation subscribes to the
‘strategic choice’ perspective (Child, 1972). The research question is:
What strategic choices involving governance mechanisms intended to
minimize agency conflicts can firms make, that help to differentiate the firm
from its peers embedded in similar less-developed institutional environments?
It therefore represents a significant departure from the more
deterministic institution-based models that have traditionally been
adopted when examining such phenomena.
We rely on precepts from agency theory and from corporate
governance research to investigate this research question. The study was
conducted on a sample of 499 Indian family business firms listed on two
of India’s major stock exchanges (i.e., Bombay Stock Exchange, National
Stock Exchange), in the 10-year time frame between the years 2006 and
2015. The data was sourced from the Prowess database and the India
Boards database. We drew on a rigorous classificatory scheme developed
in prior research (Anderson & Reeb, 2003; Singla et al., 2014), where we
classified our sample of family business firms into four groups,
categorized based on the extent of the family’s ownership control and
managerial control, the two operative governance mechanisms that we
examine in this study. We used panel regressions to test our hypotheses.
In addition, we conducted several additional statistical tests to establish
the reliability of our construct measures and the validity of our findings.
As expected, we found that an increase in the family’s ownership
control reduced the extent of type I (principal-agent) agency conflicts
(while the absence of family ownership control enhanced type I agency
conflicts). However, such an increase in family ownership control led to
heightened type II agency conflicts. This effect was amplified when the
family’s ownership control was reinforced by the family also having
management control. Separating family ownership from family
management (such as in the case of family-owned non-family-managed
firms) enabled the firm to moderate the extent of type II agency conflicts,
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Journal of Business Research 153 (2022) 285–299
while also keeping Type I agency conflicts under control. This gover­
nance configuration kept in check the extent of type II agency conflicts
that characteristically arise when the family also has management
control. The concentrated family ownership, to a degree, also curtailed
the counterproductive effects of enhanced type II agency conflicts that
could possibly be created by other types of dominant ownership blocks,
through active monitoring by the family ownership group. This active
monitoring led to better oversight and instituted a set of checks and
balances among dominant blockholder categories that are ownership
characteristics of firms in emerging economies. Overall, it appeared that
the optimal governance configuration that simultaneously reduced the
effects of both Type I and Type II agency conflicts (among all the
considered governance configurations) is the one represented by the
family-controlled and non-family-managed (FCNFM) firm.
The paper is organized as follows. The next section provides brief
reviews of the extant literature on type 1 and type II agency conflicts, the
private benefits of control research from where type II agency conflicts
originate, the type I and type II agency conflicts (as well as the private
benefits of control) that arise in firms with family ownership and family
management control, a brief description of how we derived the four
governance categories of family business firms that we investigate,
followed by the hypotheses section. The methods section describes the
country context, the study sample, the operationalization of all of the
study’s variables (independent, dependent and control variables), and
the analytical techniques employed. This is followed by a discussion of
the results (along with robustness checks), and the discussion and
conclusions section. Finally, the limitations section documents some of
the weaknesses in the study that should be addressed in future work.
2. Theoretical background
2.1. Type I (principal-agent) agency or PA conflicts
Type I agency conflicts arise because widely dispersed shareholders
are unable to monitor and control the activities of opportunistic agents
(i.e., managers). Managers can benefit through outsized increases in
their compensation triggered by increased firm size (Baker & Hall, 2004;
Geiger & Cashen, 2007; Wright, Knoll, & Elenkov, 2002) and from
reductions in their employment risks (Rajgopal, Shevlin, & Zamora,
2006). In addition, managerial entrenchment makes it difficult to
replace managers, thus creating added costs. Entrenched managers are
able to make specific investments that render their expertise
indispensable and reduce their personal risks at shareholder expense
(Shleifer & Vishny, 1989), to choose capital structures that alleviates the
pressure from creditors (Berger, Ofek, & Yermack, 1997), and to
establish anti-takeover mechanisms (Bebchuk, Cohen, & Farrell, 2009;
Gompers, Ishii, & Metrick, 2003) that shield them from the discipline
imposed by the external capital markets for corporate control.
Solutions to Type I agency problems that have been suggested have
included increasing ownership concentration (La Porta, Lopez-de-
Silanes, Shleifer, & Vishny, 2000; Miller & Le Breton-Miller, 2006),
tailoring employment contracts for the top management teams
(Carpenter & Sanders, 2002), implementing optimal compensation
structures, configuring board composition and structure to ensure board
and director independence (Kang, Cheng, & Gray, 2007; Lefort & Urzua,
2008; Liu, Miletkov, Wei, & Yang, 2015), issuing shares to management
personnel (agents) to align their goals with those of the principals (Chu,
2011; Singla et al., 2014), and splitting the two roles of CEO and
chairperson of the board (Ramaswamy, Veliyath, & Gomes, 2000;
Tuggle, Sirmon, Reutzel, & Bierman, 2010; Veliyath & Ramaswamy,
2000).
2.2. Type II (principal-principal) agency or PP conflicts
Unfortunately, some of the remedies suggested to reduce Type I
agency conflicts exacerbate the other type of agency conflict, i.e., Type
S. Purkayastha et al.
II agency conflict (Sauerwald et al., 2016). Type II agency conflicts
arise because the interests of the dominant shareholder groups may
diverge from those of other shareholders on a variety of dimensions.
These dimensions include their views on the professionalization of
management, the strategic choices of the firm involving risk-taking,
acquisitions and diversification, international expansion, capital
structure, and R&D investments, as well as the adoption of corporate
governance practices that shape the role of the board and its
relationships with other stakeholders (Faccio, Lang, & Young, 2001;
Filatotchev & Wright, 2011; Harford et al., 2007; Young, Peng, Ahl­
strom, Bruton, & Jiang, 2008). When such choices are made primarily
to protect the dominant shareholders’ interests, those choices may not
support value-maximization economic outcomes that equitably benefit
all shareholders (Holderness, 2003). Influential principals such as
family owners can also usurp value (from the minority shareholders)
through tunneling, asset stripping, related-party transactions, or
through other diversionary tactics (Bae, Kang, & Kim, 2002; Bertrand,
Mehta, & Mullainathan, 2002; Durnev & Kim, 2005; Faccio et al.,
2001). Additionally, family owners could pursue non-pecuniary goals
such as protecting their socio-emotional wealth (Gomez-Mejia, Cruz,
Berrone, De Castro, 2011).
2.3. Private benefits of control
Firms with dominant ownership groups (like family firms) experience
costs arising from Type II (i.e., principal-principal) agency conflicts that
arise from allowing the dominant shareholder groups to exercise private
benefits of control (PBC) (Barclay & Holderness, 1989; Faccio et al., 2001;
Gugler & Yurtoglu, 2003). Though commonly considered as costs borne by
minority shareholders, PBC can sometimes also result in shared benefits
that accrue to all shareholders through the dominant shareholder groups’
provision of the benefits of control, resource provision, and strategy
implementation (Sauerwald et al., 2019). While PBC compensates
dominant shareholders for their efforts in monitoring and controlling the
firm (Gilson & Gordon, 2013; Gilson & Schwartz, 2013), their active
monitoring also helps to dissuade other influential stakeholders such as
employees, managers, or activist shareholders from usurping private
benefits for themselves. The costs of this monitoring to the controlling
shareholder are compensated by the presence of PBC benefits, which
makes it attractive for them to advise management on strategic options
(Cheffins & Armour, 2012), advocate for uncertain and/or risky projects
(Chang, 2003), and provide access to rare goods and services (Inoue,
Lazzarini, & Musacchio, 2013). Although the returns from such efforts
largely accrue to the controlling shareholders, to some extent, minority
shareholders also benefit from them because the performance of the firm
increases as a consequence of better monitoring.
Moreover, while the existence of PBC incentivizes controlling
shareholders in terms of the recognition of their efforts, the fraction of
future surpluses from better monitoring also accrue to minority
shareholders (Baron & Ensley, 2006; Shane & Venkataraman, 2000).
Some PBC benefits may be nonpecuniary, such as the visibility
accruing from managing a reputable and large organization (David,
O’Brien, Yoshikawa, & Delios, 2010), while others may be pecuniary in
nature, such as the ability to appropriate larger payments for the
benefit of the controlling shareholders (Gilson & Schwartz, 2013).
2.4. The benefits and costs of family ownership and management arising
from Type I, Type II agency conflicts, and PBC
A family-owned firm is one where the family has a dominant or
controlling shareholding in the firm. In contrast, a family-managed firm
is one where a member of or descendants of the founding family, or
agents affiliated with the family control and operate the firm. The
ownership influence and management control acting in unison
strengthen the family’s ability to influence firm decisions (Singla et al.,
2014; Villalonga & Amit, 2006). Managerial entrenchment is reduced in
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family firms since ownership and control are unified. Likewise, mana­
gerial opportunism (Eisenhardt, 1989) and incomplete contracts
(Shleifer & Vishny, 1997) are also minimized because of ties associated
with the family identity and kinship (Berrone, Cruz, & Gomez-Mejia,
2012). This combination of governance characteristics ensures goal
compatibility and congruence between the majority owners and the
managers, thereby reducing Type I agency conflicts (Cordeiro, Veliyath,
& Romal, 2007; Hillman & Dalziel, 2003; Tuggle et al., 2010).
However, dominant family ownership when accompanied by man­
