A Transition Cost Rationale for Transition of the Firm within the Family

This paper is about the transition of ownership of shares in small and medium-sized enterprises (SMEs) within the family (i.e. from parents to children). In spite of the fact that such successions are rather prevalent among SMEs, there are no explanations in the literature as to why transitions are preferred to outright sale.In this paper we assume that the decisive factor in the choice of succession mode is the desire for efficiency expressed as the highest possible firm value. A firm should stay in the family if this is the most profitable transition alternative. One reason for intergenerational succession to be the most profitable alternative is knowledge idiosyncrasy.However, the benefits of knowledge idiosyncrasy cannot be reaped without an institutional framework that constrains human activities in a proper way. A part of an institutional framework are the laws that act as constraints in successions. Do these laws foster or prevent efficient transition of family firms? This question is addressed in a study of the Swedish inheritance and inheritance tax laws in the light of the policy recommendations on succession made by the European Commission.

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