Why do family firms switch between family CEOs and non-family professional CEO?

Abstract

Purpose – This study aims to examine whether a switching decision between a family CEO and a non-family professional CEO has a different effect on firm performance and what determines such a decision by family firms. Design/methodology/approach – This study uses multiple regressions, Probit and univariate analyses, based the sample of family-controlled Chaebol firms in Korea for the 11-year period from 2001 to 2011. Findings – Evidence found was consistent with the family entrenchment hypothesis: firms experiencing declining Q value are more likely to replace family CEOs with non-family CEOs, and that these firms, having switched to non-family CEOs, exhibit an improvement in firm performance as measured by the change in Q value. On the other hand, for those firms that replace non-family CEOs with family member CEOs, no evidence was found that the switching decision either decreases or increases firm performance. The results of Probit and univariate analyses suggest that firms switching to family CEOs tend to be larger, stock-exchange listed and more “central”, with more cash flow rights held by the controlling families and with relatively more equity holdings in the other affiliated firms of the same Chaebol group. In contrast, firms switching to non-family CEOs tend to be smaller, unlisted and less “central”, with less equity holdings in the other affiliated firms of the same Chaebol group. Originality/value – This study sheds light on the different value implications and determinants of a decision between “family CEO” and “non-family CEO”.

Internationalization of family firms: the effect of CEO attributes

“…Decisions that may seem unprofessional to an outside observer-such as naming an inexperienced family member as the CEO of the company-could be logical to the family owners, as the action can provide benefits that are not financial in nature. Specifically, for those companies that replace non-family member CEOs with family-member CEOs, Kang and Kim (2016) found no evidence that the decision to change the CEO category would decrease or increase the performance of a company. Previous findings also suggest that having low levels of growth and profit are associated with the selection of a non-family member CEO (Datta & Guthrie, 1994).…”

Effect of Family Involvement and Corporate Governance on Dividend Policy: A Study of Non-Financial Listed Firms in Morocco

“…Family firms: A family firm is defined as one in which a family controls at least 20% of the shares of the business directly or through another cross-or pyramid-shaped ownership structure (Yang, 2010;Kang & Kim, 2016;Briano-Turrent et al, 2019). A family-owned firm is one whose CEO is a founder or member of the family that is the majority shareholder, while a non-family firm is one whose CEO is external and independent of the majority shareholder (Yang, 2010;Kang & Kim, 2016;Briano-Turrent et al, 2019). This variable is dichotomous, taking the value 1 if the firm is family-owned and 0 if the firm is non-family owned.…”

The Effect of the Board Composition on Dividends: The Case of Brazilian and Chilean Family Firms

“…This study defines family firms as those in which the founding family or family members controlled 20% or more equity, and was involved in the top management of the firm (La Porta et al, 1999). The family nature of the firm is measured through two dummy variables: 1) A dummy variable that takes a value of 1 if the family controlling shareholder owns at least 20% of the firm's shares either directly or indirectly through cross-holding or pyramid ownership structure and 0 otherwise (FAMFIRM1) (Claessens et al, 2000;La Porta et al, 1999); 2) a dummy variable that takes a value of 1 if the CEO is a founding member of the firm or the CEO has a family tie with the controlling family shareholder (spouse, child, sibling, or parent), and 0 otherwise (Kang & Kim, 2016;Yang, 2010). Board director's composition is measured by four variables: 1) Board size is the total number of directors sitting on the board (BOARDSIZE); 2) board independence is measured as the number of independent directors divided by board size (INDEPENDENCE); 3) COB-CEO duality is an indicator variable equal to one if the CEO is the chairman of the board, and zero otherwise (DU-ALITY); 4) gender on the board is measured as the number of female directors divided by board size (GENDER) (Chen et al, 2017;Setia-Atmaja, 2010).…”