Family Feud: Succession Tournaments and Risk-taking in Family Firms

Abstract

We identify succession as a novel determinant of risk-taking in family firms. We find significantly higher risk-taking (M&A and cash flow volatility) and lower operating efficiency in firms controlled by families with multiple sons during the pre- rather than the post-succession period compared to family firms with one or no sons. Pre-succession risk-taking by sons decreases following inheritance law amendments that require sharing of wealth among heirs, bolstering the causal interpretation of our findings. An infusion of outside talent via daughters’ marriages also alleviates sons’ relative rank-seeking behaviors during succession tournaments.

Online appendix available at http://ssrn.com/abstract=4091019.

Keywords: succession tournaments, business group, risk shifting, family composition, sons, daughters, sons-in-law, sudden death of a group chairman, inheritance law

JEL Classification: G30