BONDING AND MONITORING IN EQUITY AGENCY RELATIONSHIPS: NON-FAMILY VERSUS FAMILY SMEs FROM AUSTRALIA’S BUSINESS LONGITUDINAL SURVEY Professor

The principal objective in this paper is to examine certain bonding and monitoring practices intended to address equity agency problems in SMEs, and to compare and contrast such practices between nonfamily and family concerns. The research employs longitudinal panel data for 2,794 SMEs across industry sectors taken from the Australian federal government’s Business Longitudinal Survey for three financial years from 1995-96 to 1997-98. Overall, this exploratory research reveals that, while family businesses do seem to undertake less bonding and monitoring than their non-family counterparts, this does not appear to be a consequence of ‘familyness’ per se. Rather, it is evidently an outcome of the smaller size, legal structure, industry and less complex agency relationships of family firms. Introduction A theoretical perspective that has contributed significantly to modern financial theory is that of agency theory, which considers a business enterprise from the viewpoint of the various stakeholders it might have, and explores how their financial interests are furthered and protected in their dealings with each other. The stakeholder relationships that receive most attention in the small and medium-sized enterprise (SME) literature are those between: • Managers and owners. • Owner-managers and other owners. • Insiders (primarily owners and managers) and outsiders (mainly creditors and lenders). The central dilemma in agency theory is that day-to-day control of an SME’s activities and financial fortunes very often rests in the hands of only some stakeholders who are usually managers or owner-managers. Yet all stakeholders have a legitimate expectation that their interests will be well served. By analogy with legal notions of agent and principal, those who exercise control are seen as being agents for the other stakeholders who are considered to be principals. The most significant problems that may arise from agency relationships in SMEs are: • Information asymmetry.