Small Business Economics

, Volume 45, Issue 1, pp 15–37 | Cite as

A sequential choice model of family business succession

Article

Abstract

Management succession is a critical process, especially in family-owned businesses. Current models of management succession focus on elements such as personal development of potential successors and decision-making processes by incumbents and governance bodies, but do not account for interactions among actors. This paper addresses this weakness using a game-theoretic approach applied to the setting of family businesses. We model a tournament-style game in which two siblings pursue the CEO position of a family business. In the course of our analysis, we consider a variety of factors, such as the predispositions of the founder to choose one sibling over the other, the value placed on winning the top job by each sibling, the cost for the siblings of pursuing the job, and the possibility of “first-mover advantages.” We close the paper by discussing implications of our work for both family businesses and corporations.

Keywords

Applied game theory Family business Management succession 

JEL Classifications

M50 D20 C70 L26 

References

  1. Allen, M. P., & Panian, S. K. (1982). Power, performance and succession in the large corporation. Administrative Science Quarterly, 27(4), 538–547.Google Scholar
  2. Amegashie, J. A. (2006). Asymmetry and collusion in infinitely repeated contests. University of Guelph working paper.Google Scholar
  3. Baik, K. H. (1994). Effort levels in contests with two asymmetric players. Southern Economic Journal, 61(2), 367–378.Google Scholar
  4. Ballinger, G. A., & Schoorman, F. D. (2007). Individual reactions to leadership succession in workgroups. Academy of Management Review, 32(1), 118–136.Google Scholar
  5. Barnett, T., Long, R. G., & Marler, L. E. (2012). Vision and exchange in intra-family succession: Effects on procedural justice climate among nonfamily managers. Entrepreneurship: Theory & Practice, 36(6), 1207–1225.Google Scholar
  6. Bennett, J. (2013). A new game of thrones at general motors. Wall Street Journal (Eastern Edition), October 2, B1.Google Scholar
  7. Blumentritt, T., Mathews, T., & Marchisio, G. (2013). Using game theory to understand family business succession: An introduction. Family Business Review, 26(1), 51–67.Google Scholar
  8. Cannella, A. A, Jr., & Lubatkin, M. (1993). Succession as a sociopolitical process: Internal impediments to outsider selection. Academy of Management Journal, 36(4), 763–793.Google Scholar
  9. Cannella, A. A, Jr., & Shen, W. (2001). So close and yet so far: Promotion versus exit for CEO heirs apparent. Academy of Management Journal, 44(2), 252–270.Google Scholar
  10. Chrisman, J. J., Chua, J. H., & Sharma, P. (1998). Important attributes of successors in family businesses: An exploratory study. Family Business Review, 21(1), 19–34.Google Scholar
  11. Chua, J. H., Chrisman, J. J., & Sharma, P. (1999). Defining the family business by behavior. Entrepreneurship: Theory & Practice, 23, 19–39.Google Scholar
  12. Craig, J., & Dibrell, C. (2009). Accession tournaments: The application of a game theory derivative to the multi-dimensional family business accession process. Frontiers of Entrepreneurship Research, 29(14): Article 10. http://digitalknowledge.babson.edu/fer/vol29/iss14/10.
  13. Dalton, D. R., & Kesner, I. F. (1983). Inside/outside succession and organizational size: The pragmatics of executive replacement. Academy of Management Journal, 26(4), 736–742.Google Scholar
  14. Dalton, D. R., & Kesner, I. F. (1985). Organizational performance as an antecedent of inside/outside chief executive succession: An empirical assessment. Academy of Management Journal, 24(4), 749–762.Google Scholar
  15. Datta, D. K., & Rajagopalan, N. (1998). Industry structure and CEO characteristics: An empirical study of succession events. Strategic Management Journal, 19(9), 833–852.Google Scholar
  16. Davis, P. S., & Harveston, P. D. (1998). The influence of family on the family business succession process: A multi-generational perspective. Entrepreneurship: Theory & Practice, 22(3), 31–53.Google Scholar
  17. Davis, S. M. (1968). Entrepreneurial succession. Administrative Science Quarterly, 13(3), 402–416.Google Scholar
  18. Eklund, J., Palmberg, J., & Wiberg, D. (2013). Inherited corporate control and returns on investment. Small Business Economics, 41(2), 419–431.Google Scholar
  19. Friedman, S. D., & Olk, P. (1995). Four ways to choose a CEO: Crown heir, horse race, coup d’etat, and comprehensive search. Human Resource Management, 34(1), 141–164.Google Scholar
  20. Garcia-Alvarez, E., Lopez-Sintas, J., & Saldana-Gonzalvo, P. (2002). Socialization patterns of successors in first- to second-generation family businesses. Family Business Review, 15(3), 189–203.Google Scholar
  21. Green, J. R., & Stokey, N. L. (1983). A comparison of tournaments and contracts. Journal of Political Economy, 91(3), 349–364.Google Scholar
  22. Gürtler, O. (2010). Collusion in homogeneous and heterogeneous tournaments. Journal of Economics, 100(3), 265–280.Google Scholar
  23. Güth, W., Schmittberger, R., & Schwarze, B. (1982). An experimental analysis of ultimatum bargaining. Journal of Economic Behavior and Organization, 3(4), 367–388.Google Scholar
  24. Handler, W. (1990). Succession in family firms: A mutual role adjustment between entrepreneur and next-generation family members. Entrepreneurship: Theory & Practice, 15(1), 37–51.Google Scholar
