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Small Business Economics

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01.02.2014

Ownership structure, horizontal agency costs and the performance of high-tech entrepreneurial firms

verfasst von: Massimo G. Colombo, Annalisa Croce, Samuele Murtinu

Erschienen in: Small Business Economics | Ausgabe 2/2014

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Abstract

We use the lens of the resource-based view and horizontal agency cost theory to analyse the effect of the presence of different types of individual owners, i.e., owner-managers and non-manager individual shareholders, on the performance of high-tech entrepreneurial firms. Ownership enlargement may contribute to fill the resource gap faced by entrepreneurial firms and improve firm performance. However, whereas owner-managers engender low horizontal agency costs, non-manager individual shareholders generate high horizontal agency problems because of their limited managerial involvement. Our results on a sample of Italian high-tech entrepreneurial firms show that the number of owner-managers has a positive effect on firm performance, whereas the effect of the number of non-manager individual shareholders is negligible. This latter effect becomes more positive, even though still not statistically significant, when firms are highly leveraged confirming the disciplining role of bank debt.

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In Europe, small and medium enterprises account for more than 67 % of jobs in the private sector (87.5 million in 2010) and more than 58 % of total turnover (European Commission 2011).

Many works referred to these gaps as the ‘funding' gap and ‘knowledge' gap, respectively (e.g., Colombo and Grilli 2005; Storey and Tether 1998; Van Auken 2001).

This work is not the first attempt to combine arguments from the resource-based view and agency cost theory (e.g., Hillman and Dalziel 2003). However, it is the first study that does so in the field of high-tech entrepreneurship. In this effort, we follow the suggestions provided by Barney et al. (2001).

The use of an efficiency indicator to measure agency costs is suggested by Ang et al. (2000). In their paper, they use a quite unsophisticated efficiency indicator: the ratio between annual sales and total assets. This measure has subsequently been employed by Singh and Davidson (2004). With regard to horizontal agency costs, Dalziel et al. (2011) claim that principal-principal conflicts lead to inefficiencies at the firm level, thus confirming our choice.

For instance, owner-managers may collude and engage in actions that maximise their personal utility but negatively affect firm performance, e.g. by placing unqualified relatives or friends in managerial positions (Faccio et al. 2001) or by purchasing materials for private benefits (Chang and Hong 2000).

In Italy, most individuals who are defined as self-employed by official statistics (i.e., ‘independent employees') are in fact salaried workers with atypical employment contracts. This makes the official number of high-tech entrepreneurial firms in Italy enormously inflated.

We aggregate RITA industries into three macro industries: manufacturing, software and web services. We do so because we need a sufficient number of observations in each industry to estimate TFP (see Sect. 4.1).

It is worth noting that we may underestimate total (horizontal) agency costs, as firm efficiency does not fully capture indirect agency costs, such as: (1) potential distortions in operating and strategic decisions due to agency problems and (2) agency costs not included in financial statements, such as the private monitoring costs incurred by non-manager individual shareholders (for more details, see Ang et al. 2000).

For more details on the estimation of TFP and on the choice of output and input variables, see Van Biesebroeck (2007) and Levinsohn and Petrin (2003).

In other words, for both ratios, we calculated the values corresponding to the 1st and 99th percentiles of the variable's distribution and assigned these values to all observations falling before the 1st percentile and beyond the 99th percentile, respectively. This approach is useful because it reduces the impact of outliers and allows the use of a larger number of observations than would be possible if the outliers were deleted. As robustness check we use other winsorising thresholds (e.g., 2 and 5 %). Results are very similar to those reported in the text and are available upon request from the authors.

As is customary in this context (e.g., Colombo et al. 2011; Girma et al. 2007), we do not insert industry dummies at the second step because TFP is estimated separately for each industry at the first step.

Our results are robust to the use of different thresholds of \( {\text{DebtOnTA}}_{i,t} \). Results for thresholds different than the 50th percentile (e.g., 75th, 90th and 95th) are not reported in the text but are available upon request from the authors.

As suggested by Connelly et al. (2010, p. 1563): ‘different investors take ownership stakes in companies owing to the presence of certain firm attributes such as performance […]. More specifically, ownership is not exogenous'.

Out of 255 sample firms, we are able to estimate the IMR-type variable for 251 firms. For more details on the estimation of the IMR-type variable on the same data set, see, e.g., Colombo et al. (2009, 2011).

We are grateful to an anonymous referee for this suggestion.

In order to exclude a reverse causality relationship between firm's leverage and performance, we re-estimated our models by replacing either \( {\text{DebtOnTA}}_{i,t} \) or d_highlylev_50_i,t with their lagged values, respectively. Results do not change, confirming the absence of a significant direct effect of firm leverage on productivity growth in our sample. As a further robustness check, we performed a Granger causality test between firm's leverage and performance, which still excludes reverse causality concerns. We are grateful to an anonymous referee for this suggestion.

We also estimated our models by excluding VC-backed firms from the year in which they received the first round of VC financing only. Results do not change.

A partial exception is represented by the work of Sine et al. (2006). The authors consider the number of executives in the founding team divided by the number of employees and find that this variable is positively related to the performance of Internet firms as measured by firm's revenues.

The TEPA law introduced in France in 2007 is a typical example. A 50 % share of the money invested by tax payers in the capital of unlisted SMEs on a long-term basis (i.e., the lock-up period is 5 year long) will be deducted from the solidarity tax on wealth (Impôt de solidarité sur la fortune), up to 45,000 euros per year.

The creation of the European Angels Fund by the European Investment Fund is a step in the right direction. The European Angels Fund (http://www.eif.org/what_we_do/equity/eaf/index.htm) provides equity to business angels and other non-institutional investors for the financing of innovative companies through the establishment of co-investment framework agreements. No management fee is paid to the business angel but investment-related costs are shared on a pro-rata basis. Carry payments from the European Angels Fund to the business angel increase the upsides of the investments for the latter. Partner business angels are selected on the basis of their experience in the targeted investment area and track record of successful investments. The scheme is presently active in Germany and Spain.

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Titel: Ownership structure, horizontal agency costs and the performance of high-tech entrepreneurial firms
verfasst von: Massimo G. Colombo
Annalisa Croce
Samuele Murtinu
Publikationsdatum: 01.02.2014
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 2/2014
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-013-9483-y

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