DP6977 Inheritance Law and Investment in Family Firms

Author(s): Andrew Ellul, Marco Pagano, Fausto Panunzi
Publication Date: September 2008
Keyword(s): Family firms, Inheritance law, Investor protection
JEL(s): G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6977

Entrepreneurs may be constrained by the law to bequeath a minimal stake to non-controlling heirs. The size of this stake can reduce investment in family firms, by reducing the future income they can pledge to external financiers. Using a purpose-built indicator of the permissiveness of inheritance law and data for 10,245 firms from 32 countries over the 1990-2006 interval, we find that stricter inheritance law is associated with lower investment in family firms, while it leaves investment unaffected in non-family firms. Moreover, as predicted by the model, inheritance laws affects investment only in family firms that experience a succession.