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Wealth succession and company performance evidence from western and asian family / Essay / Paper by AssignmentLab.com
 

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    Wealth succession and company performance evidence from western and asian family / Essay / Paper by AssignmentLab.com Wealth succession and company performance evidence from western and asian family / Essay / Paper by AssignmentLab.com Document Transcript

    • Wealth Succession and Company Performance: Evidence from Western and Asian FamilyOwned Business Literature review: Existing studies on Western and Asian family business model and wealth succession The importance of wealth succession in family firms has been widely proclaimed by previous studies since family businesses are believed to be the initial form of entrepreneurial activity. Family businesses constitute the core of global economy and are known to be dominating the economic landscape of the major economies in the world. For example, the United States Small Business Administration (2011) acknowledges that family businesses comprise 90% of all enterprises in America and provide 62% of American employment. Similarly, in the United Kingdom family firms account for 66% of the UK small and mediumsized enterprises population while maintaining strong presence in the economy and being exemplary players of the British industrial sector. In the European Union, family businesses make up more than 60% of all European enterprises with most SMEs being family firms (European Commission Expert Report on Family Business, 2009). The Asian Family Enterprise Forum (2007) reports that approximately 60% of Asian firms are family controlled. These facts justify the importance of family firms as a research object. This interest towards family business that has grown substantially over recent years thus laying sound foundations for an emerging field in business research studies is centered on determining whether significant differences between family-owned firms and non-family-owned businesses exist and how they manifest themselves. This section of the paper presents a structured review of the existing studies on family firms with specific emphasis being made on practical applications of such studies in management. In particular, this section is focused on available studies justifying the so-called
    • second generation wealth succession problem widely recognized by empiricists and theorists as well as analyzing country and regional models of family business management. 1. Theoretical foundations At present the study of business and family is highly fragmented thus assuming that the two social, cultural and economic institutions stand far apart from each other (Anderson et al., 2003). While this division certainly omits the fact that previously the majority of businesses were family-owned, it leads to emergence of scholarly interest towards family enterprises assuming that they are distinguishable from other forms of business ownership. Scholarly studies enumerate such distinguishing features, namely, size, profitability, long-run performance and business culture. One of the most important theoretical foundations of such studies is the aspiration towards a gradually coined definition of a family enterprise that is highly likely to be employed by legislators and policymakers. However, it can readily be observed from available literature that, first of all, each scholarly study strives to develop its own definition of the family firm, and, secondly, that those applied definitions affect the outcome of the study greatly. Thus, it is important to consider available dimensions of a family firm that have impacted formulation of a definition of such type of an enterprise. 2. Towards a definition of a family firm No universal definition of a family firm is accepted among scholars. However, there were numerous attempts to establish an operational definition; these attempts were primarily focused on distinguishing family firms from non-family firms assuming that the two types of enterprises are different. The main problem is establishing a set definition that would take into account those enterprises that are in between family and non-family businesses. Westhead et al. (1998)
    • assimilated existing definitions of family firms that were used in previous studies. These definitions demonstrate that the outcome of the study and the ratio of participating family firms vary greatly with the definition applied. There are definitions that claim that a family firm should be determined based upon the extent to which a family is involved in the business: either through ownership, or management, or through succession. Nevertheless, a precise definition is hard to be determined in this case as well: some scholars claim that a family should own 100% of shares while others state that a majority is sufficient. There are definitions based upon the family’s involvement in management and definitions that are based on setting strategic objectives for the business. Research on family firms has several streams on an individual level: the role of 1st generation CEO, women in family firms, and the role of the company’s founder. On a group level, existent research can be divided into studies of family firm performance, wealth succession, and challenges for future generations. Authors that shifted their perspective of research on family firms from the external identity of the family firm to its internal “essence” exploit the concept of “familiness” introduced by Habbershon et al. The concept defines family business as a set of unique resources and capabilities that can become a competitive advantage. Resources of a family firm are tangible, intangible, and specific resources that include family culture, communication among family members, trust, and entrepreneurial ability. Therefore, when determining an integral definition of a family business, the concept of familiness as well as the degree of control over the company for the present and forthcoming generations should be included. Chua et al. (1999) proposed the following definition that is based on extensive research of scholarly literature:
