Family First? Nepotism and Corporate Investment

51 Pages Posted: 25 Jan 2018

See all articles by Gianpaolo Parise

Gianpaolo Parise

EDHEC

Fabrizio Leone

University of Turin - Collegio Carlo Alberto

Carlo Sommavilla

Università della Svizzera italiana (USI), Lugano; Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: January 24, 2018

Abstract

Nepotism emerges in a multiplicity of contexts from political assignments to firm hiring decisions, but what are its real effects on the economy? This paper explores how nepotism affects corporate investment. To measure nepotism, we build a unique dataset of family connections among individuals employed in strategic positions by the same firm. We address endogeneity concerns by exploiting the heterogeneity in ancestries across U.S. counties to construct a measure of inherited family values. We find that firms headquartered in counties where locals inherited strong family values exhibit more nepotism. Using this measure and the percentage of family households in the county as instrumental variables, we provide evidence that nepotism hinders investment. Overall, our results suggest that underinvestment in these firms is driven by both lower quality of hired workers and lower incentive to exert effort.

Keywords: nepotism, investment, moral hazard, hiring practices, family ties

JEL Classification: G31, G40, J33

Suggested Citation

Parise, Gianpaolo and Leone, Fabrizio and Sommavilla, Carlo, Family First? Nepotism and Corporate Investment (January 24, 2018). BIS Working Paper No. 693. Available at SSRN: https://ssrn.com/abstract=3109123

Gianpaolo Parise (Contact Author)

EDHEC ( email )

393 Promenade des Anglais
Nice, 06200
France

Fabrizio Leone

University of Turin - Collegio Carlo Alberto

via Real Collegio 30
Moncalieri, Torino 10024
Italy

Carlo Sommavilla

Università della Svizzera italiana (USI), Lugano; Swiss Finance Institute ( email )

c/o Università della Svizzera Italiana
Via G. Buffi 13
CH-6904 Lugano
Switzerland

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