The Talent Gap in Family Firms

Abstract

We investigate whether family firms attract talented employees using comprehensive Danish administrative data including IQ scores from mandatory military draft sessions and high school grades. We document a substantial talent gap: family firm employees have lower IQ scores and lower academic achievement. This gap is most pronounced among senior managers and high-skill workers. Using event studies around CEO successions and instrumental variables, we establish that family control causally lowers average employee talent in the firm by reducing its ability to attract high-ability workers. A survey experiment further shows that high-achieving students report significantly lower interest in working for family firms, particularly when family control is salient. We identify two mechanisms driving this gap. First, nepotism reduces the available promotion opportunities for non-family members, causing high-ability individuals to avoid family firms. Second, family firms pay lower wages for equivalent talent, with compensation penalties particularly severe for high-ability workers. Our findings demonstrate that family governance imposes significant costs on firms’ ability to compete for human capital.