Compensation and Firm Misconduct in Family Firms




Chen, Lele

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The dissertation consists of two essays on family ownership and its implications in the U.S. public firms. Family firms constitute a significant part of the capital market. For example, one third of Standard and Poor's 500 firms are family firms. Compared to non-family firms, family firms have different agency problems. Specifically, they face fewer conflicts between managers and shareholders (Type I Agency Problem), but more conflicts between large and small shareholders (Type II Agency Problem). This dissertation investigates the compensation design and firm misconduct issues in family firms that face these unique agency problems. In the first essay, I explore and compare the use of different performance measures of CEO compensation in family vs. non-family firms. Performance measures are widely used in compensation contracts to provide benchmarks for outcomes of managers' efforts. They are designed to mitigate the agency conflicts between managers and shareholders. Because of the unique agency problems that family firms face, I expect the use of performance measures to be different in family firms. Consistent with this argument, I find that family firms place higher weight on the accounting measures since they are perceived to be more reliable. Also, such results are driven by family firms with outside hired CEOs, where the reduced Type I agency problem is more likely to dominate the increased Type II problem. When separating earnings into three components (operating cash flows, discretionary accruals, and non-discretionary accruals), I document that CEOs in family firms receive higher weight on the cash flow component in their total compensation, especially for outside hired CEOs in family firms. My investigation also shed light on the use of non-GAAP performance measures in family firms. Specifically, when the CEOs in family firms are not founding family members (outside hired CEOs), compensation committees place higher weight on the GAAP earnings but doesn't price non-GAAP earnings differently in the compensation contracts. However, when family firms hire family member CEOs, the GAAP earnings receive similar weight in CEO compensation as in non-family firms, and the non-GAAP earnings receive lower weight. The second essay examines the impact of family ownership on corporate misconduct and its consequences. Firm misconduct could occur in all business activities and cause significant economic losses. Although prior literature addresses various causes and consequences of firm misconduct, few consider the impacts of family ownership. I argue that the reduced Type I agency problem could provide alignment effects that constrain managerial misbehavior, while the more severe Type II agency issues could cause entrenchment effects and motivate misconduct in family firms. It's an empirical question whether and how family ownership impacts firm misconduct. By examining the S&P 500 firms in U.S., the empirical analyses show that family ownership could constrain firm misconduct, especially when there is an outside hired CEO in the family firm. Further analyses find that family firms face less severe consequences when they are penalized for their misconduct, in term of less credit rating change and less negative market reactions.


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Family firms