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American Economic Review Vol. 100 No. 5 2010

Inheritance Law and Investment in Family Firms

Andrew Ellul1; Marco Pagano2; Fausto Panunzi3

1 Kelley School of Business, Indiana University 1309 E. Tenth Street, Bloomington, IN 47405. · 2 Department of Economics, University of Naples Federico II, Via Cintia, 80126 Napoli, Italy, CSEF, EIEF, and CEPR. · 3 Department of Economics, Bocconi University, Via Roentgen 1, 20136 Milano, Italy, FEEM, CEPR, and ECGI.

Abstract

Entrepreneurs may be legally bound to bequeath a minimal stake to noncontrolling heirs. The size of this stake can reduce investment in family firms, by reducing the future income they can pledge to external financiers. Using a purpose-built indicator of the permissiveness of inheritance law and data for 10,004 firms from 38 countries in 1990–2006, we find that stricter inheritance law is associated with lower investment in family firms but does not affect investment in nonfamily firms. Moreover, as the model predicts, inheritance law affects investment only in family firms that experience a succession.

DOI
10.1257/aer.100.5.2414
Volume
100
Issue
5
Pages
2414-2450
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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