    • “The family business is a business governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families”. In context of the present study, it would be beneficial to accept a succession-based definition of a family firm stating that a family firm is a type of business that is likely to be passed from one generation of the family to another (or is sustainable across generations). To conclude it should be stated that “family” is a multidimensional concept that is comprised of variables like ethnicity, gender, values, and culture. Families are comprised of individuals that have emotional as well as biological kinship. Thus, family firms have to divert their resources to resolving issues that non-family firms do not have to deal with which may impact their short and long run performance. 3. Process-based approach to wealth succession There is a substantial level of agreement in the academia concerning the fact that wealth succession should be envisioned as a process with various issues and problems arising at different stages of it. Handler (1994) outlined several lifecycle-based approaches to wealth succession that separate the process into stages of wealth transition between father and son. In particular, a framework devised by Churchill and Hatten in 1987 distinguishes four stages of wealth succession process: (1) a stage of owner management, when the company owner is the only member of the family affiliated with the business; (2) training and development stage, when the founder teaches his offspring of the peculiarities of the business; (3) partnership stage when
    • father and son are equally responsible for the business; and (4) power transfer stage when responsibility for the business is shifted to the successor (Handler, 1994). Other approaches to wealth succession as a process incorporated the so-called roleadjustment paradigm, in which wealth succession process is defined through a particular type of role behavior of the founder and his or her successors and the transition between those different roles. According to Chang and Lin (2011) who follow Handler (1990) the adjustment process in this case is the process of gradual fading of the founder’s influence and level of involvement in the business. The first stage is characterized by the founder being the core of the enterprise with the rest of the family being uninvolved with the business. The second stage is the period when the primary concern of the founder of the business is its survival while one or more family members may assume the roles of assistants to the founder of the enterprise; succession just like at the first stage is envisioned as a distant future goal. Primary responsibility for the business still pertains to its founder. The last two stages of the role adjustment process are crucial to wealth succession: they are characterized by initiation of wealth succession plan and preparation of the successor while the role of the founder of the enterprise is gradually fading (Chang & Lin, 2011). Finally, the successor adopts the role of the leader and decision maker of the enterprise; however, the founder still participates in the business (being a supervisor, a consultant, or assuming a position on the board of directors). There are cases when founders do not move beyond exercising full control over the enterprise or when their successors never ascend beyond the role of an assistant (Handler, 1994). As it was already stated, the process of wealth succession is one of the most challenging stages in the lifecycle of a family enterprise. Thus, it cannot be expected to be smooth due to the very reasons that precipitate succession. According to Kram and Handler (1998), who suggest
    • that wealth succession can be divided into voluntary and non-voluntary, primary causes of voluntary business transfer in family firms are health problems and personality characteristics. Non-voluntary business succession is primary caused by poor organizational performance and “problematic environments” (Kram & Handler, 1998). Further disruptions to wealth succession may also occur when heirs or successors refuse to accept their roles or due to force major. 4. The role of first generation CEO Founders of family firms exercise specific influence on family firm performance, on its culture and values. Since they typically have long tenures (for example, in the United States tenure of family leaders is an average of 17.6 years), this influence is exercised during a lengthy period of time and spreads beyond the founder’s tenure (Sharma, 2004). Previous studies have shown that wealth succession to the second generation is different from further transfers occurring in subsequent generations (Molly et al., 2010). Therefore, family-firm CEOs have cognitive and psychological difficulties when having to exit their companies. Kram and Handler (1998) pointed out that family-firm CEOs are, in effect, “married” to their business. Multiple studies that were focused on psychodynamic aspects of leadership outlined traits and features of a founder as well as provided explanation for such type of a union. Levinson (1971) pointed out that for the founder a business has several important meanings. First of all, the business founder is typically uncomfortable with being supervised, and starts a business to avoid being dominated by any authority. Secondly, a founder typically envisions his or her business as his “baby” and his “mistress”; those who work with him or for him are perceived as instruments. Finally, “for the entrepreneur, the business is essentially an extension of himself, a medium for his personal gratification and achievement above all” (Levinson, 1971). Thus, the process of wealth succession is further complicated by the founder’s concerns about “the monument he will leave
