Vertical and Horizontal Agency Problems in Private Firms : Ownership Structure and Operating Performance

We investigate how ownership structure influences operating performance and implied agency costs using multi-year data on over 42,000 firms, covering the full spectrum of ownership and management arrangements ranging from owner or non-owner managed single or multiple-owner private firms, through to widely held publicly traded corporations. We document several new results of considerable economic significance. First, overall horizontal agency costs arising from unequal ownership within private firms dominate vertical agency costs arising from separation of ownership and control. Second, the joint presence of both horizontal and vertical agency problems in the same firm amplifies these costs. Third, the presence of a second large shareholder greatly mitigates horizontal agency costs. Fourth, complexity in ownership structure created by corporate co-ownership increases agency costs. Fifth, publicly traded firms have higher agency costs relative to comparable private firms. Finally, back-of-the-envelope estimates of the annual loss of aggregate earnings and incremental operating expenses potentially associated with agency problems across the overall economy are over 3% and 5% of GDP respectively