evidence in Bloom and Van Reenen (2007) and Bloom et. al. appoint a family member (especially the eldest son) as CEO are very badly-managed on average. Bennedsen et. al (2007) use the gender of a departing owner-CEO’s first-born child as instrument for patrimonial succession to support the causal nature of this relationship.

The evidence on the poor performance of family-managed firms therefore begs the questions: what causes firms to be family-managed, and what is the impact on aggregate performance? One potential explanation is that family management can substitute for weak legal structures, since trust between family members can be a substitute for weak contractual enforcement that can enable outside managers to expropriate resources from the firm (La Porta et. al. 1997, Burkart, Panunzi, and Shleifer 2003).<sup>3</sup> However, empirical evidence on this hypothesis is mixed both because previous efforts have focused on cross-country comparisons that are subject to omitted variable biases (La Porta, Lopez-de-Silanes and Shleifer 1999, Holmén and Högfeldt 2004, Roe 2003) and it is often challenging to disentangle family ownership from family management in the data.<sup>4</sup> This paper makes three contributions to our understanding of the causes and effects of family management. First, we create a unique database that offers a more systematic and comprehensive view of the incidence of family management and ownership than previously possible. La Porta, Lopez-de-Silanes and Shleifer (1999), with an eye to understanding the ownership structures of large firms, compiled data on largest 20 firms (by stock market capitalization) in 27 rich countries using the WorldScope database.<sup>5</sup> Addressing a broader spectrum of firms, the World Management Survey (WMS) (Bloom and Van Reenen 2007) advanced the literature significantly by asking explicit questions on ownership/management structure variables across a broader spectrum of firms, but overall sample size within and across countries remains modest.<sup>6</sup> as regional characteristics that covers over 119,000 firms from 134 regions across 11 European countries. We draw on the Amadeus (Bureau Van Dyke) database that offers consistent data on firm performance as well as the full names of owners and managers which we then match to systematically measure management modes. To validate our measures, we show they are highly correlated with the explicit measures of family

> 3Indeed, Bloom et. al. (2013) argue that Indian textile firms do not hire professional managers because if they steal from the plant or receive kickbacks in exchange for inflated materials prices, and even if discovered, the owner’s ability to successfully prosecute them and recover the assets is likely minimal because of the inefficiency of Indian courts.

> 4Bertrand and Schoar (2006) make the point that family-controlled businesses are still common in countries like the US and Sweden with excellent investor protection. Claessens, Djankov, Fan, and Lang, (2002) find that family firms underperform relative to nonfamily firms even in Southeast Asian countries with low investor protection. Both moments suggest that weak institutions cannot fully explain family control, and that is not what we want to put forward in this paper. Indeed, the higher fixed costs of professional management in our model (one interpretation of which is the disamenity from not employing family members as managers) predicts that family-managed firms will exist even with perfectly enforced contracts. Instead, we use changes in trust across regions within countries to show that firms with the same observable characteristics are relatively more likely to be family-managed in regions within countries characterized by low trust.

> 5Others have also worked with similar sized datasets. Claessens, Djankov and Lang (2000) look at 2,980 firms in 9 east Asian countries Lins (2003) covers 1,433 firms in 18 emerging markets. Faccio and Lang, (2002) use data on 232 big and medium-sized corporations in Western Europe. Franks, Mayer, Volpin, and Wagner (2012) span 27,684 large firms with more than 50mn Euros in sales across 27 European countries. Foley and Greenwood (2010) examine 2700 firms in 34 countries. In addition, most focus on family ownership rather than differentiating the effects of ownership from management.

> 6In particular, the WMS covers 8,481 firms across 18 countries with an average of 471 firms per country compared to 10,360 average firms per country in our database.

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