Personal Relationships and Higher Agency Costs: Study of Buyers and Suppliers in Australian Manufacturing and Service Sector

Abstract

Personal relationships (i.e.friendships) have been the subject of much research in the business discipline, with the majority of literature focusing on how personal relationships yield positive firm-level outcomes.However, personal relationships are not without drawbacks and may lead to negative outcomes for the firms involved.Despite this, the current body of knowledge on this issue is relatively fragmented.This paper addresses this important gap in the literature.For exploratory purposes, the study is qualitative in nature.Based on a grounded theory approach, a model is developed describing how personal relationships embedded within inter-firm relationships lead to negative outcomes for the firms.Overall, 16 in-depth interviews with seniormanagers of buying and supplying firms were undertaken.Results from this study exhibit that managers engage in exploitation of personal relationships by demanding higher sales commission, higher bonuses and higher salaries from their respective firms, leading to higher agency costs.Firms can use these finding to understand explicitly what types of negative consequences personal relationships yield.Further, this study presents to firms specific actions that managers of buying and supplying firms engage in, when a personal relationship is present between them in the supply chain Finally, this paper concludes by providing several constructive guidelines to firms on managing personal relationships within inter-firm relationships in order to mitigate its negative firm-level consequences.

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