Founding Family Firms and Labor Cost Stickiness
47 Pages Posted: 21 Nov 2023
Date Written: September 2023
We investigate the role of founding family control on labor cost stickiness. We argue that labor cost stickiness is a double-sided sword: While it can be interpreted as long-term commitment to employees and employment, it increases operating leverage, reduces operating performance, and thus jeopardizes long-term firm survival. Analyzing data from 17 European countries, we find that – consistent with socioemotional wealth (SEW) theory suggesting that founding family firms are more employee oriented – founding family firms exhibit greater labor costs stickiness than non-family firms, even after controlling for unobserved heterogeneity and under application of propensity score matching. In follow up tests, we find that the family firm effect is especially strong in industries with high labor turnover and high labor intensity. Furthermore, we find that abnormal high labor cost stickiness in family firms reduces profitability and non-labor investments. Taken together, our results suggest that founding family firms accept sticky labor costs – arguably as a byproduct of socioemotional wealth considerations – even at the expense of lower profitability and lower growth in the future.
Keywords: Cost stickiness, Labor costs, Family firm, Socioemotional wealth
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