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All in the family? CEO choice and firm organization

Lemos, Renata and Scur, Daniela (2018) All in the family? CEO choice and firm organization. CEP Discussion Papers (CEPDP1528). Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2018 The Authors
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
JEL classification: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior
M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration > M11 - Production Management
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 26 Jun 2018 11:49
Last Modified: 20 Nov 2019 05:07
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/88679

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