Working Paper Series, Department of Economics, Copenhagen Business School
Morten Bennedsen, Kasper Nielsen, Francisco Pérez-González and Daniel Wolfenzon
Inside the Family Firm
Abstract: This paper uses a unique dataset from Denmark to
investigate (1) the role of family characteristics in corporate decision
making, and (2) the consequences of these decisions on firm performance. We
focus on the decision to appoint either a family or an external chief
executive officer (CEO). We show that a departing CEO’s family
characteristics have a strong predictive power in explaining CEO succession
decisions: family CEOs are more frequently selected the larger the size of
the family, the higher the ratio of male children and when the departing
CEOs had only had one spouse. We then analyze the impact of family
successions on performance. We overcome endogeneity and omitted variables
problems of previous papers in the literature by using the gender of a
departing CEO’s first-born child as an instrumental variable (IV) for
family successions. This is a plausible IV as male first-child family firms
are more likely to pass on control to a family CEO than female first-child
firms, but the gender of the first child is unlikely to affect firms'
performance. We find that family successions have a dramatic negative
causal impact on firm performance: profitability on assets falls by at
least 6 percentage points around CEO transitions. These estimates are
significantly larger than those obtained using ordinary least squares.
Finally, our findings demonstrate that professional nonfamily CEOs provide
extremely valuable services to the organizations they work for.
Keywords: Family firms; Successions; CEO turnover; governance; (follow links to similar papers)
JEL-Codes: G32; G34; M13; (follow links to similar papers)
46 pages, September 14, 2005
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