    • behind” (Levinson, 1971). Furthermore, Handler (1994) followed Kets de Vries (1985) who pointed out that the founder’s inability to consider wealth transition in its dynamics and establish a set future for his company should be explained by the owner’s “desire for applause”. These features of family-firm founders and first generation CEOs lead us to another body of research that suggests that family-firm founders deliberately select successors that are bound to lead the company to failure. According to Levinson (1974), CEOs choose several types of failures to become their direct successors. The term “loyal servant” is employed by Levinson (1974) to denote a “loyal and conscientious servant of unquestionable integrity and dedication” who does not have any rivalry feelings towards the CEO and also is incapable of changing the structure that is tailored to the CEOs management style. A “watchful waiter” is an outsider hired by the CEO to become a scapegoat who is normally reprimanded and manipulated on petty matters and who is eventually turned down. A “false prophet” is an individual “whose area of competence is unrelated to the leadership role for which he is chosen, and who therefore cannot deliver what is unrealistically expected of him”. Finally, Levinson (1974) pointed out that CEOs may choose to procrastinate on the decision to nominate a successor. Kram and Handler (1998) pointed out that such resistance on an individual level is highly determined by the extent to which the CEO envisions his life as purposeful after retirement. To conclude, it is necessary to emphasize that the leader’s sense of irreplaceability, limited self-understanding, inability to perceive their own competencies, and unconscious rivalry with potential successors as well as difficulty to “divorce” his own enterprise contribute to problematic wealth transfer. This is further intensified by the founder’s resistance “to facing the thought of aging, dying, or being incapacitated” (Kram & Handler, 1998). Wealth transfer immediately suggests the loss of self-constructed monument. Therefore, successful wealth
    • transition in a family firm would inevitably depend on proper adjustment of the founder’s attitudes to the process. 5. Challenges for further generations While much of the available research is focused on the perspective of the business founder and his role in the succession process, a significant body of research exists that is set out to investigate the position, perspectives and challenges for those who in many studies are named simply as “the family”. Sharma (2004) pointed out that the directions of research on family members’ perspective in wealth succession is generally divided into three dimensions, namely, determination of successor’s attributes from the family-firm leader’s perspective; factors enhancing family-firm performance in lieu of wealth transfer; and determination of factors that affect family members’ decisions to pursue a career in their family firms. Chua, Chrisman, and Sharma (1999) stated that from the leader’s point of view, commitment to business and family integrity are the most important characteristics of potential successors. In addition, Levinson (1974) pointed out that the primary concern for a family-firm CEO is to determine how his heir would “fit among the family members” in terms of conflict resolution. It is also important to state that such qualities as ability to make decisions, self-confidence, and intelligence and outside the company experience play an important part when determining the desirable characteristics of a potential successor. Handler (1994) outlines several studies that analyze the perspective of heirs in terms of accession planning. It is pointed out that several studies suggest that it is highly desirable for potential heirs to gain experience outside the firm even if they find working for their family enterprise a satisfying experience. Furthermore, studies analyzed by Handler (1994) suggested that not all students who are involved with a family enterprise plan to return to it
    • immediately after school. These factors are directly correlated with the extent to which heir’s succession experience would be positive. Handler (1994) designed a descriptive framework that incorporates factors that are likely to impact the next generation’s perspectives and potential success of the wealth transfer process. The framework which is based on in-depth interviews suggests that in order to have a positive wealth succession experience a member of the family firm has to achieve fulfillment of career interests, psychological needs, and life stage needs (such as exploration, and advancement). Furthermore, in order for the succession process to be successful for the heir, he or she has to be granted an opportunity to exercise personal influence in the family business. The founder also plays an important part in this process since mutual respect and understanding