We study an agency problem in private universities – the conflict between controlling families and other stakeholders. We investigate whether universities over which controlling families have disproportionately significant power relative to the amount of funds they contribute, that is, universities with high expropriation risk, are associated with lower outside donations and poor quality.
Using a sample of Korean private universities, we find that measures of family control in excess of monetary contributions are negatively related to the level of outside donation and measures of university quality. We also find that universities at which the controlling family exerts disproportionate control are more likely to face disputes between the controlling family and other stakeholders. Finally, we show that our results are not driven by reverse causality.
While the existing literature on not-for-profit organizations focuses on the conflict between professional managers and other stakeholders, we study the conflict between controlling families and other stakeholders. We investigate a situation in which the controlling family expropriates other stakeholders, a topic missing from the existing not-for-profit literature.
This study offers insights to policymakers interested in creating private universities in an emerging market setting. The relevance of our results is not limited to Korea. According to Altbach, family control of private universities is prevalent in a number of countries, including Mexico, Thailand, Taiwan, Japan, Korea, the Philippines, Argentina, India, and China.