1 Family Firm Succession: The Roles of Specialized Assets and Transfer Costs 1 Joseph P.H. Fan* a , Ming Jian b , and Yin-Hua Yeh c *a Corresponding author, Faculty of Business Administration, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong; Email: pjfan@cuhk.edu.hk; Tel: 86-852-39437839; Fax: 86-852-26036586. b Division of Accounting, College of Business (Nanyang Business School), Nanyang Technological University, 50 Nanyang Avenue, Singapore; Email: AMJian@ntu.edu.sg; Tel: 65-67906051. c Graduate Institute of Finance, Fu Jen Catholic University, 510 Chung-Cheng Rd., Hsin-Chuang, 242, Taipei, Taiwan; E-mail: trad1003@mail.fju.edu.tw; Tel: 886-2-29052725. Abstract This paper reports an average negative 56 percent buy-and-hold market-adjusted stock return of emerging market entrepreneurial/family firms during a 5-year period in which their controlling owners pass on ownership and control to their successors. The value destruction is importantly attributable to the difficulties in partitioning and transferring specialized assets across individuals and/or firm boundaries, including intangible assets such as relationships with employees and banks, or assets jointly controlled by family members and/or co-founders. The existence of these specialized assets also explains why firm ownership is concentrated and why heirs or close relatives are chosen as successors in most of the succession events. JEL Classifications: G32; L21; M13 Key Words: Succession; Family firms; asset specificity 1 We thank comments and suggestions from Morten Bennedsen, Manapol Ekkayokkaya, Randall Morck, Kasper Nielsen, Garry Twite, Yupana, Wiwattanakangtang, T.J. Wong, and participants of the 2007 Family Firm Workshop in Tokyo. We thank the data collection team members Ching-I Chang, Xianjie He, Yuh-Ling Hsu, Pei-En Lee, Winnie Siuching Leung, Danmeng Li, Ellen Lin, Flora Siu, Ming-Chieh Tsai, Joyce Xin Yu, Samantha Wong, Ya-Wei Yang, Tianyshu Zhang, and Nancy Ying Zheng. Jun Huang provides excellent research assistance. Joseph Fan thanks the financial support by the Centre for Institutions and Governance of the Chinese University of Hong Kong and the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. CUHK4716/05H), and the research support by Hitotsubashi University during his visit when part of the research was carried out.