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

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  • Morten Bennedsen
  • Kasper M. Nielsen
  • Francisco Pérez-González
  • Daniel Wolfenzon
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    Abstract

    This paper uses a unique dataset from Denmark to investigate the impact of family characteristics in corporate decision making and the consequences of these decisions on firm performance. We focus on the decision to appoint either a family or external chief executive officer (CEO). The paper uses variation in CEO succession decisions that result from the gender of a departing CEO%u2019s firstborn child. This is a plausible instrumental variable (IV), as male first-child firms are more likely to pass on control to a family CEO than are female first-child firms, but the gender of the first child is unlikely to affect firms%u2019 outcomes. We find that family successions have a large negative causal impact on firm performance: operating profitability on assets falls by at least four percentage points around CEO transitions. Our IV estimates are significantly larger than those obtained using ordinary least squares. Furthermore, we show that family-CEO underperformance is particularly large in fast-growing industries, industries with highly skilled labor force and relatively large firms. Overall, our empirical results demonstrate that professional, non-family CEOs provide extremely valuable services to the organizations they head.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12356.

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    Date of creation: Jul 2006
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    Publication status: published as Bennedsen, Morten, Kasper Meisner Nielsen, Francisco Pérez-González, and Daniel Wolfenzon. "Inside the Family Firm: the Role of Families in Succession Decisions and Performance." Quarterly Journal of Economics 122, 2 (2007): 647-691.
    Handle: RePEc:nbr:nberwo:12356

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    Cited by:
    1. Ernesto Dal Bo & Pedro Dal Bo & Jason Snyder, . "Political Dynasties," Working Papers 2006-15, Brown University, Department of Economics.
    2. Simon C. Parker & C. Mirjam van Praag, 2006. "The entrepreneur’s mode of entry: Business takeover or new venture start?," Papers on Entrepreneurship, Growth and Public Policy, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group 2006-26, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
    3. Schneider, Cédric, 2007. "The Determinants of Patent Applications Outcomes - Does Experience Matter?," MPRA Paper 3359, University Library of Munich, Germany.
    4. Luc Laeven & Ross Levine, 2007. "Complex Ownership Structures and Corporate Valuations," IMF Working Papers 07/140, International Monetary Fund.
    5. Bjuggren, Per-Olof & Duggal, Rubecca & Giang, Dinh Tung, 2011. "Ownership Dispersion and Capital Structures in Family firms: A study of closed medium sized enterprises," Ratio Working Papers, The Ratio Institute 175, The Ratio Institute.
    6. Geraldine Ryan & Bernadette Power & Noreen McCarthy & Paul Braidford, 2011. "Regional Influences oBusiness Transfers within the British Isles," ERSA conference papers ersa10p1094, European Regional Science Association.
    7. Houben, Henriette & Maiterth, Ralf, 2009. "Zurück zum Zehnten: Modelle für die nächste Erbschaftsteuerreform," arqus Discussion Papers in Quantitative Tax Research 69, arqus - Arbeitskreis Quantitative Steuerlehre.
    8. repec:dgr:uvatin:2006089 is not listed on IDEAS
    9. Prasad S. Bhattacharya & Michael Graham, 2007. "Institutional Ownership and Firm Performance: Evidence from Finland," Accounting, Finance, Financial Planning and Insurance Series, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance 2007_01, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.

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