No. 905 - Family firms and the Great Recession: out of sight, out of mind?

This paper studies how family firms reacted to the 2008 economic crisis by adjusting employment. In particular, we look at how the geographical distribution of the workforce may have led to divergencies between family and non-family firms. Using a difference-in-difference approach, we provide empirical evidence that paths of adjustment did diverge, with family firms systematically preferring to safeguard workplaces close to headquarters. We offer a new theoretical framework, the social recognition motive, that is consistent with this finding; it is based on contributions in the literature on corporate governance that stress the importance of the non-pecuniary benefits of the owner's control of the family firm. The social recognition motive originates from the psychological relation linking the family-firm owner with his or her community. The theory also offers a clear set of predictions that are all confirmed by the data. Alternative explanations, although theoretically plausible, seem to be ruled out in our setting.