Three essays on family firms

Family businesses are important in many economies worldwide. One reason family firms pique many researchers' interest is the interplay of family and business. Decisions made within family firms often reflect business as well as family objectives, and controlling families have to find the right balance between the two without distorting firm's outcomes or family's well-being. All three papers in this dissertation use detailed micro-level data on Norwegian family firms and empirically examine some of the questions often associated with family businesses. The first paper takes a closer look at the compensation of family firm employees and examines the pay gap between family and non-family employees. I find that the pay gap is highly contingent on the equity that the controlling family and firms' employees invest in the firm. Family employees only earn more than their non-family counterparts in firms owned solely by one family. Family firms with minority owners, on the other hand, offer similar compensation to all employees without invested equity regardless of their family status. Family owners earn significantly more than non-owner employees do, but always less than other owners employed in the firm. Taken together, my results suggest that families compensate their members without equity with above-market salaries, however, the presence of minority shareholders limits such nepotistic behaviour. The second paper, co-authored with Charlotte Ostergaard and Amir Sasson, studies the underperformance of firms that undergo a family succession. We capture career trajectories of all successors and show that family firms prefer to promote insider successors, and that their lack of outside work experience rather than the small pool-effect drives the underperformance of family successions. The performance of outside family successors is, on the other hand, similar to that of unrelated successors. These results suggest that successors with multiple work experiences are more likely to develop strong skill sets that are needed for managing the firm, and that controlling families are willing to put in charge successors with inferior skills if that helps preserve their socioemotional wealth. The third paper turns the focus to the next-generation family members and asks the question which factors determine their employment in the family firm. A senior's children are often employed in the family firm, however, some decide to work elsewhere. I show that the decision to work in the family firm depends on firm characteristics, though these alone cannot explain why sons (and especially the eldest sons) are more likely to work in the family firm. The observed primogeniture gap can be explained by the number of potential successors and by the presence of non-family members within the firm, nonetheless, the gender gap cannot be attributed to the factors used in the analysis. These results shed new light onto how the next generation self-selects into working for their family's firm.