The Role of Family Involvement on CEO Turnover: Evidence from Colombian Family Firms

Abstract

AbstractManuscript TypeEmpiricalResearch Question/IssueWe analyze CEO turnover in closely held firms with some level of ownership dispersion in a context of low investor protection. In particular, we examine the impact of family involvement on CEO turnover and CEO turnover/performance sensitivity. We argue that family involvement in management, ownership, and control has both a direct effect on CEO turnover from the family presence itself, and a moderating effect over CEO turnover/performance sensitivity attributable to the agency tensions between majority and minority shareholders (whether other family blocks or non‐family shareholders).Research Findings/InsightsUsing data from 1996–2006 for 523 Colombian firms, we find direct and moderating effects, depending on the type of family involvement. Family involvement in management and boards reduces CEO turnover, but family involvement in ownership increases it. Regarding moderating effects, family involvement in ownership reduces CEO turnover/performance sensitivity, while the opposite occurs with family directors.Theoretical/Academic ImplicationsOur results show that closely held firms in emerging markets exhibit a strong negative CEO turnover/performance sensitivity, which is a somewhat counterintuitive result, and also contribute to a better understanding of agency conflicts within family firms by highlighting the different ways families affect CEO turnover.Practitioner/Policy ImplicationsOur findings suggest that even benevolently entrenched family CEOs are not immune to poor financial performance. Families that are majority or controlling shareholders may support CEOs even when the firm performs poorly because of potential benefits from control. Family boards are very sensitive to financial performance even when the CEO is a family member.