Abstract
This paper offers new evidence on the relationship between contractual institutions, family management, and aggregate performance. The study creates a new firm-level database on management and ownership structures spanning 134 regions in 11 European countries. To guide the empirical analysis, it develops a model of industry equilibrium in which heterogeneous firms decide between family and professional management when the latter are subject to contracting frictions. The paper tests the model's predictions using regional variation in trust within countries. Consistent with the model, the finding show that there is sorting of firms across management modes, in which smaller firms and those in regions with worse contracting environments are more likely to be family managed. These firms are on average 25 percent less productive than professionally managed firms, and moving from the country with the least reliable contracting environment to the most increases total factor productivity by 21.6 percent. Family management rather than ownership drives these results.
Highlights
This paper provides new evidence on the way in which weak contracting environments affect the choice of firms to be family-managed, and assesses this channel’s importance in explaining cross-country productivity differences
To guide our analysis we develop an equilibrium model where heterogeneous firms sort across family and professional management modes when the latter are subject to contracting frictions
To discipline the empirical analysis, we develop a simple model of an industry equilibrium in the spirit of Melitz (2003) in which heterogeneous firms decide between family and professional management when the latter are subject to contracting frictions
Summary
In emerging economies (e.g. La Porta, Lopez-de-Silanes and Shleifer 1999). This allows us to characterize how these choices might affect firms differentially across the size distribution (which we find support for in the data) as well as the aggregate effects on TFP These results are important since they imply that only the behavior of certain types of firms is distorted by weak contracting institutions through the family management channel. In contrast to the existing literature that examines cross-country correlations between family firms and legal institutions (e.g. La Porta, Lopez-de-Silanes and Shleifer 1999, Burkart, Panunzi and Shleifer 2003, Aminadav and Papaioannou 2018), we are able to leverage our large sample size to examine how management modes respond to changes in proxies for the contractual environment across regions within countries. Since the patterns borne out in the data are consistent with our model’s multiple predictions, they support its narrative that legal institutions lower aggregate performance by causing more firms to sort into less productive family management.
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