Heterogeneous evolution of family firm efficiency

Purpose We address the question: What explains the dynamic behavior of family firm efficiency? Motivated by previous research, the “What” of our study is to document heterogeneity in dynamic efficiency. The “Why” involves theoretically parsing factors that drive dynamic efficiency. Design/methodology/approach We offer a theory, the dynamic family management model of family firm efficiency. Since family and firm differences engender dynamic heterogeneity in efficiency, firms must respond to efficiency shortfalls. They respond via family presence in management and executive compensation. We utilize stochastic frontiers to compute efficiencies for a longitudinal dataset of US family firms, from which we remove lone founders. We thereby focus on firms that face dynamic issues such as succession and kinship struggles. Findings We document large heterogeneity in dynamic efficiency. It is typically negatively related to family involvement and positively related to compensation, supporting our theory. Originality/value Our study is valuable for researchers interested in family firm performance. Our theory provides original predictions about dynamic family firms. Counterintuitively, the main forces affect efficiency in opposite directions, and are still discernible. Our estimates deliver value in testing our theory and providing evidence on dynamics in family firm performance.