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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)

Registered author(s):

    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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    File URL: http://www.econ.ku.dk/cie/dp/dp_2003-2006/2005-13.pdf/
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    Bibliographic Info

    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

    Contact details of provider:
    Postal: Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark
    Phone: (0045) 35 32 30 54
    Fax: +45 35 32 30 00
    Email:
    Web page: http://www.econ.ku.dk/cie/
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    Related research

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

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    References

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    1. Bhattacharya, Utpal & Ravikumar, B, 1997. "From Cronies to Professionals: The Evolution of Family Firms," MPRA Paper 22939, University Library of Munich, Germany, revised Jan 2004.
    2. Angrist, Joshua D. & Krueger, Alan B., 1999. "Empirical strategies in labor economics," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 23, pages 1277-1366 Elsevier.
    3. Nick Bloom & John Van Reenen, 2006. "Measuring and explaining management practices across firms and countries," LSE Research Online Documents on Economics 733, London School of Economics and Political Science, LSE Library.
    4. Andrei Shleifer & Fausto Panunzi & Mike Burkart, 2002. "Family firms," LSE Research Online Documents on Economics 24926, London School of Economics and Political Science, LSE Library.
      • Mike Burkart & Fausto Panunzi & Andrei Shleifer, 2003. "Family Firms," Journal of Finance, American Finance Association, vol. 58(5), pages 2167-2202, October.
    5. Sraer, David & Thesmar, David, 2004. "Performance and Behaviour of Family Firms: Evidence from the French Stock Market," CEPR Discussion Papers 4520, C.E.P.R. Discussion Papers.
    6. Ralph Chami, 2001. "What is Different About Family Businesses?," IMF Working Papers 01/70, International Monetary Fund.
    7. Daniela del Boca, 2001. "Mothers, Fathers And Children After Divorce: The Role Of Institutions," CHILD Working Papers wp25_01, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
    8. Francesco Caselli & Nicola Gennaioli, 2003. "Dynastic Management," NBER Working Papers 9442, National Bureau of Economic Research, Inc.
    9. Randall K. Morck & David A. Strangeland & Bernard Yeung, 1998. "Inherited Wealth, Corporate Control and Economic Growth," William Davidson Institute Working Papers Series 209, William Davidson Institute at the University of Michigan.
    10. Yoram Weiss, . "The Formation and Dissolution of Families: Why Marry? Who Marries Whom? And What Happens Upon Marriage and Divorce," University of Chicago - Population Research Center 92-7a, Chicago - Population Research Center.
    11. Ted Bergstrom, 1995. "A Survey of Theories of the Family," Papers _027, University of Michigan, Department of Economics.
    12. Butcher, Kristin F & Case, Anne, 1994. "The Effect of Sibling Sex Composition on Women's Education and Earnings," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 531-63, August.
    13. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, vol. 65(3), pages 365-395, September.
    14. Gordon B. Dahl & Enrico Moretti, 2008. "The Demand for Sons," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1085-1120.
    15. Gordon B. Dahl & Enrico Moretti, 2004. "The Demand for Sons: Evidence from Divorce, Fertility, and Shotgun Marriage," NBER Working Papers 10281, National Bureau of Economic Research, Inc.
    16. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1989. "Characteristics of Hostile and Friendly Takeover Targets," NBER Working Papers 2295, National Bureau of Economic Research, Inc.
    17. 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.
    18. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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    Cited by:
    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.
    2. Francesco Caselli & Nicola Gennaioli, 2006. "Dynastic management," LSE Research Online Documents on Economics 3558, London School of Economics and Political Science, LSE Library.
    3. Smith, Nina & Smith, Valdemar & Verner, Mette, 2005. "Do Women in Top Management Affect Firm Performance? A Panel Study of 2500 Danish Firms," IZA Discussion Papers 1708, Institute for the Study of Labor (IZA).

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