The Ties that Bind: Implicit Contracts and Management Practices in Family-Run Firms

82 Pages Posted: 29 Jul 2019

See all articles by Renata Lemos

Renata Lemos

World Bank

Daniela Scur

Massachusetts Institute of Technology (MIT) - Sloan School of Management; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Date Written: June 2019

Abstract

This paper investigates the impact of family CEOs on firm organizational choices and the causes and consequences of these decisions. We focus on second-generation (dynastic) family firms, collect new data on CEO successions for over 900 firms in Latin America and Europe and merge it with unique data on organizational choices, specifically, structured management practices. We use variation in the gender composition of the outgoing CEOs' children for identification. There is clear preference for male heirs: conditional on number of children, having at least one son is correlated with a 30pp higher likelihood of dynastic family succession. As the gender composition of the outgoing CEO's children is unlikely to affect decisions on mid-level managerial practices, we use it as an instrumental variable for family succession. Dynastic CEO successions lead to almost one standard deviation lower adoption of structured management practices, with an implied productivity decrease of about 10%. We rationalize this finding with a new conceptual framework that accounts for the importance of implicit employment commitments to employees of dynastic firms in determining the adoption of monitoring technologies. We find empirical evidence that, controlling for lower levels of knowledge and skills of family CEOs, concerns for reputation and "family name" can play a role in constraining investment in structured management practices. Overall, our empirical results shed new light on dynastic firms' persistent performance deficit and apparent lag in the adoption of structured management practices.

JEL Classification: D22, M11, M12

Suggested Citation

Lemos, Renata and Scur, Daniela, The Ties that Bind: Implicit Contracts and Management Practices in Family-Run Firms (June 2019). CEPR Discussion Paper No. DP13794, Available at SSRN: https://ssrn.com/abstract=3428314

Renata Lemos (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Daniela Scur

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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