All in the family? CEO choice and firm organization

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Abstract: Family firms are the most prevalent type of firm in the world and account for a large proportion of economic activity and employment, especially in developing countries. In this paper we investigate the relationship between family control and firm organization and performance in the manufacturing sector of primarily emerging economies. We collect a new detailed dataset of the succession history in terms of ownership (who owns the shares) as well as control (who is the CEO) for over 800 firms in Latin America, and Southern Europe. We merge this with a unique dataset on firm performance and organizational structures, including quality of managerial practices. We exploit exogenous variation in the gender composition of the outgoing CEO’s children, and use it as an instrumental variable for family ownership and control. Our results suggest that family-owned-and-controlled firms are worse managed, and that the negative link comes from family CEO control rather than simply family ownership. We propose the relatively poorer performance of many family-controlled firms stems at least partly from this deficit in management quality. Using a theoretical framework we explore the mechanisms behind the deficit in management quality and present empirical evidence to shed light on four possible reasons hypothesized by the literature. Although we find evidence that family CEOs tend to be less cognizant of their failings in management and tend to be less well-educated, we propose that one of the key reasons for family CEOs lower management quality is rather the relational contracts they have with their employees and use data from a Brazilian employer-employee matched dataset to show this empirically.