Relationship between family ownership, agency costs towards financial performance and business strategy as mediation
Abstract
This study investigates the relationship between family ownership, agency costs, financial performance, and companies’ business strategies. The targeted population of this study were all 143 manufacturing companies listed on the Indonesia Stock Exchange (IDX) during 2007–2014. About 31% (45) of these manufacturing companies are family companies. The hypotheses were tested using the partial least-square (PLS) method. Our findings reveal that the companies’ business strategies are not affected by the family ownership. Family ownership and business strategies influence companies’ financial performance. Agency costs influence business strategy and financial performance, and this shows that agency costs contribute to both the increase and decrease of financial performance. Business strategy mediates the relationship between family ownership and financial performance. This shows that family companies do not concentrate on financial goals but rather on the sustainability. Business strategy influences the relationship between agency costs and financial performance. This shows that funds can be redistributed in the course of business strategy planning, which will, in turn, improve the company’s development.
Keyword : family ownership, agency costs, financial performance, business strategy
How to Cite
Savitri, E. (2018). Relationship between family ownership, agency costs towards financial performance and business strategy as mediation. Business: Theory and Practice, 19, 49-58. https://doi.org/10.3846/btp.2018.06
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Bae KH, Jae SB, Jun KK, Wei LL (2012) Do controlling shareholders expropriation incentives imply a link between corporate governance and firm value? Theory and evidence. Journal of Financial Economics 105: 412-435. https://doi.org/10.1016/j.jfineco.2012.02.007
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Meyer M, Zucker LG (1989) Permanently failing organizations. Newbury Park: Sage.
Moores K (2009) Paradigms and theory building in the domain of business families. Family Business Review 22: 167-180. https://doi.org/10.1177/089448650933337
Morck R, Yeung B (2004) Family control and the rent-seeking society-etrepreneurship. Family Business Review 22: 167-180. Porter ME (1980) Competitive strategy: techniques for analyzing industries and competitors. New York: Free Press.
Poza EJ, Alfred T, Maheswari A (1997) Stakeholders perception of culture and management practices in family firms – a preliminary report. Family Business Review (10): 135-155. https://doi.org/10.1111/j.1741-6248.1997.00135.x
Powell TC (1992) Strategic planning as competitive advantage. Strategic Management 13: 551-558. https://doi.org/10.1002/smj.4250130707
Sawir A (2005) Financial performance analysis and financial planning company. Jakarta: Gramedia Pustaka.
SFAS 15 (2013) Statement of Financial Accounting Standards 15 concerning Investments in Associates and Venture Parties, par 5 and 6.
Shyu J (2011) Family ownership and firm performance: evidence from Taiwanese Firms. International Journal of Managerial Finance 7 (4): 397-411. https://doi.org/10.1108/17439131111166393
Villalonga B, Amit R (2006) How do family ownership, control and management affect firm value?. Journal of Finance Economics 80: 385-417. https://doi.org/10.1016/j.jfineco.2004.12.005
Ward JL, Handy JL (1988) A survey of board practices. Family Business Review 1 (3): 298-308. https://doi.org/10.1111/j.1741-6248.1988.00289.x
Warsini S, Rossieta H (2013) The Influence of family ownership on corporate performance taking into account the business strategy as moderating variable (Study on Indonesia Stock Exchange). Proceeding Simposium Nasional Akuntansi XVI, Manado.
Werts CE, Linn RL, Joreskog KG (1974) Intraclass reliability estimates: Testing structural assumptions. Educational and Psychological Measurement 34 (1): 25-33. https://doi.org/10.1177/001316447403400104
Wiranata, Nugrahanti (2013) Effect of ownership structure on profitability in Indonesia. Jurnal Akuntansi Keuangan 15 (1): 15-26.
Xiao S (2009) How does agency costs affect firm value? Evidence from China. Journal of Economic Literature 30 (10): 1113-1132.
Ang J, Cole S, Rebel A, Wuh LJ (2000) Agency costs and owners-hip structure. Journal of Finance 55 (1): 81-106. https://doi.org/10.1111/0022-1082.00201
Anggraita V (2013) The effect of moderation on the relationship between corporate strategy and corporate performance monitoring mechanism. Simposium Nasional Akuntansi: 5062-5087.
Astuti AD, Rahman, Sudarno (2015) The influence of family ownership of the company’s financial performance with the agency costs as a moderating variable in Indonesian. Jurnal Dinamika Akuntansi 7 (2): 98-108.
Bae KH, Jae SB, Jun KK, Wei LL (2012) Do controlling shareholders expropriation incentives imply a link between corporate governance and firm value? Theory and evidence. Journal of Financial Economics 105: 412-435. https://doi.org/10.1016/j.jfineco.2012.02.007
Breton-Miller I, Miller D (2008) Why do some family businesses out compete?: governance, long term orientation and sustainable capability. Entrepreneurship Theory and Practice 30: 731-746. https://doi.org/10.1111/j.1540-6520.2006.00147.x
Chin WW (1998) The partial least squares approach to structural equation modeling. In: Marcoulides GA (Ed) Modern methods for business research. Erlbaum, Mahwah, 295-358.
Chu W (2011) Family ownership and firms performance: influence of family management, family control and firm size. Asia Pacific Journal Management 28 (4): 833-851. https://doi.org/10.1007/s10490-009-9180-1
Claessens S, Dajnkov S, Lang HP (2000) The separation of owners-hip in East Asia corporation. Journal of Finance Economics 58 (1-2): 81-112. https://doi.org/10.1016/S0304-405X(00)00067-2
David FR (2011) Management strategy: concept and cases. New Jersey: Prentice Hall International.
