The Employment And Performance Of Professional Management In Listed Family Enterprises

Family firms have flourished during past two decades in China and now become major driver of economic growth. Hiring external senior managers become common choice for family firms to expand their business and effectively increase performance. The study focuses on listed family firms in China associated with influence of employment of external CEOs. The study manually screens out 162 family firms in total listed on China SMEs board by March, 2010. Based on subsample of 93 firms which consistently hire the same type of CEO, family firms with external CEO in general outperform those with family member CEO in terms of sales growth and earnings growth over medium-to-long term period. The regression analysis shows that external CEO has significant positive relation with sales and earnings growth but no significant influence on change in profit margin. The study further probes into how external CEO hires interact with other characteristics of family firms. Positive effect of external CEO is offset by ownership concentration but is enlarged when family firms are in high tech sector or has lower-level educated controllers. To validate the robustness of the empirical result, the study conducts a series of test and proves that potential earning management, local economic condition,different family ties and past performance of family firms are not likely to drive the result. In addition, the study investigates the CEO replacement of family firms and calculates CAR during a replacement event. Results of CAR indicate market response negatively to CEO replacement of family firms only when CEO type changes. But regression analysis finds no significant effect of change in CEO type on the short-term market response. Ownership concentration of family firms and the expiry of stock sales lock-up would have negative impact on short-term market performance when external CEO succeeds a departing internal CEO.