Working Paper: CEPR ID: DP6977
Authors: Andrew Ellul; Marco Pagano; Fausto Panunzi
Abstract: Entrepreneurs may be constrained by the law to bequeath a minimal stake to non-controlling heirs. The size of this stake can reduce investment in family firms, by reducing the future income they can pledge to external financiers. Using a purpose-built indicator of the permissiveness of inheritance law and data for 10,245 firms from 32 countries over the 1990-2006 interval, we find that stricter inheritance law is associated with lower investment in family firms, while it leaves investment unaffected in non-family firms. Moreover, as predicted by the model, inheritance laws affects investment only in family firms that experience a succession.
Keywords: Family Firms; Inheritance Law; Investor Protection
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inheritance law constraints (K36) | Reduced ability to pledge future income streams (G33) |
| Reduced ability to pledge future income streams (G33) | Lower investment capacity (G31) |
| Permissiveness of inheritance law (K36) | Enhanced investment in family firms (O16) |
| Stricter inheritance laws (K36) | Lower investment in family firms (G31) |
| Stricter inheritance laws (K36) | No significant effect on nonfamily firms (G39) |
| Inheritance law's constraints (K36) | Lower investment in family firms experiencing succession (D25) |