Working Paper: NBER ID: w12356
Authors: Morten Bennedsen; Kasper M. Nielsen; Francisco Prez-Gonzalez; Daniel Wolfenzon
Abstract: 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 the 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: operating 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 highly 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; CEO Succession; Firm Performance
JEL Codes: G32; G34; M13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| gender of firstborn child (J16) | family CEO appointment (M12) |
| family CEO appointment (M12) | firm performance (L25) |
| family CEO appointment (M12) | operating profitability on assets (L21) |
| family CEO appointment (M12) | larger decline in performance (D29) |
| family CEO underperformance (M12) | fast-growing industries (O14) |
| family CEO underperformance (M12) | larger firms (L25) |
| professional, non-family CEOs (M12) | firm performance (L25) |
| family CEOs (M12) | underperformance relative to non-family counterparts (D29) |