How Inheritance Law Affects Family Firm Performance: Evidence from a Natural Experiment

Abstract

We argue that changes in the inheritance system affect the incentives toward sibling rivalry among descendants, thereby having a material impact on family firm performance. Using South Korea’s 1991 inheritance law reform that stipulates the equal distribution of a deceased person’s property to the descendants, we find that performance and operating growth rate in family firms show a significant enhancement compared to those of non-family firms. Moreover, the positive effects are greater for family firms that undertake a business succession with multiple sons and married daughters. Overall, our results suggest that changing to equal bequests of inheritance brings positive effect on firm value by providing better-aligned incentives to heirs in family firms. We conclude our paper by discussing implications of our findings for current generations in family firms.

Keywords: Family Firm, Inheritance Law, Succession, Performance, Growth

JEL Classification: G30