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

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'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.

Are Founding Families Special Blockholders? - An Investigation of Controlling Shareholder Influence on Firm Performance

“…Several studies have shown that family firm characteristics, and here especially the active involvement of a family member, or generational issues may have an important impact on firm performance 11 and policy (e.g. Pérez-González (2006), Villalonga and Amit (2006) or Bennedsen et al (2007)). Considering these findings, founding family firms have further been categorised into groups depending on the active position and generation of a family member.…”

Endangering of Businesses by the German Inheritance Tax? — An Empirical Analysis

“…Bloom and Van Reenen (2006) found that mismanagement will occur in particular if a business is transferred to the eldest son (primogeniture), whereas the management abilities will not be affected if the entire family appoints the management of a transferred business. In contrast, Morck, Shleifer, and Vishny (1989), Bennedsen, Nielsen, Pérez-González and Wolfenzon (2007), Pérez-González (2006) and Villalonga and Amit (2006) discovered in general a significantly poorer performance of companies run by heirs compared to firms with non-family executives. Grossmann and Strulik (2010) disapproved an inheritance tax privilege for businesses in a general equilibrium model.…”

“…Inheritance tax can jeopardize businesses due to liquidity problems if the transferees of a business lack liquid assets to meet inheritance tax liability and if, in addition, imperfect capital markets inhibit refunding. Furthermore, advocates of an inheritance tax privilege for businesses stress the specialized leading skills of relatives resulting from their particular identification and family-specific know-how (Bennedsen, Nielsen, Pérez-González, and Wolfenzon 2007). Additionally, it is stated that principal-agent problems are less virulent.…”

Excess Control Rights and Corporate Acquisitions

“…By selecting the CEO from the small pool of family heirs, the firm might have a top executive who lacks managerial talent. Consistent with this view, Pérez-González (2006) and Bennedsen et al (2007) find evidence of lower operating performance of firms which experienced a family succession. The success of large acquisitions strongly depends on the managerial skills of those who conduct them, for instance highly-skilled CEOs may have abilities to detect good targets.…”