Agency Conflicts and the Small Firm Investment Decision

This paper explains how agency conflicts—and potential agency conflicts—can influence the investment decisions of small firms, and provides evidence of these effects using data from a re-cent survey of small firm investment practices. The survey asks business owners to identify their most important investment concern—over-investment or under-investment. We find that under-investment concerns are more prevalent in growing firms, and those with concentrated owner-ship and control structures. Over-investment concerns increase as firms adopt less-concentrated ownership and control structures. These results suggest that the management challenges facing small firms shift as the degree of separation between ownership and control becomes greater