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

Abstract

Manuscript Type: Empirical

Research Question/Issue: How sensitive is CEO turnover to firm performance in the context of family firms?

Research Findings/Insights: Using a detailed database of mostly non-listed Colombian firms, we find that family ownership (direct and indirect through pyramidal structure) reduces the probability of CEO turnover when financial performance has been poor, but found the opposite effect when families participate actively on the board of directors. These results hold even when the manager is a family member, although the probability of turnover is lower for a family member. This lower probability does not affect the financial performance of the firm. In other words a benevolent entrenchment of the family CEO seems to occur.

Theoretical/Academic Implications: First, the theoretical premise that bad financial performance usually leads to changes in top management has been widely tested around the world; however, this study is among the few to deal with this issue in terms of closely held firms’ micro-data. Second, our results contribute to the growing literature on agency problems inside family firms. Third, this study contributes to the empirical literature of corporate governance in family firms for an under-studied region that has gained relevance in the world economy.

Practitioner/Policy Implications: Usually family firms are treated as a single unit, ignoring the different ways families may influence governance decisions. This study considers family involvement in three dimensions: management, ownership (direct and indirect), and control, and shows that the impact of family in governance decisions is not uniform and depends largely on the different ways family is involved in business.

Keywords: family businesses, CEO turnover, family control

JEL Classification: G3, G34