The power of dynastic commitment


We study how, at times of CEO transitions, the identity of the CEO successor shapes labor contracts within family firms. We propose an alternate view of how family management might underperform relative to external management in family firms. The idea developed in this paper is that, in contrast to external professionals, CEOs promoted from within the family not only inherit control of the firm but also inherit a set of implicit contracts that affects their ability to restructure the firm. Consistent with our dynastic commitment hypothesis, we find that family-promoted CEOs are associated with lower turnover of the workforce, lower wage renegotiation, and greater loyalty for the incumbent workforce.

Laurent Bach and Nicolas Serrano-Velarde 

Research Highlight 2010

This research project concerns family firms, and in particular, it aims to address the special characteristics of such firms. It does so by comparing such firms in periods when the CEO changes, and compares firms where the CEO remains a member of the original family with the case where an outsider takes over. The research indicates that the type of the CEO successor has a significant effect on the type of labour contract within the firm. We suggest that CEOs promoted from within the family not only inherit control of the firm but also inherit a set of implicit contracts that affects their ability to restructure the firm. Consistent with this dynastic commitment hypothesis, we find that cases of family-promoted CEOs are  associated with lower turnover of the workforce, lower wage renegotiation, and greater loyalty for the incumbent workforce.

Nicolas Serrano-Velarde