Donaldson L, Davis JH (1991) Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of Management 16 (1): 49-64. https://doi.org/10.1177/031289629101600103
Faccio M, Lang LH (2002) The ultimate ownership of Western European corporations. Journal of Financial Economics 65 (3): 365-395. https://doi.org/10.1016/S0304-405X(02)00146-0
Faisal (2005) Analysis of agency costs, ownership structure and corporate governance mechanism In Indonesian. Jurnal Riset Akuntansi 8 (2): 175-190.
Fama EF, Jensen MC (1983) Separation of ownership and control. European Journal of Law and Economics 26: 301-325. https://doi.org/10.1086/467037
Gani L, Jermias J (2006) Investigating the effect of board independence on performance across different strategies. The International Journal of Accounting 41: 295-314. https://doi.org/10.1016/j.intacc.2006.07.009
Ghozali I (2014) Structural equation modeling: alternative method with partial least square (4th ed). Semarang: Diponegoro University.
Haque A, Omotta H (2001) Strategic marketing practice considerations in family business in Bangladesh. New England Journal of Enterpreneurship 42: 102-111.
Haryadi B (2008) Strategic alignment between business strategy and information systems strategy. Telaah Manajemen 33: 127-144.
Ibrahim NA, Angelidis JP, Parsa F (2008) Strategic management of family business: current findings and directions for future research. International Journal of Management 25: 95-110.
Jensen MC, Meckling WH (1976) Theory of the firms: managerial behavior, agency costs and ownership structure. Journal of financial and economic 3 (4) 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
La Porta R, Lopez-de-Silanes F, Shleifer A (1999) Corporate ownership around the world. Journal of Finance 54 (2): 471-517. https://doi.org/10.1111/0022-1082.00115
Lamin A (2007) The Effect of business group affiliation on firms strategy. Disertation, University of Minnesota.
Layyinaturrobaniyah R, Fitriyana D (2014) The agency costs of family and non family firms. Siasat Bisnis 18 (2): 169-179. https://doi.org/10.20885/jsb.vol18.iss2.art3
Lena (2007) Alignment technology operations strategy and corporate performance: an exploration study on manufacturing company in Indonesia. Usahawan 36: 43-55.
Lindow CM, Stubner S, Waft T (2010) Strategic fit within family firms: the role of family influence and the effect on performance. Journal of Family Business Strategy 1: 167-178. https://doi.org/10.1016/j.jfbs.2010.08.004
Litz RA, Crewman JJ, Chua JH (2004) Comparing the agency costs of family and non family firms: conceptual and exploratory evidence. Enterpreneurship Theory and Practice 28 (4): 335-354. https://doi.org/10.1111/j.1540-6520.2004.00049.x
Madison KJ (2014) Agency theory and stewardship theory integrated, expanded, and bounded by context: an empirical investigation of structure, behavior, and performance within family firms. Doctoral Dissertation, University of Tennessee.
Meyer M, Zucker LG (1989) Permanently failing organizations. Newbury Park: Sage.
Moores K (2009) Paradigms and theory building in the domain of business families. Family Business Review 22: 167-180. https://doi.org/10.1177/089448650933337
Morck R, Yeung B (2004) Family control and the rent-seeking society-etrepreneurship. Family Business Review 22: 167-180. Porter ME (1980) Competitive strategy: techniques for analyzing industries and competitors. New York: Free Press.
Poza EJ, Alfred T, Maheswari A (1997) Stakeholders perception of culture and management practices in family firms – a preliminary report. Family Business Review (10): 135-155. https://doi.org/10.1111/j.1741-6248.1997.00135.x
Powell TC (1992) Strategic planning as competitive advantage. Strategic Management 13: 551-558. https://doi.org/10.1002/smj.4250130707
Sawir A (2005) Financial performance analysis and financial planning company. Jakarta: Gramedia Pustaka.
SFAS 15 (2013) Statement of Financial Accounting Standards 15 concerning Investments in Associates and Venture Parties, par 5 and 6.
Shyu J (2011) Family ownership and firm performance: evidence from Taiwanese Firms. International Journal of Managerial Finance 7 (4): 397-411. https://doi.org/10.1108/17439131111166393
Villalonga B, Amit R (2006) How do family ownership, control and management affect firm value?. Journal of Finance Economics 80: 385-417. https://doi.org/10.1016/j.jfineco.2004.12.005
Ward JL, Handy JL (1988) A survey of board practices. Family Business Review 1 (3): 298-308. https://doi.org/10.1111/j.1741-6248.1988.00289.x
Warsini S, Rossieta H (2013) The Influence of family ownership on corporate performance taking into account the business strategy as moderating variable (Study on Indonesia Stock Exchange). Proceeding Simposium Nasional Akuntansi XVI, Manado.
Werts CE, Linn RL, Joreskog KG (1974) Intraclass reliability estimates: Testing structural assumptions. Educational and Psychological Measurement 34 (1): 25-33. https://doi.org/10.1177/001316447403400104
Wiranata, Nugrahanti (2013) Effect of ownership structure on profitability in Indonesia. Jurnal Akuntansi Keuangan 15 (1): 15-26.
Xiao S (2009) How does agency costs affect firm value? Evidence from China. Journal of Economic Literature 30 (10): 1113-1132.