  25. Harbring, C., & Irlenbusch, B. (2003). An experimental study on tournament design. Labour Economics, 10(4), 443–464.Google Scholar
  26. Hirshleifer, J. (1989). Conflict and rent-seeking success functions: Ratio versus difference models of relative success. Public Choice, 63(2), 101–112.Google Scholar
  27. Hillman, A. J., Withers, M. C., & Collins, B. J. (2009). Resource dependence theory: A review. Journal of Management, 35(6), 1404–1427.Google Scholar
  28. Jaskiewicz, P., Uhlenbruck, K., Balkin, D. B., & Reay, T. (2013). Is nepotism good or bad? Types of nepotism and implications for knowledge management. Family Business Review, 26(2), 121–139.Google Scholar
  29. Jost, P. J. (2001). Sequential tournaments. German Economic Association of Business Administration Discussion Paper No. 01–04.Google Scholar
  30. Jost, P. J., & Kräkel, M. (2005). Preemptive behavior in sequential-move tournaments with heterogeneous agents. Economics of Governance, 6(3), 245–252.Google Scholar
  31. Lazear, E. P., & Rosen, S. (1981). Rank-order tournaments as optimum labor contracts. Journal of Political Economy, 89(5), 841–864.Google Scholar
  32. Le Breton-Miller, I., Miller, D., & Steier, L. P. (2004). Toward an integrative model of effective FOB succession. Entrepreneurship: Theory & Practice, 28, 305–328.Google Scholar
  33. Lee, K. S., Lim, G. H., & Lim, W. S. (2003). Family business succession: Appropriation risk and choice of successor. Academy Management Review, 28, 657–666.Google Scholar
  34. Michael-Tsabari, N., Weiss, D. (2013). Communication traps: Applying game theory to succession in family firms. Family Business Review. doi:10.1177/0894486513497506.
  35. Mitchell, J. R., Hart, T., Valcea, S., & Townsend, D. (2009). Becoming the boss: Discretion and post-succession success in family firms. Entrepreneurship: Theory & Practice, 33(6), 1201–1218.Google Scholar
  36. Mookherjee, D. (1984). Optimal incentive schemes with many agents. Review of Economic studies, 51(3), 433–446.Google Scholar
  37. Morgan, J. (2003). Sequential contests. Public Choice, 116(1/2), 1–18.Google Scholar
  38. Nalebuff, B. J., & Stiglitz, J. E. (1983). Prizes and incentives: Towards a general theory of compensation and competition. Bell Journal of Economics, 14(1), 21–43.Google Scholar
  39. Naveen, L. (2006). Organizational complexity and succession planning. Journal of Financial & Quantitative Analysis, 41(3), 661–683.Google Scholar
  40. Pfeffer, J., & Davis-Blake, A. (1986). Administrative succession and organizational performance: How administrator experience mediates the succession effect. Academy of Management Journal, 29(1), 72–83.Google Scholar
  41. Pitcher, P., Chreim, S., & Kisfalvi, V. (2000). CEO succession research: Methodological bridges over troubled waters. Strategic Management Journal, 21(6), 625–648.Google Scholar
  42. Rose, S., & Grant, P. (2013) Succession issues plague some real-estate empires: Experts say families that control businesses often have difficulty divvying up power and money. Wall Street Journal (Eastern Edition), September 2, A20.Google Scholar
  43. Rosen, S. (1986). Prizes and incentives in elimination tournaments. American Economic Review, 76(4), 701–715.Google Scholar
  44. Royer, S., Simons, R., Boyd, B., & Rafferty, A. (2008). Promoting family: A contingency model of family business succession. Family Business Review, 21(1), 15–30.Google Scholar
  45. Sharma, P., Chrisman, J., Pablo, A., & Chua, J. (2001). Determinants of initial satisfaction with the succession process in family firms: A conceptual model. Entrepreneurship: Theory & Practice, 25(3), 17–35.Google Scholar
  46. Sharma, P., & Irving, P. G. (2005). Four bases of family business successor commitment: Antecedents and consequences. Entrepreneurship: Theory & Practice, 29(1), 13–33.Google Scholar
  47. Shen, W., & Cannella, A. A, Jr. (2002a). Power dynamics within top management and their impacts on CEO dismissal followed by inside succession. Academy of Management Journal, 45(6), 1195–1206.Google Scholar
  48. Shen, W., & Cannella, A. A, Jr. (2002b). Revisiting the performance consequences of CEO succession: The impacts of successor type, postsuccession senior executive turnover, and departing CEO tenure. Academy of Management Journal, 45(4), 717–733.Google Scholar
  49. Shepherd, D., & Zacharakis, A. (2000). Structuring family business succession: An analysis of the future leader’s decision making. Entrepreneurship: Theory & Practice, 24(4), 25–39.Google Scholar
  50. Smith, M., & White, M. (1987). Strategy, CEO specialization, and succession. Administrative Science Quarterly, 32(2), 263–280.Google Scholar
  51. Trow, D. B. (1961). Executive succession in small companies. Administrative Science Quarterly, 6(2), 228–239.Google Scholar
  52. Venter, E., Boshoff, C., & Maas, G. (2005). The influence of successor-related factors on the succession process in small and medium-sized family businesses. Family Business Review, 18(4), 283–303.Google Scholar
  53. Zhang, Y., & Rajagopalan, N. (2004). When the known devil is better than an unknown god: An empirical study of the antecedents and consequences of relay CEO successions. Academy of Management Journal, 47(4), 483–500.Google Scholar
  54. Zajac, E. J., & Westphal, J. D. (1996). Who shall succeed? How CEO/board preferences and power affect the choice of new CEOs. Academy of Management Journal, 39(1), 64–90.Google Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Coles College of BusinessKennesaw State UniversityKennesawUSA

Personalised recommendations