Inherited Control and Firm Performance
Stanford University; National Bureau of Economic Research (NBER)
This paper examines the impact of inherited control on firms' performance. To address this issue, I use data from management successions where the departing chief executive officer (CEO) was a member of the controlling family of the corporation. I find that firms where control is inherited undergo large declines in return on assets and market-to-book ratios that are not experienced by firms that promote CEOs not related to the controlling family. Consistent with wasteful nepotism, I find that these declines are particularly prominent in firms that appoint family CEOs that did not attend a selective college. Overall, the results strongly suggest that nepotism hurts firms' performance by limiting the scope of labor market competition.
Number of Pages in PDF File: 36
Keywords: corporate governance, family firms, nepotism, firm performance, CEO successions
JEL Classification: G32, G34, M13
Date posted: October 3, 2002
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