Family firms

Inheritance in family firms

What are the tradeoffs in passing ownership to the next generation?

How does the founder decide who inherits the company?

In families with multiple children, disagreement between sibling owners over how to run the family business can adversely impact the future success of the firm. When deciding on how to allocate ownership across multiple siblings, an owner faces a tradeoff of bequeathing the firm to one child only or to multiple children. Bequeathing the firm to only one child ensures that decisions are quickly made but comes at a cost when sibling-owners have different views on the firm. Bequeathing the firm equally to all children ensures socially optimal inheritance, but comes at the cost of slow decision-making which may impede the firm's ability to adapt in a changing environment.

A CCGR study examines how families trade off these considerations.

The study starts with the population of family firms in Norway and identifies 15000 firms where the founder sells a significant ownership stake; 7000 of these firms undergo a within-family ownership transition, where the shares are awarded to the children of the immediate family. Ownership transitions are defined as events where the firm's founder gives up a major portion of his initial ownership at or prior to his/her time of death, while a family firm is a business group or standalone firm where a family or an individual holds a major stake. 

The study's main findings and policy implications are as follows:

1. When future conflicts between siblings are less likely, inheritance is more likely to be divided between multiple family members.

2. When future conflicts between siblings are less likely, ownership remains longer in the family's hands.

3. Firms that divide up inherited ownership experience lower investment and growth after the transfer, compared with firms that concentrate inheritance in one child.

4. Foreseen internal social frictions within families are influential in shaping inheritance decisions.

5. Private economic benefits of being associated with the family firm and disagreement among inheriting siblings work as substitutes in shaping future ownership concentration. 

6. The inheritance law (inheritance tax and law policy on equality in inheritance) shapes future ownership concentration in the firm.

Empirical Observations