Family Firms

49 Pages Posted: 21 Mar 2002

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Fausto Panunzi

Bocconi University - Department of Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 4 versions of this paper

Date Written: February 2002

Abstract

We present a model of succession in a firm controlled and managed by its founder. The founder decides between hiring a professional manager or leaving management to his heir, as well as on how much, if any, of the shares to float on the stock exchange. We assume that a professional is a better manager than the heir, and describe how the founder's decision is shaped by the legal environment. Specifically, we show that, in legal regimes that successfully limit the expropriation of minority shareholders, the widely held professionally managed corporation emerges as the equilibrium outcome. In legal regimes with intermediate protection, management is delegated to a professional, but the family stays on as large shareholders to monitor the manager. In legal regimes with the weakest protection, the founder designates his heir to manage and ownership remains inside the family. This theory of separation of ownership from management includes the Anglo-Saxon and the Continental European patterns of corporate governance as special cases, and generates additional empirical predictions consistent with cross-country evidence.

Keywords: Corporate governance, law and finance

JEL Classification: G34

Suggested Citation

Burkart, Mike C. and Panunzi, Fausto and Shleifer, Andrei, Family Firms (February 2002). CEPR Discussion Paper No. 3235. Available at SSRN: https://ssrn.com/abstract=304683

Mike C. Burkart (Contact Author)

Swedish House of Finance ( email )

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111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Fausto Panunzi

Bocconi University - Department of Economics ( email )

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Italy
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+39 02 5836 5343 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR)

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United Kingdom

Andrei Shleifer

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
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617-496-1708 (Fax)

HOME PAGE: http://www.economics.harvard.edu/~ashleife/

National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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Belgium

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