Agency Problems in Entrepreneurial Firms
Abstract: Researchers have long been interested in understanding how top managers may affect firm performance and value. They paid particular attention to the differences in performance of firms with owner-managers and those with hired managers, with the principal-agent problem being a core explanation for the observed variations. However, this stream of research has largely overlooked young entrepreneurial and family firms, where the principal-agent problem was assumed to be nonexistent or minimal. In this paper, we question this assumption. We examine whether the principal-agent conflict affects the performance of young entrepreneurial ventures with hired managers and determine whether their performance is more sensitive to the monitoring difficulty or effort incentives of hired managers. We use two policy changes that would exogenously increase monitoring difficulty and managers’ effort incentives—a shock to the accounting system and a shock to the local labor market. We find that, similar to established corporations, young entrepreneurial ventures suffer from the principal-agent problem. However, unlike corporations, entrepreneurial ventures seem to be much more sensitive to the managers’ incentive intensity than monitoring difficulty. These results suggest that the sources of the principal-agent conflict may be different in entrepreneurial start-ups and corporations and open a broad avenue for further research of the underlying mechanisms. The findings also suggest that entrepreneurs may be better off motivating their managers through incentives, rather than further investing in monitoring systems. Additionally, we demonstrate how policy changes may exogenously discipline hired managers through the labor markets.