agement control by the family could create several other problems. It
offers the potential for enhancing Type II agency conflicts (Bertrand
et al., 2002; Villalonga & Amit, 2006). This is especially the case when
the family’s goals (some of which are non-pecuniary in nature) and in­
terests are not congruent with the wealth-maximization needs of the
firm’s other minority shareholders (Berrone, Cruz, Gomez-Mejia, &
Larraza-Kintana, 2010). Type II agency conflicts (and resultant costs)
increase when the family’s preferences are prioritized over those of the
firm’s other shareholders (Chrisman, Chua, Kellermanns, & Chang,
2007; Gomez-Mejia, Haynes, Nunez-Nickel, & Moyano-Fuentes, 2007;
Kim & Gao, 2013; Mazzola, Sciascia, & Kellermanns, 2013; Miller, Le
Breton-Miller, & Scholnick, 2008).
In such a scenario, capital markets are likely to take note of these
latent conflicts and either increase the firm’s cost of capital or deduct
from the value of the firm (Gilson, 2006; Johnson, La Porta, Lopez-de-
Silanes, & Shleifer, 2000). Additionally, the mixed ownership can
generate Type II agency costs if the family uses its influence arising from
dominant ownership to usurp value from minority shareholders (Young
et al., 2008). Type II agency costs may arise when dominant owners
transfer resources by subsidizing personal loans and by providing higher
compensation for family executives, or through the approval of addi­
tional perks for the supervisory roles that family managers perform (Li &
Qian, 2013; Ward & Filatotchev, 2010). Despite this risk of expropria­
tion by the dominant owners, there may be a positive side of Type II
agency conflicts emanating from PBC. PBC may be considered partly
beneficial to minority shareholders since they are the ‘price’ they pay to
ensure the smooth functioning of the firm (Sauerwald et al., 2019). PBC
could also be manifested through the firms’ engagement in suitable
entrepreneurial activities (Baron & Ensley, 2006).
To contextually represent the situations that represent the intersec­
tion of the two different dimensions of ownership control and man­
agement control, we created a 2 × 2 matrix. The family’s ownership
control is one governance dimension and the family’s dominance (and
level of input) into management decisions (leading to executive control)
is the second (orthogonal) governance dimension. These four contextual
situations would differently affect the extent of Type I agency as well as
Type II agency conflicts (and costs) arising in the firm. The four contexts
are visually shown in Fig. 1.
In Fig. 1, Quadrant 1 is the baseline (for reasons we explain later).
The four resulting contexts would be: Non-Family-Controlled and
Family-Managed firms (NFCFM) in Quadrant 1; Family-Controlled and
Family-Managed firms (FCFM) in Quadrant 2; Family-Controlled and
Non-Family-Managed firms (FCNFM) in Quadrant 3; and finally, Non-
Family-Controlled and Non-Family-Managed firms (NFCNFM) in
Quadrant 4 of Fig. 1. We first explain the attributes of the baseline firms
(Quadrant 1), and then subsequently, we derive our hypotheses based on
these varied governance contexts.
3. Hypotheses
3.1. Baseline: Non-family-controlled family-managed (NFCFM) firms
(Quadrant 1)
In Quadrant 1, among NFCFM firms, the family may not have a
dominant ownership position. The prevalence of this type of firm that is
non-family-controlled (i.e., the family having no concentrated owner­
ship) combined with family management is unusual and may represent a
S. Purkayastha et al.
Fig. 1. A 2 × 2 matrix visualizing the context of interaction between the di­
mensions of family ownership and family management control.
transitional organizational form where a previously family-controlled
firm is in the process of gradually moving towards becoming widely
owned and professionally managed for a variety of reasons (Chang &
Shim, 2015). Alternatively, the family could be in the process of
acquiring control over a firm that was previously not family-owned (by
first obtaining management control). Or this firm might be a division in
a business group holding structure controlled by the family at the
corporate level (where the individual business units or divisions are
independent legally constituted business entities). In this type of firm,
because the family lacks dominant ownership, monitoring efficiencies
(over the agents) are absent (as also is the possibility of exercising PBC).
Such conditions could provide scope for opportunistic, self-dealing be­
haviors by the family-affiliated agents (which could penalize share­
holders). Due to information asymmetries and divergence of
shareholders’ interests, these family managers could also pursue their
own idiosyncratic interests to the detriment of the broader group of
shareholders. This might exacerbate Type I (PA) agency conflicts.
Alternatively, since the agents (i.e., management) are family mem­
bers (or are family-affiliated), they may sometimes still be inclined to
manage the firm for the benefit of the (minority) family shareholders.
The incentive for managers at the strategic apex of the firm to behave
opportunistically by consuming non-pecuniary benefits or misallocating
resources at the expense of shareholders decreases with increasing
family involvement in management (De Massis, Kotlar, Campopiano, &
Cassia, 2015). Chrisman et al. (2007) also propose that these family
agents reduce the need for monitoring, thereby providing efficiencies
that ultimately enhance firm performance. Given this multitude of
contravening and interacting effects in play, we posit that those
opportunistic family agent behaviors could be mitigated by the adoption
of stewardship attitudes by family agents along with the relative absence
of PBC issues. Thus, Type I (PA) Agency conflicts are neither higher nor
lower among NFCFM firms.
As explained, in Quadrant 1 NFCFM firms, the family does not have a
dominant or controlling ownership stake. This reduces the opportunities
for them to exercise PBC and misappropriate wealth to enrich them­
selves at other shareholders’ expense (Anderson & Reeb, 2003; Gomez-
Mejia et al., 2011). Moreover, the family managers in charge might act
as true stewards who willingly forgo higher compensation because their
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interests are aligned with those of the firm (Neckebrouck, Schultze, &
Zellweger, 2018). Forbearance with regard to their compensation along
with identification, pride, and the fulfillment of their higher-order needs
might motivate them to improve the collective welfare of all organiza­
tional stakeholders, including that of the family owners. The ability of
the family to pursue socioemotional wealth by exercising the family’s
ownership influence (Chang & Shim, 2015) is also limited. This gover­
nance setting would serve to neutralize the Type I agency conflicts (as
described earlier) and would have no impact on Type II agency conflicts.
Therefore, we propose that the governance structure in NFCFM firms
predicates no additional Type II agency conflicts. Consequently, Type II
agency conflicts will remain unchanged among NFCFM firms.
Since these NFCFM firms (in Quadrant 1 of Fig. 1a) represent a
baseline categorization where no significant increases (or decreases) in
both types of agency conflicts are expected, we do not propose formal
hypotheses for this category of firms.
3.2. Family-controlled and family-managed (FCFM) firms (Quadrant 2)
In Quadrant 2, among FCFM firms, the family’s block ownership and
dominance ensure monitoring efficiencies, which reduce the scope for
managers to display opportunistic behaviors that benefit them while
detracting from the goal of wealth maximization for the firm’s share­
holders. In addition, since the agents (i.e., managers) are concurrently
also family members (or family-affiliated individuals), these agents’
interests and decisions are closely aligned with the interests of the
dominant shareholder group (the family in this case; see Miller & Le-
Breton Miller, 2006; Miller, Minichilli, & Corbetta, 2013).
This governance configuration also reinforces and maximizes op­
portunities to exploit PBC. The stewardship literature argues that family
managers may act as stewards by subordinating their personal goals to
the family’s goals along non-financial dimensions such as the preser­
vation of family values, safeguarding the family’s social capital and
socio-emotional wealth, and maintaining family control of the firm
(Chrisman et al., 2007; Corbetta & Salvato, 2004; Davis, Schoorman, &
Donaldson, 1997). Family managers’ commitment to the business along
with their understanding of the intricacies of the business creates social
and human capital (Dyer, 2006: Kowalewski, Talavera, & Stetsyuk,
2010). A sense of identification with the business, kinship obligations,
and other sources of personal and social fulfillment of family managers
may facilitate stewardship behaviors that protect the well-being of the
business (Miller et al., 2008). Because of the power and influence
resulting from these two separate governance components of ownership
and management control, the family also has the ability to overtly in­
fluence the agent’s actions. The cumulative effect when both these in­
fluences are combined is an alignment of the interests of shareholders
and managers, resulting in a reduction in Type I agency conflicts.
Therefore, we anticipate that Type I agency conflicts in FCFM firms will
be lower compared with our baseline group discussed earlier, i.e.,
NFCFM firms. Consequently,
H1: Type I agency conflicts among Family-Controlled Family-Managed
(FCFM) firms will be lower compared to those among Non-Family-Controlled
Family-Managed (NFCFM) firms.
However, among these FCFM firms in Quadrant 2, the co-alignment
in the goals and preferences of the dominant family shareholder group
and those of their affiliated agents (managers) can create a powerful
nexus, where the dominant family shareholders have both the owner­
ship (voting) influence as well as the management control to exercise
PBC and steer the firm towards making decisions that benefit only them
to the exclusion of minority shareholders. This combination might not
present a problem if the goals and interests of the family owners are
congruent with those of the firm’s other minority shareholders.
However, concentrated family owners could be myopic and risk-
averse (De Massis et al., 2015). They might attribute lower valuations
to uncertain cash flows. This could result in inappropriate investment
decisions that avoid risky long-terms investments such as
S. Purkayastha et al.
internationalization or diversification (Shleifer & Vishny, 1986) and
cause sub-optimal investments in areas such as R&D that could be
beneficial for long-term shareholder value creation (Carney, Duran, Van
Essen, & Shapiro, 2017). Additionally, if the family managers (i.e.,
agents) focused exclusively on goals and outcomes that enhanced
family-centered socio-emotional wealth generation while being diver­
