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

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

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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 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 : operation 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 higly 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. Keywords: family firms, successions, CEO turnover, governance.
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 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 : operation 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 higly 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. Keywords: family firms, successions, CEO turnover, governance.

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Published by: Familles_en_affaires on Sep 21, 2012
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Finance Working Paper N°.132/2006June 2006
Morten Bennedsen
Copenhagen Business School and ECGI
Kasper Meisner Nielsen
Copenhagen Business School
Francisco Pérez-González
Columbia Business School
Daniel Wolfenzon
 New York University - Leonard N. Stern School of Business and NBER © Morten Bennedsen, Kasper Meisner Nielsen,Francisco Pérez-González and Daniel Wolfenzon2006. All rights reserved. Short sections of text, notto exceed two paragraphs, may be quoted withoutexplicit permission provided that full credit, includ-ing © notice, is given to the source.This paper can be downloaded without charge from:http://ssrn.com/abstract_id=925650www.ecgi.org/wp
Inside the Family Firm: theRole of Families in SuccessionDecisions and Performance
 
ECGI Working Paper Series in Finance
Working Paper N°.132/2006June 2006
Morten BennedsenKasper Meisner Nielsen
 
Francisco Pérez-GonzálezDaniel Wolfenzon
Inside the Family Firm: the Role of Families inSuccession Decisions and Performance
We thank three anonymous referees and Edward Glaeser and Lawrence Katz (the editors) for valuablecomments. We also thank Renee Adams, Marianne Bertrand, Douglas Diamond, Mariassunta Giannetti, DenisGromb, Maria Guadalupe, Atif Mian, Thomas Rønde, Jonah Rockoff, Amir Sufi, Annette Vissing-Jørgensen,David Yermack, and seminar participants at the Aarhus School of Business, BI Norwegian School of Management, Brown University (economics), the University of Chicago (GSB), Columbia University (GSB),Copenhagen Business School, Duke University (Fuqua), Harvard Business School, Harvard Law School, MIT(Sloan), Northwestern University (Kellogg), the University of Illinois at Urbana-Champaign (Business), theUniversity of Maryland (Smith), SUNY (Binghamton), the University of Texas at Austin (McCombs), StanfordUniversity (GSB), the finance lunch at the University of Chicago GSB, the CEPR annual meeting in Gerzensee,the Corporate Governance of Closely Held Firms Conference in Copenhagen, the CEBR conference onEntrepreneurship: Occupational Choice and Financing, and the Berkley Center for Entrepreneurial studies atStern for comments. Pérez-González thanks Chicago-GSB for providing a stimulating research environmentwhile writing this paper. We are grateful to the Berkley Center for Entrepreneurial Studies, CEBR and theDanish Social Science Research Foundation (project GOCOW) for financial support. We are also grateful tothe Danish Commerce and Companies Agency and the Research Office in Statistics Denmark for providing uswith data. We thank Frederik Vinten for excellent research assistance. All errors are our own.
© Morten Bennedsen, Kasper Meisner Nielsen, Francisco Pérez-González and Daniel Wolfenzon2006. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quotedwithout explicit permission provided that full credit, including © notice, is given to the source.
 
Abstract
This paper uses a unique dataset from Denmark to investigate the impact of familycharacteristics in corporate decision making and the consequences of these deci-sions on firm performance. We focus on the decision to appoint either a familyor external chief executive officer (CEO). The paper uses variation in CEO suc-cession 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 morelikely to pass on control to a family CEO than are female first-child firms, but thegender of the first child is unlikely to affect firms’ outcomes. We find that familysuccessions have a large negative causal impact on firm performance: operating profitability on assets falls by at least four percentage points around CEO transi-tions. Our IV estimates are significantly larger than those obtained using ordinaryleast squares. Furthermore, we show that family-CEO underperformance is par-ticularly large in fast-growing industries, industries with highly skilled labor forceand relatively large firms. Overall, our empirical results demonstrate that profes-sional, non-family CEOs provide extremely valuable services to the organizationsthey head.
Keywords: family firms, successions, CEO turnover, governanceJEL Classifications: G32, G34, M13
Morten Bennedsen
Copenhagen Business School - Department of EconomicsDK-2000 Frederiksberg C,Denmarkphone: +45 38 15 26 07 , fax: +45 38 15 25 75e-mail: mb.eco@cbs.dk
Kasper Meisner Nielsen
Copenhagen Business School - Department of FinanceSolbjerg Plads 3, A52000 FrederiksbergDenmarkphone: +45 3815 3629 , fax: +45 3815 3600e-mail: kmn.fi@cbs.dk
Francisco Pérez-González
Columbia Business School3022 Broadway, Uris Hall 422New York, NY 10027phone: 212-854-9683 , fax: 212-316-9180email: fp2010@columbia.edu
Daniel Wolfenzon
New York University - Leonard N. Stern School of Business and NBER44 West Fourth StreetSuite 9-190New York, NY 10012-1126phone: (212) 998-0309 , fax : (212) 995-4233email: dwolfenz@stern.nyu.edu

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