Founders Versus Descendants: How Generational Leadership Differences Affect the Use of Cash Profit Sharing in Family Firms

While family firms tend to outperform nonfamily firms when using cash profit sharing, our understanding of their propensity to engage in cash profit sharing is limited. Drawing on the behavioral agency theory and the socioemotional wealth preservation literature, this study examines the propensity of family firms under different generations of familial leadership (founders vs. descendants) to engage in cash profit sharing. Essentially, founder and descendant leaders have distinct views of what it means to pursue family firm longevity in order to perpetuate the family dynasty, and these divergent views shape family firms' decision on cash profit sharing. Using a 5-year panel dataset of listed U.S. family and nonfamily firms, the findings demonstrate that family firm preferences regarding cash profit sharing vary based on the familial generation in charge. Specifically, founder-led family firms are less inclined to use cash profit sharing, as doing so limits the financial resources available to pursue a long-term growth approach. Conversely, family firms under descendant leadership are more apt to using cash profit sharing, which supports their desire for long-term stability in firm profits.