gent from the goals of other minority shareholders, Type II agency
conflicts would arise (Chrisman et al., 2007; Corbetta & Salvato, 2004;
Miller et al., 2013), resulting in the inferior performance of these firms.
The cost resulting from lower performance caused by the firm not
pursuing optimal strategic options is borne primarily by minority, non-
family shareholders (one of the negative consequences of PBC). Family
owners offset these losses by retaining family control over the firm and
by preserving the family’s socio-emotional wealth and social capital. For
example, altruistic families may employ less-qualified family members
in management, which can cause resentment among non-family man­
agers and reduce their motivation (Martin, Gomez-Mejia, & Wiseman,
2013; Sciascia & Mazzola, 2008). This might also cause these non-family
agents to not exert commensurate effort, with consequent negative ef­
fects on firm performance (Chua, Chrisman, & Bergiel, 2009). Further,
the desire among family managers to accommodate the views of other
family members may also lead to the insufficient examination of alter­
natives. Dissenters may be ostracized from the family. The extreme
involvement of family members in top management teams might result
in a limited consideration of diverse inputs and perspectives that are
needed for higher quality decisions (De Massis et al., 2015).
In totality, the firm’s decisions that are undertaken to benefit the
family’s interests may not necessarily benefit the residual group of mi­
nority shareholders. This sub-optimization of shareholder wealth is also
often accompanied by opportunities for the family group to misappro­
priate wealth (in pecuniary or non-pecuniary ways), thereby creating
Type II agency conflicts between them and other minority shareholders
in the firm. Overall, this governance context accentuates the costs
(rather than shared benefits) arising from PBC. Therefore, these Type II
agency conflicts for FCFM firms will be higher compared with our
baseline group (considered earlier), i.e., NFCFM firms.
Consequently,
H2: Type II agency conflicts in Family-Controlled and Family-Managed
(FCFM) firms will be higher compared to those in Non-Family-Controlled
Family-Managed (NFCFM) firms.
3.3. Family-controlled and non-family-managed (FCNFM) firms
(Quadrant 3)
Per agency theory, concentrated ownership leads to enhanced
monitoring of managers, causing a reduction in Type I conflicts
(Anderson & Reeb, 2003; Cordeiro et al., 2007; Miller & Le Breton-
Miller, 2006; Tuggle et al., 2010). Ownership by the family provides
benefits through the family owners’ (i.e., principals) ability to more
effectively monitor management (i.e., agents). This ensures that the
agents do not display shareholder value-destroying opportunistic, self-
serving behaviors (Anderson & Reeb, 2003; Gomez-Mejia et al., 2011;
Morck, Shleifer, & Vishny, 1988; Shleifer & Vishny, 1989). Consequent
to the diligent monitoring by family owners (Cordeiro et al., 2007;
Hillman & Dalziel, 2003; Tuggle et al., 2010), previous studies have
noted a reduction in Type I conflicts stemming from an increase in the
family’s dominant ownership position in the firm.
However, since the family owners do not have their affiliated agents
in management positions in the firm, it somewhat limits their ability to
directly influence and curb the unaffiliated non-family agents’ oppor­
tunistic behaviors. One solution would be to actively monitor those
managerial behaviors that are observable and to ensure incentive
alignment (to the extent possible) between the preferences of the man­
agers and those of the family owners (Chrisman et al., 2007). Alterna­
tively, the adverse selection and moral hazard agency issues arising from
asymmetric information (that afflict all firms alike) might also affect
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family-owned firms who recruit professional non-family managers
(Chua et al., 2009). Lower ability and self-interest among non-family
agents arising from adverse selection and moral hazard might enhance
their ability to optimize their own utility by either choosing more leisure
or by working less efficiently (op. cit.). Such tendencies on the part of the
hired agents increase monitoring costs for the family owners. On the
other hand, the firm’s professional (non-family) managers (Patel &
Chrisman, 2014) could facilitate greater transparency in the information
and communication channels between the firm’s management and its
board. This reduces the potential for information asymmetries among
board members of the firm (Filatotchev, Zhang, & Piesse, 2011). Family
firms could also safeguard their wealth by limiting the agency costs of
appointing non-family managers, mainly through more active
monitoring.
Overall, the combination of these circumstances creates a situational
context that helps to restrict Type I agency conflicts. Therefore, these
Type I conflicts for FCNFM firms will be lower compared with our
baseline group, i.e., NFCFM firms. Consequently,
H3: Type I agency conflicts among Family-Controlled Non-Family-
Managed (FCNFM) firms will be lower compared to those among Non-
Family-Controlled Family-Managed (NFCFM) firms.
Among FCNFM firms in Quadrant 3, the dominant ownership stake
of the family offers opportunities for them to influence the firm’s de­
cisions such that the family benefits (in pecuniary or non-pecuniary
ways). If the family’s interests are not congruent with the wealth-
maximization preferences of the firm’s other minority shareholders (as
well as other blockholders), the potential to enhance type II (principal-
principal) agency conflicts (and costs) arises. The divergence of the
family’s interests from those of other shareholders could arise from
unique family values, the need for the preservation of the family dy­
nasty, the need to conserve the family’s social capital, altruism, and the
family’s desire to protect its socio-emotional wealth (Gomez-Mejia et al.,
2011). Moreover, the continued pursuance of family-centered non-eco­
nomic goals might also limit the ability to attract high quality non-
family managers (Chrisman, Memili, & Mishra, 2014). Additionally,
from a stagnation perspective, family-owned businesses are sometimes
prone to being sentimental, conflict-ridden, resource-starved, and sub­
ject to cronyism, all of which result in slow growth and reduced
longevity (Miller et al., 2008).
However, because non-family managers are at the helm, the lack of
management control and consequent inability to push through the
family’s private agenda may limit opportunities for exercising PBC to
the detriment of minority shareholders. Importantly, this constraint
hinders the family’s ability to misappropriate shareholder wealth
unrestrictedly (Sauerwald et al., 2019). Professional non-family man­
agers might be sensitive to reputational risks (Bednar, Love, & Kraatz,
2015). Managerial decisions could be perceived as ‘self-serving’ if they
were motivated by and aligned with the interests of certain influential
blockholders (such as the family). Dominant equity holdings by a family
could facilitate the expropriation of wealth from minority shareholders
(Dalton, Hitt, Certo, & Dalton, 2007; Villalonga & Amit, 2006). Man­
agers who succumb to the temptation of ‘going along’ with the dominant
family’s wishes might find themselves running afoul of the desires of
other influential blockholder groups (such as mutual funds, pension
funds, public sector investors, corporates), in addition to sacrificing the
value-maximization interests of minority shareholders. Additionally,
public companies are also answerable to the interests of other powerful
(non-shareholder) stakeholder groups, whose competing claims on the
firm must be considered and weighted in corporate decisions (op. cit.).
Differing attributions of managerial motivations are made by individual
stakeholder groups based on their idiosyncratic proclivities and prefer­
ences (Bednar et al., 2015). These attributions could impact individual
managerial reputations depending on whether they are perceived as
being ‘self-serving’ (or otherwise). A negative or less-than-favorable
attribution can adversely impact managerial reputations (op. cit.).
Therefore, managers are sensitive to these negative attributions, since
S. Purkayastha et al.
they can likely result in a decrease in the managers’ human capital in the
external labor market (Bednar et al., 2015). Potentially, there could also
be negative career consequences for the individual manager. Thus, these
non-family professional managers whose human capital (as well as
financial capital) is closely tied to the firm are likely to be more risk-
averse compared to shareholders (and other stakeholder groups) who
are more risk-neutral (Beatty & Zajac, 1994; Dalton et al., 2007).
Consequently, they are also more likely to chart a path more indepen­
dent of the family’s preferences compared to a family-affiliated man­
ager. This would likely result in a decreased scope for Type II conflicts to
manifest in such firms.
The combination of these contravening effects—one created by the
family’s dominant ownership position leading to increased scope for
Type II (i.e., PP) conflicts, and the other created by the absence of
management control for the family owners, thereby curbing the family’s
ability to opportunistically implement its private agenda—leads overall
to a decreased scope for Type II conflicts to manifest. This decreased
scope for Type II conflicts stems largely from the that fact that, while the
dominant owners can articulate their wishes, it is important to recognize
important constraints associated with executing those choices, which
may have to be implemented without the acquiescence of accommo­
dating and willing agents.2 This combination of opposing forces leading
to an increased or a decreased scope for Type II conflicts among FCNFM
firms presents an inability to conjecture the overriding discernible ef­
fects in terms of one effect significantly outweighing the other effect as
far as the manifestation of Type II agency conflicts is concerned.
Therefore, we propose that in this scenario, there will be no significant
increase or decrease in Type II agency conflicts. Consequently, we do not
anticipate that Type II agency conflicts among FCNFM firms are likely to
be either greater or lesser compared with our baseline group, i.e.,
NFCFM firms.
Consequently,
H4: Type II agency conflicts among Family-Controlled Non-Family-
Managed (FCNFM) firms will be neither higher nor lower compared to those
among Non-Family-Controlled Family-Managed (NFCFM) firms.
3.4. Non-family-controlled, non-family-managed (NFCNFM) firms
(Quadrant 4)
The NFCNFM group (in Quadrant 4) represents a category of firms
where there is no possibility of overt influence from the family, exer­
cised either through the family having a controlling (or dominant)
ownership stake or alternatively, through having their family members
(or family affiliates) managing the firm. Since the family has no
