Inside the family firm: The role of families in succession decisions and performance

TY - JOUR

T1 - Inside the family firm

T2 - The role of families in succession decisions and performance

AU - Bennedsen, Morten

AU - Nielsen, Kasper Meisner

AU - Perez-Gonzalez, Francisco

AU - Wolfenzon, Daniel

PY - 2007/5/1

Y1 - 2007/5/1

N2 - 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, nonfamily CEOs provide extremely valuable services to the organizations they head.

AB - 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, nonfamily CEOs provide extremely valuable services to the organizations they head.

UR - http://www.scopus.com/inward/record.url?scp=34249847377&partnerID=8YFLogxK

U2 - 10.1162/qjec.122.2.647

DO - 10.1162/qjec.122.2.647

M3 - Journal article

AN - SCOPUS:34249847377

SN - 0033-5533

VL - 122

SP - 647

EP - 691

JO - Quarterly Journal of Economics

JF - Quarterly Journal of Economics

IS - 2

ER -