Family First? Kinship Ties and Equity Prices

Abstract

In this paper, we construct a novel measure of nepotism and explore its implications for firm value. We document that 35% of U.S. public firms employ relatives in top jobs. Using our measure, we show that nepotism decreases firm value: high-nepotism stocks underperform low-nepotism stocks by 7.4% annually. One-fourth of this underperformance is explained by the price reaction to the announcement of predictably negative ``unexpected'' earnings. At the firm level, nepotism signals low human capital value, as high-ranking employees are less qualified and exert insufficient effort. We conclude that the market overlooks public signals on firm human capital.

Keywords: Nepotism, Mispricing, ESG, Governance, Market Inefficiency, Human Capital

JEL Classification: G14, J24, M14