dominant ownership, they are unable to vigilantly monitor and regu­
late the agents’ action with maximal efficacy. Principal-agent conflicts
abound in such firms where owners are fragmented, widely dispersed,
and uninvolved, and where day-to-day control of the firm’s operations
are in the hands of managers (Eisenhardt, 1989; Fama, 1980; Fama &
Jensen, 1983; Hillman & Dalziel, 2003; Jensen & Meckling, 1976). The
possibility of both moral hazard and adverse selection problems arising
(characteristics of Type I agency conflicts) is high in this setting.
Consequently, among these Quadrant 4 firms, the governance context
represents a situation that is devoid of (or has minimal) family
2
This is in contrast to the Type I agency literature, where the agent is typi­
cally central to the emergence of that type of (i.e., principal-agent) agency
conflict. Our understanding is that barring a very few exceptions (e.g., Villa­
longa & Amit, 2006), the Type II Agency literature has largely glossed over the
role of the agent as a critical instrument in implementing the choices and de­
sires of dominant ownership groups (for example, the family). We believe this
omission in not recognizing the role of the agent (whether they are affiliated
with the family or not) in the enabling of Type II agency conflicts manifested in
firms is a crucial oversight in the extant body of Type II agency conflict
literature.
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Journal of Business Research 153 (2022) 285–299
influence, either through ownership or through management control.
Therefore, we posit that the firm’s agents would act opportunistically,
thereby increasing Type I conflicts. Furthermore, these Type I agency
conflicts among NFCNFM firms will be greater compared with our
baseline group, i.e., NFCFM firms.
Consequently,
H5: Type I agency conflicts among Non-Family-Controlled Non-Family-
Managed (NFCNFM) firms will be higher compared to those in Non-
Family-Controlled Family-Managed (NFCFM) firms.
In Quadrant 4 NFCNFM firms, the family does not have a dominant
or controlling ownership stake. This reduces their ability to opportu­
nistically enhance and expropriate their (i.e., the family’s) private
benefits to the detriment of the firm’s other (minority) shareholders.
Additionally, the family also does not have its members (or family af­
filiates) managing the firm. Consequently, this governance combination
of a lack of ownership influence along with an absence of management
control restricts the capability of family owners to usurp the firm’s
wealth from other (minority) shareholders. The potential for PBC to
arise is not present in these firms. Therefore, both the potential costs and
the benefits associated with PBC alluded to in the discussions of the
earlier firm categories are also non-existent. Therefore, Type II (PP)
agency conflicts would not be manifested and therefore are not
discernable. Accordingly, we propose that in this situation, there will be
no significant increase or decrease in Type II conflicts (reflecting the
absence of conditions enabling the manifestation of Type II agency
costs) in this category of firms. Therefore, these agency conflicts among
NFCNFM firms will be neither greater nor lesser compared with our
baseline group, i.e., (NFCFM firms).
Consequently,
H6: Type II agency conflicts among Non-Family-Controlled Non-Family-
Managed (NFCNFM) firms will be neither higher nor lower compared to those
in Non-Family-Controlled Family-Managed (NFCFM) firms.
4. Methods
4.1. Research setting and sample
India served as an appropriate setting for our analysis because firms
here were owned and/or managed by a diverse range of shareholders
(owners). Firms in India may be family firms, government-controlled
firms, promoter-controlled firms, or subsidiaries of firms owned by
foreign multinationals.
We primarily used two data sources for our study—the Prowess
database and the Indian Boards database. The ownership data came
from the Indian Boards database, while financial data came from the
Prowess database. Ownership data is also available in the Prowess
database. In case of the unavailability of such data in the Indian Boards
database, we consulted the Prowess database. Additionally, we also
drew data from firms’ annual reports and other sources if data was not
available from these two databases. For example, data for affiliated di­
rectors (used for calculation of the Type II agency conflicts) was not
available in the two databases, and we hand-coded this information
from multiple sources such as annual reports, business magazine arti­
cles, and correspondence with the companies. We chose the 10-year
period from 2006 to 2015 for our study because the coverage of
ownership data prior to 2006 was incomplete.
We included firms in our sample that were listed on the Bombay
Stock Exchange (BSE) and the National Stock Exchange (NSE). From this
sample, we selected firms whose annual sales revenues were above 60
million Indian Rupees—approximately 0.75 million USD at current ex­
change rates (Purkayastha, Manolova, & Edelman, 2012)—because
bigger firms were less likely to suffer from missing data and uneven
variations in our independent and dependent variables. This resulted in
a sample of 2473 firms. We then dropped firms that were subsidiaries of
foreign multinationals and for whom the data for calculating the control
S. Purkayastha et al.
variables was not available. Our sample narrowed to 1004 firms. These
1004 firms were categorized into the four different types of ownership
and management combinations discussed earlier. An additional 170
firms had no data required for this categorization, which resulted in our
sample going down to 834 firms. Finally, sufficient data to measure the
indicators associated with Type I and Type II agency conflicts were
unavailable for 335 firms. These firms were subsequently dropped,
bringing our final sample to 499 firms.
4.2. Operationalization of independent variables
4.2.1. Type I agency conflict
We used multiple measures of Type I and Type II conflicts. For Type I
conflicts, we used four different measures. First, we used asset utilization
ratio (annual sales divided by total assets) (Singh & Davidson, 2003).
Asset utilization is a measure of efficiency that reflects how well managers
are managing the firm in order to enhance returns to shareholders. Firms
with higher asset turnover ratios will have lower Type I agency conflict.
To maintain consistent directionality with our other measures, we used
the reciprocal of the asset utilization ratio. Our second measure of Type I
agency conflict was operating expenses divided by total sales (Ang, Cole,
& Lin, 2000). This ratio measured how effectively managers were con­
trolling operating costs and other direct agency costs. A firm whose
operating expenses were higher could experience higher Type I agency
costs because managers could be making sub-optimal investment de­
cisions, thereby resulting in lower revenues and profits that potentially
reduced shareholder returns. There could also be increases in costs due to
managers rewarding themselves with excessive executive compensation
and perquisites. Firms with higher operating expenses will have higher
Type I agency conflict. Our third measure of Type I conflict was free cash
flow. Higher free cash flow may encourage managers to make wasteful
expenditures, thereby increasing Type I agency conflicts (Singh &
Davidson, 2003). Following Chen, Chen, and Wei (2011), we also
measured free cash flow as cash flow from operations minus dividends
and scaled by lagged total assets.3 However, since all of these measures
are single-item measures, in our fourth measure of Type I agency conflict,
we used a combination of multiple variables (Purkayastha et al., 2019).
We conducted principal component analysis with varimax rotation to
derive a multi-variable measure of Type I conflicts. We used the following
two variables that have been previously argued to influence (i.e., reduce)
primary agency Type I (PA) conflicts: i) the percentage of independent di­
rectors on the board (Cordeiro et al., 2007; Mangel & Singh, 1993;
Ramaswamy et al., 2000; Tuggle et Al., 2010; Veliyath & Ramaswamy,
2000; Zahra & Pearce, 1989); and ii) a dummy variable (1, 0) measuring
CEO duality (Boyd, 1995; Ramaswamy et al., 2000; Tuggle et al., 2010;
Veliyath & Ramaswamy, 2000; Zahra & Pearce, 1989).4 Board indepen­
dence (as measured by the proportion of independent directors on the
board) has previously been posited to reduce Type I agency conflicts.
Likewise, the presence of CEO duality heightens the possibility of Type I
conflicts.5 There are limitations with this measure as both percentage of
3 6
Chen et al. (2011) used cash dividends. We used total dividends because the
data on cash dividends was not separately available. Because investors in India
generally prefer cash dividends, we believe this is a reasonable proxy. For more
information on cash dividends, see https://www.businessinsider.com/personal-
finance/stock-dividend-vs-cash-dividend?IR=T (access date: June 20th, 2022).
4 8
A third indicator of Type I agency conflict, the number of blockholders whose
ownership stakes were greater than 10% (Barclay & Holderness, 1989; Hoskisson,
Hitt, Johnson, & Grossman, 2002; Tuggle et al., 2010; Westphal & Zajac, 1998),
was dropped because it represented a measure of ownership concentration,
which would have resulted in tautological problems, as pointed out by one of
the reviewers.
5
We reverse-coded the independent directors’ variables to maintain consis­
tent directionality of effects and convergent validity.
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Journal of Business Research 153 (2022) 285–299
independent directors and CEO non-duality are internal governance
mechanisms used to constrain the type I agency problem.6
4.2.2. Type II agency conflict
We used two measures for Type II agency conflict. First, we
employed a modified version of the Renders and Gaeremynck (2012)
measure, which were also used in recent work by Purkayastha et al.
(2019) to capture the Type II conflicts. This measure utilized three
separate variables: a) a dummy variable (1,0) indicating whether the
company had dual-class shares (Gompers et al., 2003; Grossman & Hart,
1988; Harris & Raviv, 1988; Masulis, Wang, & Xie, 2009); b) a dummy
variable (1, 0) indicating whether the voting rights of the largest share­
holder exceeded their cash flow rights by more than 10% (Gompers et al.,
2003; Grossman & Hart, 1988; Harris & Raviv, 1988; Purkayastha et al.,
2019, p. 55); and c) dividend per share divided by earnings per share
(Jensen, 1986; La Porta et al., 2000; Lang & Litzenberger, 1989). Taking
these three variables, we conducted a principal components analysis
using varimax rotations to obtain a measure for Type II conflicts. Sec­
ond, we measured Type II agency conflicts using a modified version of
the measure constructed by Sutton et al. (2018).7 We used two domains
