The Effect of Succession Taxes on Family Firm Investment: Evidence from a Natural Experiment

Abstract

This paper provides causal evidence on the impact of succession taxes on firm investment decisions and transfer of control. I exploit a 2002 policy change in Greece that substantially reduced the tax on intra-family transfers of businesses and show that succession taxes lead to more than a 40% decline in investment around family successions, slow sales growth, and depletion of cash reserves. Furthermore, succession taxes strongly affect the decision to sell or retain the firm within the family. I conclude by discussing implications of my findings for firms in the United States and Europe.

Keywords: Family Firms, Transfer of Control, Successions, Private Firms, Estate Taxes, Inheritance Taxes, Investment

JEL Classification: G30, H20