Nepotism Everywhere: The Real Effects of Widespread Family Ties

Abstract

This paper provides evidence for a causal effect of nepotism on corporate investment. To measure nepotism, we build a unique database that tracks potential conflicts of interest arising from family connections among directors, shareholders and other stakeholders. Our analysis indicates that firms in which family ties are widespread invest substantially less than peer firms and are less responsive to changes in investment opportunities. To establish causality, we use state-level divorce and marriage rates as sources of exogenous variation in the most popular form of family tie in our sample, a director's link to his wife. The effect that we uncover is robust to the exclusion of family firms. Overall, our results suggest that underinvestment in nepotistic firms is driven by the diversion of resources out of the firm via generous payouts and higher salaries.