from among their measures to construct our measure of Type II agency
conflicts: the domain of differential control and the domain for capturing
the absence of board neutrality. The domain of differential control was
measured through the presence of dual-class shares and the percentage
of shares held by top managers and directors (Purkayastha et al., 2019,
p. 60).8 The domain for the absence of board neutrality was measured
using the percentage of affiliated directors and CEO duality. A director
was considered to be affiliated if (1) he/she was a blockholder, (2) he/
she was an employee of a block holder, (3) he/she had the same family
name as a block holder, or (4) he/she was affiliated with a block holder.
4.2.3. Classification of family firms into the four governance categories
We categorized family firms following Singla et al.’s (2014)
approach. We first constructed a family-controlled firm variable and a
family-managed firm variable. Family-Controlled firms were coded as a
dummy variable with value equal to 1 if any two of the following three
criteria were met: 1) the family had an ownership stake of 20% or more
in the firm; 2) a member of the family was on the board of the firm; and
3) a member of the family was the chairperson of the board. Similarly, a
Family-Managed firm was also coded with a dummy variable (1, 0) if any
two of the following three criteria were met: 1) a founding family
member was the CEO of the firm; 2) a member of the founding family
was an executive director; and 3) more than one member of the founding
family were executive directors (Singla et al., 2014; p. 611).
Combining these two dimensions, a Family-Controlled Family-
Managed (FCFM) firm was coded 1 when both the family-controlled
firm variable and the family-managed firm variable had values equal
to 1; else it was coded 0. A Non-Family-Controlled but Family-Managed
(NFCFM) firm was coded 1 when the family-controlled firm variable
had a value equal to 0 and the family-managed firm variable had a value
We discuss the limitations of our measures further in the Discussions and
the Limitations sections.
7
Sutton et al. (2018) used an additional domain of ownership control, which
we had to drop to avoid tautological issues (since our firm categorization
variable was already based on ownership). This was pointed out by a reviewer.
Dual-class shares (Masulis et al., 2009) were not prevalent in India during
the sampled period (except under very rare circumstances). Consequently, as a
proxy, we coded preference shares and ordinary voting shares. Preference
shares included the company’s stock with fixed dividends that were paid to
shareholders before common stock dividends were paid out. In the event of a
company declaring bankruptcy, preferred stock shareholders had the right to be
paid first from the company assets. However, unlike common shareholders,
preferred stock shareholders typically did not possess voting rights. Therefore,
they were the closest approximation to dual-class shares in the Indian context
during the sampled period (see also Purkayastha et al., 2019, p. 55).
S. Purkayastha et al.
equal to 1. Likewise, a Family-Controlled and Non– Family-Managed
(FCNFM) firm was coded 1 when the family-controlled firm variable
had a value equal to 1 and the family-managed firm variable had a value
equal to 0. Finally, a Non-Family-Controlled and Non-Family-Managed
(NFCNFM) firm was coded 1 when both the family-controlled firm
variable and the family-managed firm variable had values equal to 0. Of
the 499 sampled firms, 147 firms were Non-Family-Controlled and Non-
Family-Managed (NFCNFM), 202 firms were Family-Controlled and
Non-Family-Managed (FCNFM), 306 firms were Family-Controlled and
Family-Managed (FCFM) firms, and 42 firms were Non-Family-
Controlled and Family-Managed (NFCFM).9 The total of the different
categories of firms is higher than the reported sample size because over
the time period of our study, some of the sampled firms changed their
governance structures.
4.2.4. Control variables
A number of control variables were used in our study. Control
variables that affect Type I and Type II conflicts—such as firm size, firm
age, current ratio, and leverage—were included (Chittoor & Ray, 2007;
Gubbi, Aulakh, Ray, Sarkar, & Chittoor, 2010). As the ownership
characteristics of the firm may simultaneously have an impact on both
Type I and Type II agency conflicts, following Purkayastha et Al.
(2019), we controlled for blockholder ownership categories in the firm,
such as family ownership (FAMO; percentage of shares held by the
founding family), domestic financial institutional ownership (DOMFI;
the percentage of shares owned by domestic financial institutions),
domestic corporate ownership (DOMC; the percentage of shares owned
by domestic corporate institutions), foreign corporate ownership
(FORC; the percentage of shares owned by foreign corporate in­
stitutions), government ownership (GOVT; the percentage of shares
owned by government bodies), and foreign financial institutional
ownership (FORI; the percentage of shares owned by foreign financial
institutions). Additionally, we included ROA to control for the firm’s
past performance. All of the included control variables were grounded
in previous research. A summary of our measures and the sources of
data is provided in Appendix 1.
4.3. Regression analyses
We estimated our models using panel regression procedures. We use
the fixed effects model as it allowed us to control for all the time-
invariant omitted variables (Wooldridge, 2002).10
Our regression model was formulated as follows:
Conflict it = α1 + ξ1 (Firm ownership) i (t-1) + Ω1 (Control variables) i (t-1) + φ1
(Year Effects) it + εit,
In this equation, conflict refers to Type I or Type II agency conflicts.
Firm ownership reflects firm categorization. Firm categorization refers
to whether the firm was categorized as non-family-controlled and non-
family-managed (NFCNFM), family-controlled and non-family-
managed (FCNFM), family-controlled and family-managed (FCFM), or
non-family-controlled and family-managed (NFCFM) firms. A one-year
lag was introduced in all our regressions between our independent
variables and dependent variables.
5. Results
Table 1 reports the descriptive statistics and correlations of all
9 used an alternative approach wherein we used dynamic panel data with
The data on family management and family control was manually extracted
from the annual reports of the firms and from leading business magazines such
as Business Today. In addition, corporate history reports from the CMIE database
were utilized.
10
As additional tests, we ran random effects estimation. The results were
similar though less statistically significant.
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Journal of Business Research 153 (2022) 285–299
variables used in our empirical analyses.
Table 2 presents the results of the regression. We used robust stan­
dard error clustered at the firm level. Models 1 to 4 present the results
with different measures of Type I agency conflicts, while Models 5 and 6
present the results with alternate measures of Type II agency conflict.
Model 1 presents the results with the asset utilization ratio measure of
Type I agency conflicts. From this model, we find that FCFM firms have a
negative co-efficient (β = -0.046, p < 0.10), signifying that among FCFM
firms, Type I conflicts were significantly lower, which provided support
for H1. Similarly, among FCNFM firms, we also find a negative co-
efficient (β = − 0.010, p < 0.05), signifying that among FCNFM firms,
Type I conflicts were significantly lower, which provided support for H3.
Finally, the co-efficient for NFCNFM firms was positive (β = 0.011, p <
0.05), signifying that among NFCFM firms, Type I conflicts were
significantly higher, which provided support for H5. Our results
exhibited similar patterns (for the most part) with the other measures of
Type I conflict that we used, namely, operating expenses (Model 2), free
cash flow (Model 3), and the principal components measure of Type I
agency conflict (Model 4).
Model 5 presents the results for Type II agency conflict, measured as
a modified version of the Renders and Gaeremynck (2012) measure, and
described earlier in Section 4.2.2. In this model, we find that FCFM firms
had a positive co-efficient (β = 0.083, p < 0.10), signifying that among
FCFM firms, Type II conflicts were significantly higher, which provided
support for H2. Among FCNFM firms, we find that the regression co-
efficient is insignificant, signifying that among FCNFM firms, Type II
conflicts were neither higher nor lower, which provided support for H4.
Finally, the co-efficient for NFCNFM firms was also insignificant,
signifying that among NFCNFM firms, Type II conflicts were neither
higher nor lower, which provided support for H6. Using Sutton et al.’s
(2018) results as alternate measures of Type II conflict (shown in Model
6 of Table 2), we obtained a similar pattern of results that supported our
hypotheses.
In summary, our results indicated support for all our proposed
hypotheses.
5.1. Robustness tests
It is becoming increasingly common in strategy research to control
for endogeneity (Campa & Kedia, 2002; Villalonga, 2004; Ramaswamy,
Purkayastha, & Petitt, 2017). There are typically three main sources of
endogeneity: (a) errors in variable measurement, (b) reverse causality,
and (c) unobserved heterogeneity (Zaefarian, Kadile, Henneberg, &
Leischnig, 2017; Gretz & Malshe, 2019). While variable measurement
errors cannot be eliminated, random measurement errors arising from
managerial discretion can be reduced by using larger sample sizes
spread across different industries. Our understanding is that our model
specification is theoretically unlikely to suffer from endogeneity on ac­
count of reverse causality (i.e., the type of agency conflict—Type I or
Type II—determining the ownership structure and the nature of the
involvement of the family in the governance of the firm). Consequently,
the remaining possible endogeneity concerns could be owing to unob­
served heterogeneity.
One possible empirical approach that controls for unobserved het­
erogeneity is the two-stage least-squares estimator. However, the two-
stage least-squares procedure requires the identification of instruments
that are correlated with the endogenous variables and are also uncor­
related with the error term of the model (Wooldridge, 2002). The search
for such instruments is often hampered by the lack of empirical validity,
as was the case in our study. Following Ward and Filatotchev (2010), we
the construction of lagged dependent variables in order to estimate
unbiased coefficients (see Baltagi, 2005; Roodman, 2009). We used a
linear dynamic panel-data model (Arellano-Bond, AB) estimator to try
and overcome these issues. The advantage of this estimator is its ability
to correct problems related to both autocorrelation and
S. Purkayastha et al. Journal of Business Research 153 (2022) 285–299

