Financial Dependence and Innovation: The Case of Public versus Private Firms

While agency theory predicts that the unification of ownership and control of private family firms reduces agency concerns, some prior studies suggest that the complex family relationships of private, family firms increases agency conflicts. To investigate these conflicting predictions, this study empirically examines with regression analysis how executive total compensation levels relate to dividends at public versus private firms to compare the conflict resolution strategies of public versus private firms. For public firms, this study finds a positive compensation-dividend relation, indicating that public firms increase total compensation levels to reward executives for supporting firms’ dividend policies and realign the interests of owners and managers from the conflict created by dividends. Drawing from special access to Forms 1120, this study examines a large sample of privately held U.S. firms. For private firms, this study finds a negative compensation-dividend relation, indicating that private, family firms do not use compensation to realign the interests of owners and managers and overcome the conflict created by dividends. This new evidence suggests that the ownership structure of private, family firms systematically mitigates agency concerns to some degree. On a practical level, this study indicates that firms can provide compensation arrangements that support firms’ dividend policies, and that regulatory agencies should continue to focus on public firms where the great dispersion of ownership systematically increases agency concerns.

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Creditors’ and Shareholders’ Reporting Demands in Public Versus Private Firms: Evidence from Europe*

Contemporary Accounting Research ◽

10.1111/j.1911-3846.2010.01001.x ◽

2010 ◽

Vol 27 (1) ◽

pp. 49-91 ◽

Cited By ~ 80

Author(s):

ERIK PEEK ◽

RICK CUIJPERS ◽

WILLEM BUIJINK

Keyword(s):

Private Firms ◽

Public Versus Private

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Private versus Public Corporate Ownership: Implications for Future Changes in Profitability

Journal of Management Accounting Research ◽

10.2308/jmar-52550 ◽

2019 ◽

Vol 32 (2) ◽

pp. 27-55 ◽

Cited By ~ 2

Author(s):

Kristian D. Allee ◽

Brad A. Badertscher ◽

Teri Lombardi Yohn

Keyword(s):

Data Availability ◽

Private Firms ◽

Corporate Ownership ◽

Public And Private ◽

Public Firms ◽

Size Growth ◽

Public Versus Private ◽

Short Termism ◽

Robust Evidence ◽

Insight Into

ABSTRACT We investigate the association between public versus private ownership and future changes in profitability. Managers have long debated the implications of public and private corporate ownership; however, little empirical research has provided insight into the issue. We find robust evidence that public firms are associated with significantly lower future changes in operating profitability compared to private firms matched on current profitability, size, growth, and industry. We also find that the differential future changes in profitability of public and private firms manifests in both future changes in profit margins and changes in asset turnovers. Additionally, we find evidence consistent with an association between short-termism, competition, and agency costs and the lower future changes in profitability for public versus private firms. The results provide insight for managers and investors into the differential future changes in profitability of public versus private firms and into the factors that drive the differential profitability. JEL Classifications: M41; M42; M44. Data Availability: Data are available from sources identified in the paper.

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