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Saturday, July 29, 2006

When the Boss's Son Takes Over

When an heir takes over a business, it reduces performance:

Meet My Son, Your New CEO, by Joel Waldfogel, Slate: When the boss's son takes the helm at work, it's bad news for employees who were vying for the big promotion. But is it bad for the company? Economic intuition offers two plausible and opposing answers. On the one hand, a scion CEO probably has a large ownership share and therefore huge incentives to run the company well. He also knows a lot about the firm and faces the scorn of his extended family, as well as more distant critics, if he fails. On the other hand, ...[t]he best candidate among the boss's relatives may not be as good as the best available. A new study resolves this tension against the heirs-apparent, showing that if the new CEO is related to his or her predecessor, the firm's performance will suffer.

The question of how installing the boss's kid as CEO affects firms' performance is actually quite hard to answer.  ... The ... decision to hand over the reins within the family is not random. Firms may choose scion CEOs when calm seas are expected and a highly qualified outsider when storms are on the horizon. ... The authors of the new study, Morten Bennedsen and Kasper M. Nielsen of the Copenhagen Business School, Francisco Pérez-González of Columbia University, and Daniel Wolfenzon of New York University, came up with a way to measure the effects of scion succession that solves this... They hypothesize that firms whose male CEOs have male firstborns are more likely to hand over the reins within the family—in other words, they want to pass down control but are sexist.

The researchers get to test their thesis by taking advantage of Denmark's relaxed attitude toward data disclosure. ... The authors' hunch about CEO sexism turns out to be right. When the outgoing CEO's firstborn was male, succession passed within the family 40 percent of the time; when the firstborn was female, the in-family succession rate was only 30 percent. The sexism of the CEO dads produces conditions tantamount to the experiment we'd want to design. A random event—a firstborn boy—raises the probability of within-family succession from 30 percent to 40 percent. And here's the juicy result:

Firms in which the CEO dad had a male firstborn, a factor that by itself should have no effect on the firm's subsequent operating performance, experience a $10,000 larger deterioration in income per million dollars in assets after a succession. ... Intuitively, this means that if the choice between a relative or nonrelative CEO were made by the flip of a coin, the choice of a scion CEO would reduce performance by about 10 times as much, or about $100,000 in operating income per million in assets. The authors conclude that professional management at the top—drawn from a large outside talent pool—is "extremely valuable." ...

    Posted by on Saturday, July 29, 2006 at 02:59 AM in Economics | Permalink  TrackBack (0)  Comments (4)

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