Table 1
Means and Correlation: Type I is principal-agent conflicts (Asset utilization ratio, Operating Ex./Sales, Free cash flow and PC analysis) while Type II is principal-
principal conflicts (modified version of Renders and Gaeremynck, 2012 [R&G, 2012] and modified version of Sutton et al., 2018). NFCFM are non-family-
controlled and non-family-managed firms; NFCFM are non-family-controlled but family-managed firms; FCFM are family-controlled and family-managed firms;
and FCNFM are family-controlled and non-family-managed firms. CR is current ratio and LEV is leverage. FAMO is family ownership, GOVT is government ownership,
DOMC is domestic corporate ownership, DOMFI is domestic financial institutional ownership, FORC is foreign corporate ownership, and FORI is foreign financial
institutional ownership. ROA is return on asset. The variable definitions are given in Appendix 1. *Significant at 5%.
Variables Mean Std. Dev 1 2 3 4 5 6 7 8 9 10 11

1. Type I 0.874 0.602 1.000

conflict*
(Asset
utilization
ratio)
2. Type I 0.839 0.613 0.944* 1.000
conflict
(Operating
Ex./Sales)
3. Type I 0.048 0.079 0.164 0.192* 1.000
conflict (Free
cash flow)
4. Type I 0.008 0.398 0.032 0.012 0.002 1.000
conflict (PC
Analysis)
5. Type II 0.021 0.366 0.062* 0.063* 0.010 − 0.026 1.000
conflict
(R&G, 2012)
6. Type II 0.002 0.435 0.016 0.020 − 0.023 − 0.030 0.123* 1.000
conflict (
Sutton et al.,
2018)
7. NFCFM 0.030 0.178 − 0.029 − 0.042* − 0.038* − 0.039* − 0.027 0.001 1.000
8. FCFM 0.420 0.493 0.040* 0.034 − 0.013 0.527* − 0.016 − 0.014 − 0.157* 1.000
9. FCNFM 0.169 0.374 − 0.012 − 0.002 − 0.007 0.026 0.065* 0.024 − 0.083* − 0.383* 1.000
10. NFCNFM 0.378 0.484 − 0.020 − 0.017 0.033 − 0.542* − 0.024 − 0.005 − 0.144* − 0.664* − 0.351* 1.000
11. Firm Size 9.050 1.580 0.207* 0.175* 0.170* 0.026 0.093* − 0.047* − 0.031 − 0.064* 0.069* 0.023 1.000
12. Age 38.704 22.852 − 0.066* − 0.072* 0.018 0.009 0.041* − 0.019 − 0.033 − 0.120* 0.135* 0.030 0.135*
13. CR 1.859 1.818 − 0.070* − 0.060* − 0.069* 0.034 − 0.047* − 0.003 0.007 0.118* 0.016 − 0.135* − 0.273*
14. Leverage 0.286 0.193 − 0.155* − 0.135* − 0.147* 0.077* 0.180* 0.050* 0.015 0.045* − 0.023 − 0.033 0.062*
15. FAMO 16.154 18.802 0.054* 0.064* − 0.015 0.075* − 0.286* 0.110* − 0.059* 0.262* − 0.202* − 0.089* − 0.269*
16. GOVT 0.419 4.668 − 0.060* − 0.054* 0.024 − 0.078* − 0.079* − 0.009 − 0.017 − 0.076* − 0.038* 0.113* 0.042*
17. DOMC 33.413 20.439 − 0.021 − 0.023 0.057* − 0.071* 0.368* − 0.059* − 0.003 − 0.171* 0.108* 0.092* 0.129*
18. DOMFI 6.761 7.348 − 0.129* − 0.129* 0.016 0.052* 0.013 − 0.057* − 0.013 − 0.067* 0.141* − 0.036* 0.376*
19. FORC 1.864 6.767 0.014 0.007 0.000 − 0.079* 0.060* − 0.003 0.013 − 0.118* 0.027 0.095* 0.078*
20.FORI 9.151 10.034 − 0.156* − 0.176* − 0.025 0.032 − 0.057* − 0.085* − 0.025 0.011 0.039* − 0.031 0.338*
21. ROA 0.135 0.095 0.318* 0.277* 0.291* 0.073* − 0.018 − 0.019 − 0.013 0.051* 0.055* − 0.089* 0.146*

12 13 14 15 16 17 18 19 20 21
12. Age 1.000
13. CR − 0.112* 1.000
14. Leverage 0.017 − 0.252* 1.000
15. FAMO − 0.188* 0.132* − 0.062* 1.000
16. GOVT 0.000 − 0.048* − 0.060* − 0.077* 1.000
17. DOMC 0.116* − 0.083* 0.018 − 0.651* − 0.099* 1.000
18. DOMFI 0.264* − 0.064* − 0.030 − 0.283* 0.127* − 0.006 1.000
19. FORC − 0.022 − 0.020 − 0.035 − 0.141* − 0.022 0.261* 0.018 1.000
20.FORI − 0.079* 0.060* − 0.124* − 0.164* − 0.036 − 0.091* 0.144* 0.020 1.000
21. ROA − 0.045* 0.120* − 0.349* 0.036* 0.041* 0.028 0.025 0.032 0.050* 1.000
*
Some measures of Type I conflict are measured as a simple ratio, while Type II conflict is calculated as a principal component using a modified version of the
measures used by Renders and Gaeremynck (2012) and Sutton et al. (2018). Hence, there are limitations in the interpretation of the correlations among these different
categories of variables.

heteroscedasticity, as well as to control for the unobserved heteroge­
neity and endogeneity of all the main regressors (Ward & Filatotchev,
2010).
Table 3 provides the results from the dynamic panel analysis. Models
1 to 4 present the results with the different measures of Type I agency
conflicts (described earlier), while Models 5 and 6 present the results
with alternate measures of Type II agency conflict (also described pre­
viously). Model 1 presents the results with asset utilization ratio mea­
sure of Type I agency conflicts. From this model, we find that FCFM
firms have a negative co-efficient (β = − 1.689, p < 0.05), signifying that
among FCFM firms, Type I conflicts were significantly lower, which
provided support for H1. Similarly, for FCNFM firms, we find a negative
co-efficient (β = − 0.070, p < 0.10), signifying that among FCNFM firms,
Type I conflicts were significantly lower, which provided support for H3.
Finally, the co-efficient for NFCNFM firms was insignificant, signifying
that among NFCFM firms, Type I conflicts were not different from that
among NFCFM firms; this result does not provide support for H5. With
the other Type I measures, the results were slightly different. Using the
operating expenses measure (Model 2), H1 and H5 received support,
while H3 did not. Using the free cash flow measure (Model 3), H1
received support, while H3 and H5 did not. Finally, using the principal
components measure of Type I agency conflict (Model 4), only H5
received support.
Model 5 presents the results for Type II agency conflict, measured as
a modified version of the Renders and Gaeremynck (2012) measure.
From this model, we find that FCFM firms showed a positive co-efficient

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Table 2
The dependent variables are Type I (PA) or Type II (PP) conflict. NFCFM are non-family-controlled and non-family-managed firms; NFCFM are non-family-controlled
but family-managed firms; FCFM are family-controlled and family-managed firms; and FCNFM are family-controlled and non-family-managed firms. FIRM SIZE is
natural log of sales, AGE is the age of the firm, CR is current ratio and LEV is leverage. FAMO is family ownership, GOVT is government ownership, DOMC is domestic
corporate ownership, DOMFI is domestic financial institutional ownership, FORC is foreign corporate ownership, and FORI is foreign financial institutional ownership.
ROA is return on assets.
(1) (2) (3) (4) (5) (6)

Type I agency conflict Type II agency conflict

Asset utilization ratio Operating Ex/Sales Free cash flow PC analysis R&G, 2012 Sutton et al., 2018

Constant 1.340** − 1.377 − 0.892** − 1.859* − 3.427*** − 2.867

(0.545) (1.487) (0.356) (0.995) (1.287) (2.125)
FCFM − 0.046* − 0.058 − 0.032* − 0.077*** 0.083* 0.161*
(0.025) (0.040) (0.018) (0.025) (0.043) (0.097)
FCNFM − 0.010** − 0.065* 0.007 − 0.061** 0.016 − 0.030
(0.004) (0.036) (0.007) (0.026) (0.048) (0.097)
NFCNFM 0.011** 0.014 − 0.013 0.068*** − 0.014 − 0.144
(0.005) (0.017) (0.010) (0.012) (0.050) (0.098)
Size 0.126** 0.173*** 0.005 0.015 − 0.011 0.092*
(0.056) (0.031) (0.006) (0.016) (0.022) (0.048)
Age 0.011 0.019 0.021** 0.032 0.081*** 0.048
(0.135) (0.033) (0.008) (0.023) (0.031) (0.050)
CR − 0.832 − 0.012** − 0.002 − 0.007 − 0.003 0.002
(0.546) (0.006) (0.002) (0.004) (0.008) (0.017)
LEV 0.171* − 0.205** 0.108*** − 0.009 0.220 0.199
(0.097) (0.089) (0.025) (0.072) (0.138) (0.216)
FAMO − 0.819 − 0.005*** − 0.000 − 0.001 0.001 0.002
(0.592) (0.002) (0.000) (0.002) (0.002) (0.006)
GOVT − 0.140 − 0.025*** − 0.000 0.020*** 0.022*** − 0.043***
(0.230) (0.004) (0.001) (0.003) (0.004) (0.009)
DOMC 0.080 − 0.002 − 0.000 0.000 0.002 − 0.002
(0.161) (0.002) (0.000) (0.001) (0.002) (0.003)
DOMFI 0.090 − 0.003 0.000 0.000 − 0.003 0.005
(0.192) (0.003) (0.001) (0.002) (0.002) (0.004)
FORC − 0.478 − 0.004 0.001 − 0.000 − 0.001 0.009*
(0.330) (0.005) (0.001) (0.002) (0.003) (0.005)
FII − 0.397 − 0.004* − 0.000 0.000 − 0.004 − 0.008**
(0.380) (0.002) (0.000) (0.001) (0.002) (0.004)
ROA 0.250* 0.230** 0.052 − 0.003 − 0.037 0.213
(0.144) (0.116) (0.053) (0.084) (0.101) (0.249)
Year Effects Included Included Included Included Included Included
F Statistics 401.36*** 126.57*** 6.31*** 870.10*** 29.43*** 733.63***
R-squared 0.183 0.163 0.067 0.686 0.037 0.051
Observations 2008 2008 2008 2008 2008 2008

* p < 0.10; ** p < 0.05; *** p < 0.01; Numbers in parentheses represent Std. Errors.

