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

Morten Bennedsen, Kasper Nielsen, Francisco Pérez-González and Daniel Wolfenzon
Additional contact information
Morten Bennedsen: Copenhagen Business School
Kasper Nielsen: University of Copenhagen
Francisco Pérez-González: Columbia University
Daniel Wolfenzon: New York University

No 2005-13, CIE Discussion Papers from University of Copenhagen. Department of Economics. Centre for Industrial Economics

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 non-family CEOs provide extremely valuable services to the organizations they work for.

Keywords: family firms; successions; CEO turnover; governance (search for similar items in EconPapers)
JEL-codes: G32 G34 M13 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2005-06, Revised 2005-09
New Economics Papers: this item is included in nep-bec, nep-fin and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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