Managing the Family Firm: Evidence from CEOs at Work

by Oriana Bandiera, Andrea Prat & Raffaella Sadun

Overview — According to prior research, firm performance is weaker among companies with CEOs who have a family connection to the firm owners compared with nonfamily CEOs, that is professionals. Given the ubiquity of family firms and the implications for aggregate income and growth, what explains this variation? This paper provides evidence on the causes, features, and correlates of CEO attention allocation by looking at a simple yet critical difference between family and professional CEOs: the time they spend working for their firms. The Indian manufacturing sector makes an excellent case study because family ownership is widespread and the productivity dispersion across firms is substantial. Examining the time allocation of 356 CEOs of listed firms in this sector, the authors make several findings. First, there is substantial variation in the number of hours CEOs devote to work activities. Longer working hours are associated with higher firm productivity, growth, profitability, and CEO pay. Second, family CEOs record 8 percent fewer working hours relative to professional CEOs. The difference in hours worked is more pronounced in low-competition environments and does not seem to be explained by measurement error. Third, estimates with respect to the cost of effort, due to weather shocks and popular sport events, suggest that family CEOs place a higher relative weight on leisure, which could be due to either a wealth effect or job security. Overall, the evidence highlights the importance of how corporate leaders allocate their managerial attention. Key concepts include:

Family CEOs work 8 percent fewer hours that nonfamily CEOs (i.e., professionals).
The difference in hours worked translates in a 5.8 percent productivity gap between family and professional CEOs.
Family CEOs are more responsive to events that increase the cost of providing effort, such as monsoon rains and cricket matches.
Behavioral differences may help account for the performance differential between family and nonfamily firms.

Author Abstract

CEOs affect the performance of the firms they manage, and family CEOs seem to weaken it. Yet little is known about what top executives actually do, and whether it differs by firm ownership. We study CEOs in the Indian manufacturing sector, where family ownership is widespread and the productivity dispersion across firms is substantial. Time use analysis of 356 CEOs of listed firms yields three sets of findings. First, there is substantial variation in the number of hours CEOs devote to work activities, and longer working hours are associated with higher firm productivity, growth, profitability, and CEO pay. Second, family CEOs record 8% fewer working hours relative to professional CEOs. The difference in hours worked is more pronounced in low-competition environments and does not seem to be explained by measurement error. Third, difference in differences estimates with respect to the cost of effort, due to weather shocks and popular sport events, reveal that the observed difference between family and professional CEOs is consistent with heterogeneous preferences for work versus leisure. Evidence from six other countries reveals similar findings in economies at different stages of development.