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Family Firms

Author

Listed:
  • Mike Burkart
  • Fausto Panunzi
  • Andrei Shleifer

Abstract

We present a model of succession in a firm controlled and managed by its founder. The founder decides between hiring a professional manager or leaving management to his heir, as well as on how much, if any, of the shares to float on the stock exchange. We assume that a professional is a better manager than the heir, and describe how the founder's decision is shaped by the legal environment. Specifically, we show that, in legal regimes that successfully limit the expropriation of minority shareholders, the widely held professionally managed corporation emerges as the equilibrium outcome. In legal regimes with intermediate protection, management is delegated to a professional, but the family stays on as large shareholders to monitor the manager. In legal regimes with the weakest protection, the founder designates his heir to manage and ownership remains inside the family. This theory of separation of ownership from management includes the Anglo-Saxon and the Continental European patterns of corporate governance as special cases, and generates additional empirical predictions consistent with cross-country evidence.

Suggested Citation

  • Mike Burkart & Fausto Panunzi & Andrei Shleifer, 2002. "Family Firms," NBER Working Papers 8776, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8776
    Note: CF
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    File URL: http://www.nber.org/papers/w8776.pdf
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    Other versions of this item:

    • Mike Burkart & Fausto Panunzi & Andrei Shleifer, 2003. "Family Firms," Journal of Finance, American Finance Association, vol. 58(5), pages 2167-2201, October.

    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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