Working for Divergent Principals: Effects of Private Equity on Employment Practices in Family Firms

This research increases understanding of agency theory by exploring the influence of divergent principal interests in private firms. Investigating unique panel data on employment levels and employment terms in private equity backed family firms (from 1996 to 2013), findings reveal that, when private equity investors acquire minority positions, family control strongly weakens the positive impact of private equity on employment levels. Alternatively, when private equity investors acquire full control, employment levels increase more in previously family controlled firms compared to nonfamily firms. Results further show that neither majority nor minority private equity investments induce significant changes in employment terms such as wages or the usage of temporary contracts, yet highlight some important selection effects. These results hold broad implications for family firms, private equity investors and policy makers.