Succession: The Roles of Specialized Assets and Transfer Costs

Abstract

This paper reports an average negative 56 percent buy-and-hold market-adjusted stock return of emerging market entrepreneurial/family firms during a 5-year period in which their controlling owners pass on ownership and control to their successors. The value destruction is importantly attributable to the difficulties in partitioning and transferring specialized assets across individuals and/or firm boundaries, including intangible assets such as relationships with employees and banks, or assets jointly controlled by family members and/or co-founders. The existence of these specialized assets also explains why firm ownership is concentrated and why heirs or close relatives are chosen as successors in most of the succession events. During and after the successions, the firms and successors more subject to stakeholder conflicts and credibility losses are more likely to improve their corporate governance quality and dividend payouts.

Keywords: Succession, Family firms, Asia

JEL Classification: G32, L21, M13