From Cronies to Professionals: The Evolution of Family Firms

Bhattacharya , Utpal; Ravikumar, B.

From Cronies to Professionals: The Evolution of Family Firms

CAPITAL FORMATION, GOVERNANCE AND BANKING, Klein E., ed., Financial Institutions and Services, Nova Science Publishers, Hauppauge, NY, 2004

19 Pages Posted: 5 Feb 2005

See all articles by Utpal Bhattacharya

B. Ravikumar

Federal Reserve Bank of St. Louis; Federal Reserve Bank of Saint Louis

There are 2 versions of this paper

Abstract

We develop a dynamic model where each generation in a family can continue operating its inherited production technology or it could hire a professional to do the same. Though the professional is more qualified, his interests are not aligned with the interests of the family. In the context of an overlapping generations framework, we analyze how this tradeoff affects the evolution of the family firm. We find that family firms initially grow in size by accumulating capital and later professionalize their management after reaching a critical size.

Keywords: Family business, agency theory, corporate governance

JEL Classification: G30, F30, J41

Suggested Citation: Suggested Citation

Bhattacharya, Utpal and Ravikumar, B. and Ravikumar, B., From Cronies to Professionals: The Evolution of Family Firms. CAPITAL FORMATION, GOVERNANCE AND BANKING, Klein E., ed., Financial Institutions and Services, Nova Science Publishers, Hauppauge, NY, 2004, Available at SSRN: https://ssrn.com/abstract=645152