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's 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' 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.

I use data from chief executive officer (CEO) successions to examine the impact of inherited control on firms' performance. I find that firms where incoming CEOs are related to the departing CEO, to a founder, or to a large shareholder by either blood or marriage underperform in terms of operating profitability and market-tobook ratios, relative to firms that promote unrelated CEOs. Consistent with wasteful nepotism, lower performance is prominent in firms that appoint family CEOs who did not attend "selective" undergraduate institutions. Overall, the evidence indicates that nepotism hurts performance by limiting the scope of labor market competition. JEL G32, G34, L25, M13 "One of the strongest natural proofs of the folly of hereditary right in kings, is, that nature disapproves it, otherwise she would not so frequently turn it into ridicule by giving mankind an ass for a lion. " Thomas Paine 1 "The only reason I was on the payroll is because I was the son of the boss."

I use data from chief executive officer (CEO) successions to examine the impact of inherited control on firms' performance. I find that firms where incoming CEOs are related to the departing CEO, to a founder, or to a large shareholder by either blood or marriage underperform in terms of operating profitability and market-tobook ratios, relative to firms that promote unrelated CEOs. Consistent with wasteful nepotism, lower performance is prominent in firms that appoint family CEOs who did not attend "selective" undergraduate institutions. Overall, the evidence indicates that nepotism hurts performance by limiting the scope of labor market competition. JEL G32, G34, L25, M13 "One of the strongest natural proofs of the folly of hereditary right in kings, is, that nature disapproves it, otherwise she would not so frequently turn it into ridicule by giving mankind an ass for a lion. The promotion of one's kin to a key corporate or governmental position is often tainted with controversy. In the United States, favoritism based on relationships rather than on merit has long been questioned on ethical and practical bases. 3 Recent discussions related to public sector appointments underscore these concerns. 4 Yet, despite the widespread debate there has been little systematic economic analysis to determine the impact of family successions on the performance of firms or institutions that experience them. Reeb (2003)), and because families can potentially use their voting power to promote a family member to the top management position despite the opposition of minority investors.The main argument against family successions in publicly traded firms is that competitive contests for top executive positions would rarely result in a family chief executive officer (CEO).To use Warren Buffett's analogy, those firms that pick executives from the small pool of family Using an event-study analysis, I examine the impact on firm market value of naming family and unrelated CEOs. I find that only unrelated promotions are associated with positive abnormal returns, both upon announcement and in the three years after appointments. This result, however, is shown to be largely explained by the promotion of external CEOs. 7 Given that inference from event-studies around succession decisions is problematic when, for example, the identity of the incoming CEO is long anticipated or when CEO transitions by themselves provide information on firms' prospects, the bulk of the empirical analysis in the paper focuses on changes in accounting-based measures of performance around CEO successions.An advantage of using within-firm variation in performance is that it allows me to control for time-invariant characteristics that might jointly affect a firm's prospects and its decision to appoint a family CEO. I evaluate firm performance using operating return on assets, net income to assets, and market-to-book ratios. 8 In assessing differential performance around transitions, Iadjust these variables using industry-and industry-and performance-m...