Industry and Information Asymmetry: The Case of the Employment of Non‐Family Managers in Small and Medium‐Sized Family Firms

Abstract

As family firms begin to professionalize, they face an important crossroads in deciding whether to employ non‐family managers. To preserve socioemotional wealth and minimize agency costs, family owners may resist employing non‐family managers. However, industry sector may play a role that influences the employment of non‐family managers. We argue that the family's reluctance will be stronger in industries where information asymmetries make monitoring managers more difficult. For industries where monitoring is easier, the benefits of employing non‐family managers may offset the loss in socioemotional wealth and increase in agency costs. Results based on a sample of 965 small and medium‐sized retail and manufacturing firms confirm our predictions.

Notes

12. Family firms are defined by a family's ownership and control of a firm, and a vision for how the firm will benefit the family, potentially across generations (e.g., Bennedsen, Perez‐Gonzalez, and Wolfenzon 2010; Chua, Chrisman, and Sharma 1999).

13. A professionally managed firm is one that is more bureaucratic than a nonprofessionally managed firm and has governance mechanisms, such as the market for corporate control, that reduce the threat of managerial opportunism (see Gedajlovic and Carney 2010).

14. Incentives compensation is also possible, but the noneconomic goals of family owners often render them unreliable and in some cases counterproductive as motivational devices (Chua, Chrisman, and Bergiel 2009). In any event, for incentives to work, some amount of monitoring is still required.

15. We used labor productivity to proxy firm productivity because we are interested in managers' performance, which is likely to be influenced by employees' work productivity.

16. Endogeneity is not controlled in this analysis because the founder's control may impact a firm's potential to grow, and firm size may influence the family's desire to pass the firm to later generations

17. The results of these analyses are available from the first author on request.

18. To control for the collinearity between founder's and other family members' ownership, both terms and their interactions with retail industry were adjusted by industrial average in each year. Also we are unable to control for endogeneity in this analysis.

19. We did not use a two‐stage endogeneity‐control technique here as a binary independent variable lacks variance and should not be represented by instrumental variables.

Additional information

Notes on contributors

Hanqing “chevy” Fang

Hanqing “Chevy” Fang is Assistant Professor at the Department of Business and Information Technology, Missouri University of Science and Technology.

Esra Memili

Esra Memili is an Assistant Professor of Entrepreneurship and Margaret Van Hoy Hill Dean's Notable Scholar at the University of North Carolina at Greensboro.

James J. Chrisman

James J. Chrisman is the Julia Bennett Rouse Professor of Management, Head of the Department of Management & Information Systems, and Director of the Center of Family Enterprise Research at the College of Business, Mississippi State University. He also holds a joint appointment as senior research fellow with the Centre of Entrepreneurship and Family Enterprise at the University of Alberta School of Business.

Christopher Penney

Christopher Penney is an Assistant Professor of Management at the University of North Texas.