Implicit employment contracts and stickiness of labor costs in family firms

Abstract

Using a sample of firms in the S&P 1500, we examine the relationship between family ownership and labor costs. We posit that, compared to non-family firms, family firms better safeguard implicit employment contracts, leading to fewer layoffs during economic downturns. In turn, family firms’ better employment security leads employee-related costs and turnover to be less responsive to a sales decrease than to a sales increase, that is, to exhibit “sticky” behavior. The empirical results indicate that, ceteris paribus, family firms have fewer corporate restructurings than non-family firms, and their SG&A costs and turnover are “stickier” than those of non-family firms. These phenomena are particularly strong when the founder of the company or his descendant is CEO. Finally, we find that family firms observe better payoffs from labor-related expenses. These findings are consistent with family firms better protecting labor interests, and thus enjoying better employee productivity.