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Paper No' CEPDP1528: | Full paper
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Keywords: CEO, family firms, organisation, emerging economies
JEL Classification: M11; L2
Is hard copy/paper copy available? YES - Paper Copy Still In Print.
This Paper is published under the following series: CEP Discussion Papers
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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.
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