Family Firms and the Employee Talent Gap

Family firms represent the dominant form of business organization across the world. They are celebrated for long-term commitment, resilience, and the ability to embed purpose across generations. Yet a new paper by Morten Bennedsen (University of Copenhagen), Margarita Tsoutsoura (Washington University in St. Louis), and Daniel Wolfenzon (Columbia University) documents a largely overlooked cost of family control: family firms systematically attract less talented employees than their non-family counterparts. 

What the Data Show

Using detailed Danish administrative data, including IQ scores from mandatory military draft examinations and high school grades, the researchers tracked the cognitive ability and educational achievement of workers across thousands of firms. Their central finding is striking: employees at family firms score roughly 2 points lower on IQ tests on average — about 5% below the population mean — and are 17 percentage points less likely to have completed high school compared to workers at otherwise similar non-family firms. 

Crucially, the gap is largest at the top of the organisational hierarchy — among senior managers and in high-skill occupations — precisely where cognitive ability is most consequential for firm performance. 

Is Family Control the Cause?

To address concerns that unobserved firm characteristics might drive both family control and the talent composition of employees, the authors employ three complementary strategies. First, an event-study design around CEO successions shows that replacing a family CEO with an outsider is followed by improvements in average employee IQ relative to firms that remain within the family. Second, the authors instrument for family succession using the gender composition of the departing CEO's children. Third, a randomised survey experiment with University of Copenhagen students provides experimental variation: high-achieving students express significantly lower interest in applying to family-controlled firms even when wages and job attributes are held constant. Talented workers are, in part, self-selecting away.

Two Underlying Mechanisms

The paper identifies two mechanisms. The first is nepotism. Using a random forest trained on non-family firm data to build counterfactual predictions of where employees would sit in a hierarchy based on observable qualifications, the authors show that relatives of the controlling family occupy positions above what their qualifications would predict, while non-family employees are systematically placed below their predicted rank. Nepotism extends throughout the entire organization. 

The second mechanism is compensation. Using the Abowd, Kramarz and Margolis (AKM) wage decomposition, the authors confirm that family firms pay lower wages for equivalent talent. This wage penalty is particularly pronounced for high-ability workers — precisely those family firms most need to attract.

This is the first large-scale study to examine talent allocation across the full workforce of family and non-family firms using direct measures of cognitive ability. It shows that the costs of nepotism extend well beyond the CEO appointment — a finding with significant implications for the aggregate effects of family governance.

Several questions remain open. First, estimating the productivity costs of the talent gap would provide crucial insights into the economic magnitude of these effects. Second, understanding whether and how family firms might mitigate these disadvantages while preserving family involvement represents an important practical question.

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Margarita Tsoutsoura is an Associate Professor of Finance at Olin Business School, at the Washington University in St. Louis, a Research Associate at the National Bureau of Economic Research, Research Fellow at CEPR, Research Fellow at Halle Institute for Economic Research (IWH), and a Research Member at ECGI.

This blog is based on a discussion held at the 2026 IESE-ECGI Corporate Governance Conference Family Firms: Purpose, Economic Performance and Social Impact. Visit the event page to explore more conference-related blogs.

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