Better safe than sorry: labor market regulation and cash holdings of founding family firms

We study the impact of labor market regulation (LMR) on the cash holdings of founding family firms (FFFs). Analyzing publicly listed firms across 17 European countries, we find compelling evidence that FFFs increase their cash holdings in response to tightening LMR, relative to other firms. Consistent with intuition, this pattern is particularly pronounced in domestic and labor-intensive firms. After exploring the underlying mechanisms, we document that FFFs respond to stricter LMR by increasing long-term debt issuance and reducing dividend payouts more than other firms. Overall, our findings suggest that FFFs, relative to other firms, prioritize financial flexibility over bargaining power considerations when facing tighter labor markets, helping to reconcile the previously mixed evidence on the relationship between LMR and corporate cash holdings.