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Do Family Firms Invest More than Nonfamily Firms in Employee-Friendly Policies?

Jun-Koo Kang () and Jungmin Kim ()
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Jun-Koo Kang: Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Singapore 639798;
Jungmin Kim: School of Accounting and Finance, Hong Kong Polytechnic University, Hong Kong

Management Science, 2020, vol. 66, issue 3, 1300-1324

Abstract: We examine whether family firms invest more in employee relations than nonfamily firms. Using the variation in state-level changes in inheritance, gift, and estate taxes as an exogenous shock to family control, we find that family firms, particularly those in which a founder serves as chief executive officer or those in which a family member serves as a director on the board, treat their employees better than nonfamily firms. More importantly, family firms focus on investing in employee relations that help alleviate labor-related conflicts and controversies, possibly to avoid a negative family reputation among stakeholders. Family firms’ better treatment of their employees is also evident when we use a difference-in-difference test to exploit changes in family firm status due to (sudden) deaths of family members and firms’ inclusion in Fortune ’s “100 Best Companies to Work For” list to identify employee-friendly treatment. We further find that family firms in the early stage of their life cycle invest more in employee relations when they operate in labor-intensive industries in which the benefits from family owners’ monitoring of employees are expected to be large. Moreover, we find that although nonfamily firms’ investment in employee relations is impeded by several constraints, such as short-term investor pressure, managerial myopia, and managerial agency problems, family firms do not suffer from such constraints. These findings help explain why underinvestment in employee relations is prevalent in public firms despite potential long-term benefits from such intangible investment.

Keywords: family firm; founder; employee-friendly policy; concern score; life cycle; labor-intensive industry; managerial myopia; agency problem; endogeneity (search for similar items in EconPapers)
Date: 2020
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