CEOs in Family Firms: Does Junior Know What He's Doing?

32 Pages Posted: 15 Mar 2012 Last revised: 8 Jan 2015

See all articles by Roberto Pinheiro

Roberto Pinheiro

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Chris Yung

University of Virginia - McIntire School of Commerce

Multiple version iconThere are 2 versions of this paper

Date Written: March 14, 2012

Abstract

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

Pinheiro, Roberto and Yung, Chris, CEOs in Family Firms: Does Junior Know What He's Doing? (March 14, 2012). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2022269 or http://dx.doi.org/10.2139/ssrn.2022269

Roberto Pinheiro

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Chris Yung (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-242-0836 (Phone)

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