with the predecessor (especially with the first-generation CEO) determine the outcome of the succession. Apart from the succession process per se and successful outcomes of this process for the heir, studies have extensively focused on factors that impact the decision to stay with the family firm rather than seek employment outside. Vincente (2011) outlined factors that determine the family member’s decision not to become involved with the family business, namely, a desire to build a career outside the family company (determined by other interests or search for independence); limited number of available positions in the business (or their absence); avoidance of responsibility; and lack of compliance with the requirements to enter the family firm. Thus, it becomes apparent that lack of interest or motivation towards pursuing a career in the family company is one of the decisive factors when determining the decision of a family member (even a potential heir) to stay with the company. Following Iannarelli (1992), Handler (1994) listed factors that are crucial to developing interest towards family business, namely, exposure to various aspects of the family business in early age; skills development in the family
    • company; encouragement of the parents; individual and recognized contribution to the business; and the right time to present an opportunity to join the business. Several studies within this direction have assessed the role of gender and, specifically, pointed out to the factors that determine successful wealth transfer to female heirs. According to Vera and Dean (2005), numerous studies demonstrate that historically daughters have not been considered to fulfill the leading position in the family firm. Vera and Dean (2005) refer to Keating and Little (1997) who found that gender was one of the main factors impacting the successor, and males were typically preferred to females. Moreover, even first-born daughters were hardly ever considered for leadership positions in family businesses, with many owners preferring to sell the company rather than nominate a female heir. Both Vera and Dean (2005) and Handler (1994) cite a study by Dumas (1992) that found that daughters were primarily brought into family business to complete lower-level tasks. A term “invisible successor” was coined by Dumas; the term is used to describe daughters who were not considered for managerial positions in family firms. Handler (1994) emphasized that daughters considered entering a family business when they were forced to do so by a crisis or unforeseen circumstances of a similar nature. This may lead us to the conclusion that little or no attention is being paid by family firms in terms of preparing daughters for assuming a leadership position. Although multiple studies on gender inequality in the world suggest that the gap between men and women in leading positions in major global companies is closing, and the “glass ceiling” phenomenon is gradually ceasing to exist, family firms are a bitter exception of this trend. Vera and Dean (2005) suggest that many families seek to protect their daughters from problems that may arise when managing a business. Other factors that affect preventing daughters from succeeding their parents in CEO positions include work-life balance issues.
    • Quite contrary to previous studies, Higginson (2010) suggests that female CEOs are being drawn to business ownership; however, the study by Higginson omits important statistics on family firms. Nevertheless, Higginson (2010) suggests that based on previous studies female owners are more focused on succession planning and treat this process more diligently than male owners: they seek information, are less hierarchical, and are more likely to consider daughters as heirs. Therefore, female and male CEOs in family firms have different approaches to succession and different motivation. 6. Factors determining successful wealth succession Handler (1994) follows Ward (1987) who pointed out that failure to plan strategically may be the major reason for wealth transfer process in family firms to become a failure. However, there are factors that limit succession planning and preparation for wealth transfer inside and outside the company. Kram & Handler (1998) developed a model of resistance to succession in family firms. They outline a list of factors that promote resistance on an individual level that would cause a family firm owner or CEO to avoid planning for wealth succession such as good health, lack of other interests apart from the business, and identity with the business. On the contrary, they suggest that resistance to wealth transition planning is reduced if a family-firm owner or CEO has health problems, envisions his or her retirement as an opportunity for a new life. Kram & Handler (1998) suggested that “interpersonal and group dynamics within and between family, firm, and founder” could also reveal factors that would promote or inhibit succession planning. For example, when the owner and his successors have high levels of trust, or when heirs are actively involved in the business, it is highly likely that succession planning would not face high resistance. Moreover, there are organizational characteristics that are likely to impact wealth succession within a firm. For example, Kram & Handler (1998) followed
