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CEOs in family firms: Does junior know what he's doing?

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  • Pinheiro, Roberto
  • Yung, Chris

Abstract

We model the evolution of CEO quality in family firms. When heirs work toward a common goal alongside an older generation, Bayesian updating attributes success mostly to the older (proven) agent. Thus, heirs learn little about their own skill. This effect is strongest after the founder, implying that family firms tend to either die immediately or be relatively long-lived. More generally, we obtain an even/odd fluctuation in generational quality. Because uncertainty breeds caution, our analysis points to a conservative managerial style in family firms and emphasizes the importance of external screening mechanisms, especially for heirs following a very successful generation.

Suggested Citation

  • Pinheiro, Roberto & Yung, Chris, 2015. "CEOs in family firms: Does junior know what he's doing?," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 345-361.
    • Handle: RePEc:eee:corfin:v:33:y:2015:i:c:p:345-361
    DOI: 10.1016/j.jcorpfin.2015.01.010
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    References listed on IDEAS

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    Cited by:

    1. Lawrence, Edward R. & Nguyen, Dung T. & Upadhyay, Arun, 2021. "Are US founding families expropriators or stewards? Evidence from quasi-natural experiment," Journal of Corporate Finance, Elsevier, vol. 69(C).
    2. Karen Watkins-Fassler & Lázaro Rodríguez-Ariza, 2019. "International entrepreneurship and Mexican listed family firms’ CEO/Board characteristics," Estudios Gerenciales, Universidad Icesi, vol. 35(153), pages 361-369, December.
    3. Bennedsen, Morten & Fan, Joseph P.H. & Jian, Ming & Yeh, Yin-Hua, 2015. "The family business map: Framework, selective survey, and evidence from Chinese family firm succession," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 212-226.
    4. Stacchini, Massimiliano & Degasperi, Petra, 2015. "Trust, family businesses and financial intermediation," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 293-316.
    5. Jiang, Fuxiu & Jiang, Zhan & Kim, Kenneth A. & Zhang, Min, 2015. "Family-firm risk-taking: Does religion matter?," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 260-278.

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    More about this item

    Keywords

    Family firms; Succession; Managerial skills; Market selection;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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