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Family Ties and Organizational Design: Evidence from Chinese Private Firms

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  • Cai, Hongbin
  • Li, Hongbin
  • Park, Albert
  • Zhou, Li-An

Abstract

Analyzing data from a unique survey of managers of Chinese private firms, we investigate how family ties with firm heads affect managerial compensation and job assignment. We find that family managers earn higher salaries and receive more bonuses, hold higher positions, and are given more decision rights and job responsibilities than non-family managers in the same firm. However, family managers face weaker incentives than professional managers as seen in the lower sensitivity of their bonuses to firm performance. Our findings are consistent with the predictions of a principal-agent model that incorporates family trust and endogenous job assignment decisions. We show that alternative explanations, such as taste-based favoritism, succession concerns, and unobserved ability or risk attitudes, are unlikely to drive our results.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7855.

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Date of creation: Jun 2010
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Handle: RePEc:cpr:ceprdp:7855

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Keywords: authority; China; family firm; incentives;

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References

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  1. Kato, Takao & Long, Cheryl, 2005. "Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges," IZA Discussion Papers 1767, Institute for the Study of Labor (IZA).
  2. Bhattacharya, Utpal & Ravikumar, B, 2001. "Capital Markets and the Evolution of Family Businesses," The Journal of Business, University of Chicago Press, vol. 74(2), pages 187-219, April.
  3. Nicholas Bloom & Christos Genakos & Raffaella Sadun & John Van Reenen, 2012. "Management Practices Across Firms and Countries," NBER Working Papers 17850, National Bureau of Economic Research, Inc.
  4. Dohmen, Thomas J & Falk, Armin & Huffman, David & Schupp, Jürgen & Sunde, Uwe & Wagner, Gert Georg, 2006. "Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey," CEPR Discussion Papers 5517, C.E.P.R. Discussion Papers.
  5. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
  6. Becker, Gary S., 1971. "The Economics of Discrimination," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226041162, August.
  7. Liu, Deqiang & Otsuka, Keijiro, 2004. "A Comparison of Management Incentives, Abilities, and Efficiency between SOEs and TVEs: The Case of the Iron and Steel Industry in China," Economic Development and Cultural Change, University of Chicago Press, vol. 52(4), pages 759-80, July.
  8. Ilias, Nauman, 2006. "Families and firms: Agency costs and labor market imperfections in Sialkot's surgical industry," Journal of Development Economics, Elsevier, vol. 80(2), pages 329-349, August.
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Cited by:
  1. Oriana Bandiera & Andrea Prat & Luigi Guiso & Raffaella Sadun, 2011. "Matching Firms, Managers and Incentives," NBER Working Papers 16691, National Bureau of Economic Research, Inc.
  2. Qiuqiong Huang & Scott Rozelle & Dinghuan Hu, 2007. "Pump-set clusters in China: explaining the organization of the industry that revolutionized Asian agriculture," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 14(2), pages 75-105, December.

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