Inherited Control and Firm Performance

Abstract

This paper examines the impact of inherited control on firms' performance. To address this issue, I use data from management successions where the departing chief executive officer (CEO) was a member of the controlling family of the corporation. I find that firms where control is inherited undergo large declines in return on assets and market-to-book ratios that are not experienced by firms that promote CEOs not related to the controlling family. Consistent with wasteful nepotism, I find that these declines are particularly prominent in firms that appoint family CEOs that did not attend a selective college. Overall, the results strongly suggest that nepotism hurts firms' performance by limiting the scope of labor market competition.

Keywords: corporate governance, family firms, nepotism, firm performance, CEO successions

JEL Classification: G32, G34, M13