Nepotism Everywhere: The Real Effects of Widespread Family Ties

Directors that are not owners directly benefit from nepotism, while only indirectly gain by increasing firm value. This creates an incentive to hire less qualified family members instead of more talented external candidates. This also weakens the incentive to enforce optimal investment. To assess the implications of nepotism, we build a unique database that tracks family connections-by blood, marriage, or adoption-among individuals employed in key positions by the same firm. Our analysis indicates that firms in which nepotism is pervasive invest substantially less than peer firms and are less responsive to changes in investment opportunities. Our results suggest that previous findings by the literature on family-owned firms may not be generalizable to family-run firms.