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From Cronies to Professionals: The Evolution of Family Firms

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  • Bhattacharya, Utpal
  • Ravikumar, B

Abstract

We develop a dynamic model where each generation in a family firm can continue operating its inherited production technology or it could hire a professional to do the same. Though the professional is more qualified, his interests are not aligned with the interests of the family. In the context of an overlapping generations framework, we analyze how this tradeoff affects the evolution of the family firm. We find that family firms initially grow in size by accumulating capital and later professionalize their management after reaching a critical size.

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File URL: http://mpra.ub.uni-muenchen.de/22939/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22939.

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Date of creation: Nov 1997
Date of revision: Jan 2004
Handle: RePEc:pra:mprapa:22939

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Related research

Keywords: Family firms; Cronies; Moral Hazard;

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References

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  1. Pollak, Robert A, 1985. "A Transaction Cost Approach to Families and Households," Journal of Economic Literature, American Economic Association, vol. 23(2), pages 581-608, June.
  2. Andrei Shleifer & Fausto Panunzi & Mike Burkart, 2002. "Family Firms," FMG Discussion Papers dp406, Financial Markets Group.
    • Mike Burkart & Fausto Panunzi & Andrei Shleifer, 2003. "Family Firms," Journal of Finance, American Finance Association, vol. 58(5), pages 2167-2202, October.
  3. 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.
  4. Berhold, Marvin, 1971. "A Theory of Linear Profit-Sharing Incentives," The Quarterly Journal of Economics, MIT Press, vol. 85(3), pages 460-82, August.
  5. 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.
  6. Heckerman, Donald G., 1975. "Motivating managers to make investment decisions," Journal of Financial Economics, Elsevier, vol. 2(3), pages 273-292, September.
  7. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May.
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Citations

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Cited by:
  1. Giannetti, Mariassunta, 2011. "Serial CEO incentives and the structure of managerial contracts," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 633-662, October.
  2. Francesco Caselli & Nicola Gennaioli, 2003. "Dynastic Management," NBER Working Papers 9442, National Bureau of Economic Research, Inc.
  3. Jang, Hasung & Kang, Hyung-cheol & Park, Kyung Suh, 2005. "Determinants of Family Ownership: The Choice between Control and Performance," CEI Working Paper Series 2005-5, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  4. Maury, Benjamin, 2006. "Family ownership and firm performance: Empirical evidence from Western European corporations," Journal of Corporate Finance, Elsevier, vol. 12(2), pages 321-341, January.
  5. Morten Bennedsen & Kasper Nielsen & Francisco Pérez-González & Daniel Wolfenzon, 2005. "Inside the Family Firm: The Role of Families in Succession Decisions and Performance," CIE Discussion Papers 2005-13, University of Copenhagen. Department of Economics. Centre for Industrial Economics, revised Sep 2005.
  6. Bennedsen, Morten & Nielsen, Kasper & Pérez-González, Francisco & Wolfenzon, Daniel, 2005. "Inside the Family Firm," Working Papers 21-2005, Copenhagen Business School, Department of Economics.
  7. Jellal, Mohamed, 2009. "Family Capitalism Corporate Governance Theory," MPRA Paper 17886, University Library of Munich, Germany.

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