Determinants and economic consequences of leadership succession: Evidence from family firms in China

This thesis has three major objectives relating to leadership succession in Chinese family firms: (1) to identify the determinants of the successor choice, (2) to investigate the impact of the succession on firm performance, and (3) to explore the effect of the successor decision on the firm’s access to debt finance. Most prior studies on the leadership transition issue in family businesses are based on developed economies. Little attention has been paid to this issue in China’s context, probably because many Chinese family firms have always been managed by the founder during the past decades. However, after more than 30 years’ dedication to the business, most founders are recently retired or very close to retirement. Thus, it is clearly important and urgent to investigate the leadership succession issue in Chinese family firms. Moreover, as a country whose institutional, social, and cultural context is distinctive from developed economies, China provides an interesting setting for the exploration of the succession issue in family businesses. To achieve the above objectives, this thesis uses a sample of 348 Chairman or CEO succession cases in publicly listed family firms in China during 2003-2014. In relation to the first objective, I find that family firms without foreign ownership and whose founder is deeply affected by clan culture are more likely to choose a family successor. In addition, the founders who are strongly affected by Confucian values and having more political connections are more likely to appoint not only a family successor but also a nonfamily successor having a guanxi with them. Regarding the second objective, I document that the leadership succession does not cause a significant change in firm performance. Moreover, family and nonfamily successors do not have significantly different impacts on firm performance. Furthermore, family or guanxi-connected successors’ acquisition of the founder’s specialised assets can significantly increase the firm performance after the succession. Finally, relating to the third objective, I find that family successors have a significant and negative impact on the firm’s post-succession access to debt financing but their acquisition of the founder’s specialised assets greatly contributes to the access after the Abstract iv succession. Overall, this thesis makes the following key contributions. First, it contributes to the literature on the determinants of the successor choice in family businesses by identifying several new factors that have never been explored before in the context of family firms. This, in turn, can provide several new research avenues for future studies. Second, this thesis is the first to shed light on the existence and importance of a unique type of successors, i.e. nonfamily members having a guanxi with the founder. This also contributes to a novel research direction, i.e. paying attention to the founders’ guanxi-connected members, for researchers interested in family firms in China or other economies having a similar cultural background with China. In addition, this thesis proposes innovative criteria for identifying a guanxi-connected successor, which may be useful in future research. Moreover, while prior research recognises the importance of successors’ acquisition of the founder’s specialised assets in theory, this thesis is the first to empirically demonstrate the importance. In practice, this thesis, first, may help investors in Chinese family firms to predict the identity of the new leader more accurately based on the firm and the firm founder’s publicly available information. Second, it provides an important implication for the founders regarding the choice of the successor: both their family and guanxi-connected members can acquire their specialised assets and can use the assets to improve firm performance. Finally, this thesis provides a useful suggestion for the founders’ descendants who may inherit the business in the future that their potential inferior ability in debt-financing compared with nonfamily agents can be largely remedied by the specialised assets that they obtain from the founder.