(β = 0.000, p < 0.05), signifying that among FCFM firms, Type II con­
flicts were significantly higher, which provided support for H2. For
FCNFM firms, we found that the co-efficient was insignificant, signifying
that among FCNFM firms, Type II conflicts were neither higher nor
lower, which provided support for H4. Finally, the co-efficient for
NFCNFM firms was insignificant, signifying that among NFCNFM firms,
Type II conflicts were neither higher nor lower, thus supporting H6.
Using Sutton et al. (2018) as alternate measures of Type II conflict
(described earlier in section 4.2.2), both H4 and H6 were supported.
However, we did not find support for H2. In summary, for the most part,
our robustness tests also supported the results from the main analyses,
with the exception of Model 6.
6. Discussion and conclusions
This study examined the effects of different combinations of gover­
nance and management structures prevalent among family business
firms on Type I agency (PA) and Type II agency (PP) conflicts. Drawing
from the private benefits of control (PBC) literature (e.g., Holderness,
2003; Sauerwald et al., 2019; van Essen, Van Oosterhout, & Heugens,
2013), agency cost literature (Dharwadkar et al., 2008; Villalonga &
Amit, 2010; Young et al., 2008), and the corporate governance literature
(Sauerwald et al., 2016), we proposed that a governance context char­
acterized by dominant share ownership and management control by a
family would impact these two types of agency conflicts in different
ways. An important implication deriving from our work (and from prior
research cited earlier) is that dominant (or majority) share ownership by
a family would, through enhanced monitoring efficiencies, reduce Type
I conflicts. Importantly, this represents a shared benefit for all share­
holders (including minority shareholders) arising from the PBC effects.
However, excessive PBC can also exacerbate Type II conflicts, leading to
wealth transfer from minority to dominant shareholders.
Our results provided broad support for the arguments proposed
about the differences in effect among the various governance contexts.
Based on Fig. 1, Type I conflicts decreased significantly in FCFM firms
(see Quadrant 2), as expected. However, Type II conflicts significantly
increased since dominant family share ownership combined with family
management control maximized the potential for excessive amounts of
PBC to manifest, without the countervailing benefits of the shared
benefits of PBC that could have accrued to all shareholders. In Quadrant
3, we argued that superior monitoring by the family would reduce Type I
conflicts. However, non-family managers would sharply curtail the
family’s ability to manage events, thereby exposing these firms to only
moderate increases in Type II conflicts. This was despite moderate
amounts of PBC being present owing to the family’s dominant owner­
ship position. Interestingly, the presence of non-family managers
rendered different but somewhat consistent effects on Type I and Type II
agency conflicts among FCNFM firms (in this quadrant 3). Taken
together, the results from the firms in Quadrants 2 and 3 emphasize that
for unhindered misappropriation of shareholder wealth by the dominant

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Table 3
(Dynamic panel controlling for endogeneity): The dependent variables are Type I or Type II conflict. NFCFM are non-family-controlled and non-family-managed firms;
NFCFM are non-family-controlled but family-managed firms; FCFM are family-controlled and family-managed firms; and FCNFM are family-controlled and non-
family-managed firms. FIRM SIZE is natural log of sales, AGE is the age of the firm, CR is current ratio and LEV is leverage. FAMO is family ownership, GOVT is
government ownership, DOMC is domestic corporate ownership, DOMFI is domestic financial institutional ownership, FORC is foreign corporate ownership, and FORI
is foreign financial institutional ownership. ROA is return on assets.
(1) (2) (3) (4) (5) (6)
Type I agency Conflict Type II Agency conflict

Asset utilization ratio Operating Ex./Sales Free cash flow PC Analysis R&G, 2012 Sutton et al., 2018

Constant 3.143 4.841 − 0.240 − 0.488 0.481 6.658

(2.511) (5.348) (0.216) (1.062) (0.768) (10.692)
L1. Asset utilization 0.880
ratio (0.610)
L1. Operating Ex./ 1.201**
Sales (0.475)
L1. Free cash flow − 0.007
(0.056)
L1. PC Analysis 0.574***
(0.094)
L1. R&G, 2012 0.278**
(0.108)
L1 Sutton et al., 2018 0.178
(0.229)
FCFM − 1.689** − 0.089** − 0.002* − 0.354 0.000** − 5.873
(0.750) (0.037) (0.001) (0.246) (0.000) (5.193)
FCNFM − 0.070* − 0.432 − 0.008 − 0.251 − 0.119 − 3.314
(0.038) (0.747) (0.062) (0.289) (0.257) (4.481)
NFCNFM 0.535 1.969* 0.056 0.276*** − 0.161 − 10.540
(0.847) (1.147) (0.074) (0.051) (0.268) (7.375)
SIZE − 0.105 − 0.320 0.022 − 0.020 0.033 0.212
(0.358) (0.442) (0.022) (0.085) (0.062) (1.014)
AGE − 0.024 − 0.003 − 0.035 − 0.004 − 0.001 − 0.037
(0.027) (0.036) (0.063) (0.005) (0.004) (0.082)
CR − 0.190 − 0.136 − 0.018 − 0.022 − 0.006 0.581
(0.171) (0.156) (0.016) (0.071) (0.087) (0.640)
LEV 0.544 − 0.279 − 0.121 0.165 − 0.249 0.605
(1.935) (2.506) (0.176) (0.580) (0.561) (7.900)
FAMO − 0.038 − 0.046 0.004 0.003 − 0.015* 0.059
(0.027) (0.080) (0.003) (0.007) (0.009) (0.057)
GOVT − 0.214 0.092 − 0.011 − 0.029 − 0.023 − 0.353
(0.184) (0.262) (0.024) (0.031) (0.166) (1.132)
DOMC − 0.012 0.003 0.006 0.012 − 0.019* 0.152
(0.062) (0.037) (0.005) (0.011) (0.011) (0.172)
DOMFI 0.054 0.027 0.002 − 0.014 − 0.006 − 0.231
(0.033) (0.070) (0.004) (0.011) (0.014) (0.280)
FORC − 0.019 − 0.005 − 0.000 − 0.001 − 0.009 − 0.107
(0.034) (0.033) (0.003) (0.011) (0.010) (0.086)
FII − 0.048 − 0.022 0.002 − 0.003 − 0.002 0.054
(0.080) (0.072) (0.003) (0.008) (0.009) (0.059)
ROA 0.074 0.068 0.287 0.285 − 0.008 − 0.437
(0.063) (0.306) (0.217) (0.309) (0.545) (8.304)
F Statistics 35.18*** 49.53*** 3.42*** 18.66*** 12.23*** 1.80**
Sargan test or J statistics 7.67 8.10 4.65 3.66 1.98 5.76
Observations 2008 2008 2008 2008 2008 2008

* p < 0.10; ** p < 0.05; *** p < 0.01; Numbers in parentheses represent Std. Errors.

ownership block to occur (family, in this case), governance control
(enabled through singular dominant share ownership) has to be com­
bined with effective management control.
Finally, in Quadrant 4, among NFCNFM firms, our results indicated a
significant increase in Type I conflicts. This occurred because the family
had no dominant shareholding, resulting in monitoring efficiencies
being curtailed and possible opportunistic behaviors (i.e., moral hazard)
by the agents leading to enhanced Type I conflicts. However, the results
do confirm the absence of a significant impact on Type II conflicts among
the NFCNFM firms in this quadrant. As argued, this result is in accor­
dance with our hypotheses, since the family group did not have the
dominant ownership position in these firms that would have enabled
them to exploit the PBC excessively and appropriate wealth at the
expense of other shareholders.
Overall, the results from the several regression models presented and
discussed earlier (with multiple alternative measures of the dependent
variables along with tests for the existence of endogeneity) indicate a
pattern of findings that provide fairly consistent (and strong) support for
our hypothesized predictions regarding the effects of the various com­
binations of the two governance contexts (involving family control and
family management). It is noteworthy that reductions in Type I conflicts
along with moderation in Type II conflicts occurred only in Quadrant 3
(FCNFM firms). Thus, this governance structure with the family having
ownership control, but with the firm not being run by family managers is
an optimal governance context as far as the manifestation of Type I (PA)
and Type II (PP) conflicts are concerned. We emphasize that our findings
are particularly salient in emerging market contexts where the lack of
institutional development and institutional voids can combine to pro­
vide inadequate protection for the rights of minority shareholders.
Additionally, these findings build on results reported in prior research
(see Purkayastha et al., 2019).
Such institutional contexts are typically also characterized by the
presence of other powerful ownership blocks such as state ownership,
promoter ownership, multinational ownership, and business group

