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To Fire or Not? Employee Retention and Loss Persistence in Private Firms: The Role of Family CEOs

We study the effects of employee retention on loss reversal with a particular focus on firms with family CEOs. The results show that employee retention is positively associated with the likelihood of a return to profitability in firms with family CEOs, who are typically averse to employee dismissals in order to preserve socioemotional wealth. This effect is stronger for firms with transitory (i.e. less severe) losses. Further analysis suggests that the economic channel of our results is through productivity improvement following employee retention. Lack of socioemotional wealth in other types of firms helps to explain the negative association of employee retention and loss reversal in the absence of family CEOs. This pronounced duality of performance responses related to employee retention lends support to prior findings on the importance of socioemotional wealth for family firms thereby introducing a new dimension to both loss heuristic and loss reversal literature.