The role of corporate philanthropy in family firm succession: A social outreach perspective

Abstract

Abstract We propose and test a social outreach hypothesis of family firm succession. We argue that family firms proactively engage in social outreach activities as a strategy to ensure smooth succession. We focus on corporate philanthropy (CP), a social outreach activity, in a family firm succession to test our hypothesis. The results show that family firms engage in a strategy of using more CP in connection to family firm succession, especially when the successor is from the second generation. The findings are robust to alternative specifications of CP activities, various sub-sample analyses, using a difference-in-differences analysis, a two-stage least square approach, strategic choice on timing of succession, and accounting for the successor's education and experience of working for the family firm before succession. We document that despite generally poorer performance after succession, a family firm with a second-generation CEO that engages in CP exhibits better market and accounting performance relative to other types of transitions, suggesting a strategy in which CP reduces the magnitude of poor performance after succession.