State-owned enterprises reluctant to reduce their labor force

When firms need more resources to meet increasing demand, they usually add more resources. However, when demand declines, will firms reduce idle resources to respond to the decline? The answer is yes, but the reduction will often not be equivalent to the increase. As suggested by recent accounting studies, increasing resources is easy, but firms often find it difficult to remove idle resources for various reasons. Ronny Prabowo analyzed this phenomenon called “cost stickiness” in the context of state-owned enterprises (SOEs) and family firms.

SOEs are arguably less willing to reduce costs when sales decline because they also pursue socio-political objectives, Prabowo finds. When demand declines, governments may instruct SOEs not to lay off employees or to reduce compensation. Meanwhile, blood is thicker than water. Family firms often prioritize socioemotional wealth, which withholds them from reducing their resources when sales decline. The results reported in Prabowo’s PhD thesis are consistent with the idea that cost stickiness is more pronounced in listed firms with these types of ownership than in listed firms where either the state or a family owns a considerable stake of the firms’ shares.

Additional information

Full thesis: Cost behavior, ownership types, and managerial ability

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