    • Schein (1985) who stated that organizational culture would determine whether wealth transition is viewed as evolution or revolution. If the structure of the organization promotes financial delegation, wealth transition is likely to occur smoothly. Finally, there are factors that are likely to inhibit or facilitate successful wealth transition planning on an environmental level. For example, when the environment presents itself as problematic, organization may evolve through wealth succession, and resistance to succession planning would be reduced. Existing studies point out that there are multiple factors that determine success of wealth transfer in family firms. First of all, succession planning should begin with selecting and grooming the suitable candidate. The candidate in turn should envision working for the family firm as an opportunity to fulfill his or her career needs, personal needs and life stage needs. Grooming of the candidate may take form of a specifically designed training program, or may take place as on the job learning. Secondly, it is essential to determine whether the heir’s personal skills, ambitions and abilities are adequate to the suggested position. This process of determination may take place through assessment in formal and informal terms. Finally, in order for the owner’s knowledge to be transferred to the heir effectively, mentoring has to take place. Scholarly studies remain inconclusive as to whether mentoring by a relative or a family member is the optimal way to conduct such training; however, it may readily be inferred that the former CEO and leader of the family firm is the best source of knowledge on the company affairs. Dyer (1986) outlined business, family and board conditions that determine success of family firm wealth transfer. Business conditions that are likely to lead to successful wealth transition are the following: 1. Wealth transfer occurred in a “healthy” company;
    • 2. The owner (or first-generation CEO) gradually resigned from being involved in organizational matters; 3. The potential successor received adequate training and preparation; 4. Founders and successors developed an involving and mutually dependent relationship that was based on respect and interest in company matters. Family conditions determining successful wealth transfer are the following: 1. The family shares views and opinions concerning equity and capital management; 2. The family is prepared to emergencies; 3. The family has well-established conflict resolution mechanisms; 4. The family has high level of trust. To conclude on this section, it should be stated that succession is the outcome of multiple factors. Effective successions are determined by close cooperation between the former CEO and his potential heir. Significant investment of time and effort is required from both sides of the equation. Handler (1994) indicates that there are two outcomes that indicate a successful wealth transfer. First of all, next generation control of the company’s stock can serve as a symbol for an effective wealth transfer. Another indicator of successful wealth transfer is the amount of time that the heir was in his successor’s position. Naturally, success of wealth transfer can be measured through the reputation of the company, and its further financial performance. 7. Wealth succession and its impact on family firm performance It is emphasized that family ownership may result in better company performance due to several reasons. First of all, family-owned companies may be making better investment decisions because families have more firm specific knowledge. Secondly, family ownership mitigates the
    • classical principal-agent model since in family firms there is better alignment of the interests and incentives of management and shareholders (Feng-Li and Tsangyao, 2010). However, Feng-Li and Tsangyao (2010) pointed out that family ownership may also be detrimental for company performance since, first of all, family owners may extract private benefits from the firm; secondly, family-controlled businesses may tend to be excessively risk-averse; finally, familyowned businesses may be criticized for hiring people for their family status and not for their qualifications; it is specifically true for family CEOs that are selected from a limited pool of managerial talent (Bennedsen et al., 2007). These negative effects on business performance may be explained by the notion that decision-making process of the firm may be impacted by noneconomic goals of the business owners (Olson et al., 2003). On the other hand, family CEOs could perform better than external managers since family CEOs may have higher non-monetary incentives to which external managers are not exposed (Bennedsen et al., 2007). Thus, the impact of family ownership on business performance is a variable resulting from balance of impact of positive and negative forces. Wealth succession like any business transfer is one of the most difficult steps in the lifecycle of a family firm. According to Molly et al. (2010) who cite numerous previous studies, approximately 30% of family businesses survive to the next generation while 10% to 15% survive to the third generation. As an intergenerational transfer takes place, changes in debt rate and performance of a family firm occur (Molly et al., 2010). Therefore, succession planning is decisive in survival of the firm from one generation to another (Kram and Handler, 1998). Wealth succession is recognized to impact the company’s financial performance. Existing studies on family business succession and its impact on capital structure are inconclusive. For example, several studies quoted by Molly et al. (2010) suggested that as family companies pass from one
