Working Paper: NBER ID: w8776
Authors: Mike Burkart; Fausto Panunzi; Andrei Shleifer
Abstract: We present a model of succession in a firm controlled and managed by its founder. The founder decides between hiring a professional manager or leaving management to his heir, as well as on how much, if any, of the shares to float on the stock exchange. We assume that a professional is a better manager than the heir, and describe how the founder's decision is shaped by the legal environment. Specifically, we show that, in legal regimes that successfully limit the expropriation of minority shareholders, the widely held professionally managed corporation emerges as the equilibrium outcome. In legal regimes with intermediate protection, management is delegated to a professional, but the family stays on as large shareholders to monitor the manager. In legal regimes with the weakest protection, the founder designates his heir to manage and ownership remains inside the family. This theory of separation of ownership from management includes the Anglo-Saxon and the Continental European patterns of corporate governance as special cases, and generates additional empirical predictions consistent with cross-country evidence.
Keywords: No keywords provided
JEL Codes: G32; K22; M13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legal protection of minority shareholders (G34) | Management structure of family firms (L22) |
| Strong legal protections (P14) | Widely held, professionally managed corporation (G34) |
| Weak legal protections (P14) | Management retained within family (J54) |
| Legal protections (P14) | Ownership concentration (G32) |
| Investor protection (G18) | Ownership concentration (G32) |
| Legal environment (K20) | Incentives for monitoring and expropriation (H13) |
| Ownership concentration (G32) | Legal environment (K20) |