All in the family? CEO choice and firm organization

Renata Lemos () and Daniela Scur

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Family firms are the most prevalent firm type in the world, particularly in emerging economies. Dynastic family firms tend to have lower productivity, though what explains their underperformance is still an open question. We collect new data on CEO successions for over 800 firms in Latin America and Europe to document their corporate governance choices and, crucially, provide causal evidence on the effect of dynastic CEO successions on the adoption of managerial best practices tied to improved productivity. Specifically, we establish two key results. First, there is a preference for male heirs: when the founding CEO steps down they are 30pp more likely to keep control within the family when they have a son. Second, instrumenting with the gender of the founder’s children, we estimate dynastic CEO successions lead to 0.8 standard deviations lower adoption of managerial best practices, suggesting an implied productivity decrease of 5 to 10%. To guide our discussion on mechanisms, we build a model with two types of CEOs (family and professional) who decide whether to invest in better management practices. Family CEOs cannot credibly commit to firing employees without incurring reputation costs. This induces lower worker effort and reduces the returns to investing in better management. We find empirical evidence that, controlling for lower skill levels of managers, reputational costs constrain investment in better management.

Keywords: CEO; family firms; organisation; emerging economies (search for similar items in EconPapers)
JEL-codes: L2 M11 (search for similar items in EconPapers)
Date: 2018-01-01
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: All in the family? CEO choice and firm organization (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:88679

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