CEOs in Family Firms: Does Junior Know What He's Doing?
32 Pages Posted: 15 Mar 2012 Last revised: 8 Jan 2015
Date Written: March 14, 2012
We model the evolution of CEO quality in family firms. Agents learn about their own qualities over time by observing the successful outcome of their own actions, while failures drive agents out of the market. We show that joining the family business, while reducing the probability of failure, impairs the learning process. This implies that the pool of family CEOs, shielded from failure and with lower learning rates, is endogenously worse than that of outside CEOs in the long-run. Our model also produces an even/odd fluctuation in intergenerational quality which is consistent with existing empirical literature. Finally, we show that an increase in bankruptcy costs and capital costs increase the probability an heir joins the family firm.
Keywords: Family Firms, Succession, Managerial Skills, Market Selection
JEL Classification: D21, D23
Suggested Citation: Suggested Citation