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Inside the Family Firm: The Role of Families in Succession Decisions and Performance

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Author Info
Morten Bennedsen (Copenhagen Business School)
Kasper Nielsen (University of Copenhagen)
Francisco Pérez-González (Columbia University)
Daniel Wolfenzon (New York University)
Abstract

This paper uses a unique dataset from Denmark to investigate (1) the role of family characteristics in corporate decision making, and (2) the consequences of these decisions on firm performance. We focus on the decision to appoint either a family or an external chief executive officer (CEO). We show that a departing CEO’s family characteristics have a strong predictive power in explaining CEO succession decisions: family CEOs are more frequently selected the larger the size of the family, the higher the ratio of male children and when the departing CEOs had only had one spouse. We then analyze the impact of family successions on performance. We overcome endogeneity and omitted variables problems of previous papers in the literature by using the gender of a departing CEO’s first-born child as an instrumental variable (IV) for family successions. This is a plausible IV as male first-child family firms are more likely to pass on control to a family CEO than female first-child firms, but the gender of the first child is unlikely to affect firms’ performance. We find that family successions have a dramatic negative causal impact on firm performance: profitability on assets falls by at least 6 percentage points around CEO transitions. These estimates are significantly larger than those obtained using ordinary least squares. Finally, our findings demonstrate that professional non-family CEOs provide extremely valuable services to the organizations they work for.

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Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2005-13.

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Length: 31 pages
Date of creation: Jun 2005
Date of revision: Sep 2005
Handle: RePEc:kud:kuieci:2005-13

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Related research
Keywords: family firms; successions; CEO turnover; governance;

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nick Bloom & John Van Reenen, 2006. "Measuring and Explaining Management Practices Across Firms and Countries," CEP Discussion Papers dp0716, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  2. Nina Smith & Valdemar Smith & Mette Verner, 2005. "Do Women in Top Management Affect Firm Performance? A Panel Study of 2500 Danish Firms," CIE Discussion Papers 2005-03, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
    Other versions:
  3. Francesco Caselli & Nicola Gennaioli, 2006. "Dynastic Management," CEP Discussion Papers dp0741, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
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