Performance and abilities of family-member ceos in a context of formal institutional weakness

Abstract

Background: From the perspective of institutional theory, this paper studies the relation between the abilities of family-member ceos and the financial performance of listed family companies, in a setting of formal institutional weakness. Methodology: The study sample is composed of non-financial family firms listed in the Mexican Stock Exchange during the 2001-2014 period. Econometric analysis is attained through linear models for panel data, estimated by ordinary least squares (ols). To take into account endogeneity concerns, regressions are run through the generalized method of moments (gmm). Results: The results obtained indicate that better corporate financial outcomes are achieved with external ceos than with family-member ceos, even when their abilities, in terms of experience and academic background, are similar. The inverse relation found between family-member ceos and financial performance was moderated when the ceos had a high business-related academic background, thus acquiring the skills and greater perspective needed to cope with the higher transaction costs and increased business risks present in environments of formal institutional weakness as is the case in Mexico. Conclusions: In a context of formal institutional weakness, investment in business-related higher education —of high quality, and in one’s own country— is a good long-term strategy for family businesses that wish to promote a family-member ceo.