Cost Behavior and Profitability of Family Firms

This paper investigates whether family ownership affects a firm’s cost behavior and profitability. We find that in response to changes in business activity level, family firms adjust their costs differently than non-family firms. That is, family firms decrease costs more sharply upon a sales decline than they increase costs upon a sales raise of a similar magnitude. However, non-family firms do the opposite and respond more strongly to sales increases (a phenomenon known as “sticky cost”). This result is robust to alternative definitions of family firms. The sharp cost reduction of family firms makes their profitability more resilient to downturns. Consistent with this notion, we find that family firms exhibit better performance than non-family firms during periods of business contraction. The findings demonstrate how family involvement affects firms’ operations and profitability