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ownership, which—acting individually (or in unison)—can chip away
and undermine the rights of minority shareholders. This is especially the
case in country contexts characterized by underdeveloped regulatory
frameworks and the existence of institutional voids. Under such condi­
tions, calibrated internal governance mechanisms that combine the
components of dominant ownership control along with the absence of
management control (especially among business families) can help to
level the playing field that might otherwise hold a disadvantage for
minority shareholders. We believe this to be a novel and important
finding that has implications for theory building in corporate gover­
nance, especially because it builds on and complements recent work in
the domain of external institutional protections for minority share­
holders (Sauerwald et al., 2016; Sauerwald et al., 2019).
A practical import of our work is that it upholds the need for the
separation of ownership control from management control (in publicly
traded firms). This is especially true of emerging economies, where
dominant shareholder groups (family ownership, state ownership, pro­
moter ownership, multinational ownership, business group ownership)
are widely prevalent. In addition, the absence of institutional safeguards
for the protection of minority shareholders’ rights creates conditions for
misappropriation of their returns by the dominant groups. Dominant
ownership when combined with management control exacerbates the
situation. Firms with such types of agency conflicts typically face higher
costs of capital because of their perceived risks, along with the conse­
quent reluctance of investors to provide capital under such conditions.
The study speaks to and highlights the dissipative effects of the uncon­
trolled power and influence of dominant shareholding groups, arising
either from concentrated ownership, or from dominant management
control (as well as from a combination of both).
7. Limitations
Our study has some limitations. First, although we have used
multiple measures for Type I and Type II agency conflicts, all of these
measures (when taken individually) have limitations. With three of
the main measures of Type I agency conflicts that we used (the asset
utilization ratio, operating expenses divided by total sales, and free
cash flow), the limitations may include measurement error such as
differences in accounting methods, errors from poor recordkeeping,
and errors from the tendencies of managers to exercise their flexibility
with respect to recording certain revenue and cost items during the
year. For example, managers might be tempted to increase/lower
certain expense items, including items related to their own pay and
perquisite consumption. They may also use their discretion to shift
revenue (and sometimes cost) items between accounting periods (i.e.,
either earlier or later than the date of occurrence). However, we argue
that these anomalies are sources of random measurement errors that
may be reduced with a larger sample of firms (such as ours) in
different industries and ages (Ang et al., 2000).
Second, addressing endogeneity through instrumental variables is
fraught with considerable challenges. One of the principal challenges is
associated with the need to simultaneously manage the instrument’s
strength and its exogeneous properties, and therefore, it is often a fine
balancing act as they tend to work against each other (Semadeni,
Withers, & Certo, 2014, p. 1072). We therefore submit that it is difficult
to get suitable instrument variables for all situations, and it is difficult to
address the entire gamut of the endogeneity concerns, which is a limi­
tation of our empirical design.
Third, our principal component measures of Type I agency conflict
that use two variables (the percentage of independent directors on the
board and CEO duality) may suffer from the limitation that they may be
considered as reflective measures (i.e., as measures of corporate
governance rather than formative measures of Type I agency conflicts).
However, their usage overcomes the limitations in the extant literature,
which has utilized mostly single-variable measures of Type I conflicts
(which we have also utilized as robustness check measures in our study).
296
Journal of Business Research 153 (2022) 285–299
Nonetheless, our multi-variable measures are a step closer to ensuring
construct validity in these Type I measures. Moreover, since we con­
ducted a variety of robustness tests to assess the rigor of our results, we
are reasonably confident that the patterns of results we have presented
across both Type I and Type II agency conflicts are representative and
reliable. Nevertheless, we urge future researchers to not use these same
measures without taking note of their limitations, and also recommend
that they develop and validate alternative multi-variable measures for
Type I conflicts. The different measures utilized for Type II agency
conflict include dummy variables (Villalonga & Amit, 2006) to multi­
variable measures, all of which have been employed and validated in
prior research (Purkayastha et al., 2019; Renders & Gaeremynck, 2012;
Sutton et al., 2018). Therefore, these measures are also grounded in their
prior usage in the literature. The Sutton et al. (2018) study developed
and validated these direct measures. However, our Type II conflict
measures do not utilize the more conventional private benefits of control
(PBC) measures used in the finance and economics literature (Barclay &
Holderness, 1989, 1991; Sauerwald et al., 2019). Earlier studies in this
genre utilized pecuniary PBC benefits that are measurable and those that
can be transferred to an outside acquirer (Barclay & Holderness, 1989;
Barclay, Holderness, & Pontiff, 1993; Dyck & Zingales, 2004; Faccio
et al., 2001; Filatotchev et al., 2011; Sauerwald et al., 2019; Ward &
Filatotchev, 2010). However, those measures also suffer from the
weakness that they are more reflective, rather than formative measures.
Additionally, we were unable to replicate the use of those same mea­
sures in our study because of the unavailability of such data (i.e., on
block premiums paid for substantive transfers of block shares occurring
during takeovers resulting in change of control) in the Indian context.11
Finally, another important issue concerns the implications from the
presence of and interactions among multiple other dominant block­
holders—e.g., government block holding (among public sector firms),
foreign block holding (among multinational subsidiaries), business
group block holding (among firms connected to a common business
groups)—in the Indian (as well as other developing country) contexts.
The presence of these multiple blockholders, each with different sets of
goals and risk tolerances, could potentially result in collusion, where the
multiple blocks of dominant shareholders collaborate in order to
appropriate greater wealth at the expense of other minority shareholders
(a negative outcome resulting from PBC). This could occur in underde­
veloped institutional environments where the protection of minority
shareholders rights is absent or is weakly enforced. While we did control
for the presence of these other shareholder blocks in our regressions, we
did not test the interaction effects of these dominant shareholder blocks
in order to assess the circumstances that facilitated the extent of coop­
eration among them versus the monitoring activity among them (Attig,
Guedhami, & Mishra, 2008; Claessens, Djankov, Fang, & Lang, 2002;
Cronqvist & Nilsson, 2003; Maury & Pajuste, 2002). Moreover, these
were not the focal research questions in our study. Examining and
controlling for the presence and influence of these other potentially
dominant ownership types can enable a more fine-grained understand­
ing of these observed phenomena, especially as they pertain to emerging
markets. Our work indicates the potential for building on this stream of
work by using exogenous events such as economic shocks (e.g., Bertrand
et al., 2002), which could be useful to infer differences in the responses
to agency conflicts among different ownership categories of family
firms. The need for such investigations is an interesting revelation
emerging from our study, and represents fertile areas for future research.
11
For example, Sauerwald et al. (2019) measured PBC as the block premiums
paid as a percentage of the value of equity across public firms from several
countries around the world. They could find only two observations from India
across the 11-year period of their study.
S. Purkayastha et al. Journal of Business Research 153 (2022) 285–299

Credit authorship contribution statement Conceptualization.

Saptarshi Purkayastha: Writing – review & editing, Writing –

original draft, Validation, Methodology, Investigation, Formal analysis, Declaration of Competing Interest
Conceptualization. Rajaram Veliyath: Writing – review & editing,
Writing – original draft, Project administration, Methodology, Investi­ The authors declare that they have no known competing financial
gation, Conceptualization. Rejie George: Writing – review & editing, interests or personal relationships that could have appeared to influence
Writing – original draft, Methodology, Investigation, Formal analysis, the work reported in this paper.

Appendix A. Variables, measures, and sources of data

Variable Definition Data Sources

Dependent variable - Agency Conflicts

1.Type I agency conflict
2. Type II agency conflict
Independent variable – Firm categorization
1.NFCFM
2.FCFM
3.FCNFM
4.NFCNFM
Control variables
1.Firm age
2.Firm size
3.Firm leverage
4. Current ratio
5. Family ownership
6. Domestic financial
institutional ownership
7. Domestic corporate
ownership
8. Foreign corporate
ownership
9. Government ownership
10. Foreign financial
institutional ownership
11. Return on Assets
a. Asset Utilization Ratio Prowess, the Indian Boards database, annual report
b. Operating Expenses/Sales of firms, business magazines, and websites
c. Free Cash Flow
d. Principal Component Analysis
a. Modified version of the Renders and Gaeremynck (2012) measure Prowess, the Indian Boards database, annual report
b. Modified version of the measure constructed by Sutton et al. (2018) of firms, business magazines, and websites
Non-Family-Controlled but Family-Managed (NFCFM) was coded 1 when the family-controlled Prowess, Indian Board Database
firm variable had a value equal to 0 and the family-managed firm variable had a value equal to
1
Family-Controlled Family-Managed (FCFM) firm was coded 1 when both the family-controlled Prowess, Indian Board Database
firm variable and the family-managed firm variable had values equal to 1
Family-Controlled but Non-Family-Managed (FCNFM) firm was coded 1 when the family- Prowess, Indian Board Database
controlled firm variable had a value equal to 1 and the family-managed firm variable had a
value equal to 0
Non-Family-Controlled and Non-Family-Managed (NFCNFM) was coded 1 when both the family- Prowess, Indian Board Database
controlled firm variable and the family-managed firm variable had values equal to 0
Number of years from the date of incorporation of the firm Prowess
Natural logarithm of sales Prowess
Ratio of debt to total assets Prowess
Total assets to total liabilities Prowess
Percentage of shares held by the founding family Prowess, Indian Board Database
Percentage of shares owned by domestic financial institutions Prowess, Indian Board Database
Percentage of shares owned by domestic corporate institutions Prowess, Indian Board Database
Percentage of shares owned by foreign corporate institutions Prowess, Indian Board Database
Percentage of shares owned by government bodies Prowess, Indian Board Database
Percentage of shares owned by foreign financial institutions Prowess, Indian Board Database
Profit before depreciation, interest and tax over total assets Prowess

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Saptarshi Purkayastha (PhD, ICFAI University) is an Associate Professor of Strategy at the
Indian Institute of Management, Calcutta. His primary research interest is in investigating
the effectiveness of emerging market firms with a focus on internationalization and the
role of governance in the management of these firms. His research has been published in
the International Journal of Management Reviews, Journal of World Business, Journal of
Business Research and Asia Pacific Journal of Management.
Rajaram Veliyath (PhD, University of Pittsburgh) is a Professor of Management in the M.A.
Leven School of Management, Entrepreneurship and Hospitality in the Coles College of
Business at Kennesaw State University. His research interests include agency theory,
stewardship theory, corporate governance, board committee processes, CEO and director
compensa-tion and internationalization strategies of emerging market firms. His work has
been published in the Asia Pacific Journal of Management, British Journal of Management,
Corporate Governance: An International Review, International Business Review, Journal
of Business Research, Journal of Business Venturing, Journal of Management Studies,
Journal of Small Business Management, Long Range Planning, Management International
Review, Strategic Management Journal, and several other outlets.
Rejie George (PhD, Tilburg University) is a Professor in the Strategy Area at the Indian
Institute of Management Bangalore (IIMB). He holds the IIMB Chair of Excellence and is
the past Chairperson of the Fellowship Program (FPM) as well as past Chair of the Center
for Corporate Governance and Citizenship (CCGC) at IIMB. Rejie has published in journals
such as the Strategic Management Journal, Journal of International Business Studies, Long
Range Planning, Journal of Business Research, Asia Pacific Journal of Management and the
Rutgers Business Review. His research interests are in the areas of Corporate Governance,
Strategic Management and International Business.