    • generation to another they become more reluctant to use external sources of capital and, in general, their attitude to debt financing becomes more risk-averse. Furthermore, successors tend to be more risk averse than their predecessors since their primary task is wealth preservation compared to wealth multiplication pursued by first-generation CEOs. This suggests that wealth transfer results in limiting potential sources of capital for a family company thus becoming potentially deteriorating for its future performance. Other studies are controversial to this position pointing out that successful wealth transfer results in improved relations with external stakeholders such as banks that automatically leads to an improved status of a reliable debtor thus resulting in increased levels of external funding. Molly et al. (2010) resolve this controversy in their own study. The study discovers that wealth transfer negatively impacts financial leverage of the business; however, in later generations this negative effect is reversed. Moreover, the study reveals that growth rates decline significantly after succession from first generation owners to second generation. Finally, their study suggests that a company’s profitability is not impacted by wealth transfer. 8. Country-specific studies Issues discussed above cover a vast body of research outlining potential complexities that are likely to occur in lieu of wealth transition process. Country-specific studies discuss differences in challenges for successful wealth transfer with respect to national and economic environments of different countries; additionally, cultural and ethnic factors impact family business management. It is widely recognized that the major body of existing research has focused on companies that are of Anglo-Saxon origin. This segment of the literature review
    • section will outline main findings for companies of Asian origin (countries such as Pakistan and Malaysia) as well as analyze succession issues in Italian companies. A study by Afghan (2011) points out that 80% of employment in Pakistan is generated by family-owned companies. Afghan (2011) pointed out that existing literature on wealth transition in Pakistan is rare. However, his study provides a valuable insight into what can be defined as successful wealth transition. Namely, Afghan (2011) cites several studies that define successful wealth transition as either subsequent successful performance of the business, or stockholder satisfaction with wealth transition, or relevant company reputation and turnover, or business profitability combined with family harmony. In his study Afghan (2011) stated that culture (which in Pakistan is highly masculine, collectivist, and highly power distant, referring to Hofstede’s famous dimensions of culture) plays an essential role in family business operations and is decisive in determining success of wealth transfer. Apart from cultural norms that in Pakistan emphasize family bonds and the role of the elderly, Islamic inheritance laws also shape wealth transfer. Under these laws, sons receive twice the share of the daughter in the inheritance (however, this situation is only applicable to the death of the business owner); a father can make a gift to his son or daughter without referring to any religious norms and laws. In his research, Afghan (2011) focuses on General Fan Company, a privately held business, established in Pakistan in 1954. In his analysis Afghan (2011) states that wealth transfer was impacted by kinship cultural norms, in particular, by rivalry between cousins that eventually caused division of the business during wealth transfer. Since successful wealth transfer is referred to as business success and family harmony, this type of succession cannot be considered efficient. Amran and Ahmad (2010) researched wealth transition and company performance in Malaysia. They pointed out that 70% of listed companies in Malaysia are family-owned
    • businesses. They used panel data for 975 companies for the year 2003 to 2007 to find out specific features of family succession that determined company performance. Amran and Ahmad (2010) show that average shareholdings by family members in Malaysia are approximately 43%. 24% of Malaysian family-owned companies in the sample are managed by non-family CEOs. Amran and Ahmad (2010) found that the higher the percentage of shares owned by the family, the better is the firm’s performance; additionally, younger generations enhance firm performance due to the fact that younger family members are more risk-loving, innovative, and aware of the current business environment. Thus, it can be suggested that wealth transfer to younger generations in Malaysia is positively affecting the future of the business. Cucculelli and Micucci (2008) studied the impact of the founder-CEO succession in Italian family firms. Their study was based on a survey of 7,500 Italian family-owned companies for the period 1994-2004. The study finds that for the whole sample, post-succession performance declines with heir-managed firms experiencing a greater decline in ROA and ROS compared to unrelated-managed companies. Heir-managed companies underperform more significantly in terms of ROA than unrelated-managed companies after succession takes place. Cucculelli and Micucci (2008) pointed out that when a poor-performing family-owned business is transferred to an unrelated manager, subsequent restructuring takes place; heirs do not necessarily restructure the business. Additionally, their study finds that wealth transfer negatively affects company performance in sectors characterized by intense competition (calling for high managerial competence of the successor). Post-succession sales also tend to decline. Thus, inherited management hurts business performance.
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