This study explores the downsizing propensity of family and non-family firms by considering their territorial embeddedness during both periods of economic stability and financial crisis. By drawing on a panel dataset of Spanish manufacturing firms for the period 2002–2015, we show that, all things being equal, family firms have a lower propensity to downsizing than non-family firms. When considering the effect of territorial embeddedness, we found that territorially embedded family firms have an even lower propensity to downsizing than their non-family (...) counterparts. Furthermore, the concern of territorially embedded family firms for their employees’ welfare was particularly pronounced during the years of the global financial crisis. This result is explained by the existence of socially proximate relationships with the firms’ immediate surroundings, based on similarity and a sense of belonging, which push deeply rooted family firms to treat their employees as salient stakeholders during hard times. Overall, our study stresses the importance of local roots in moderating the relationship between family firms and downsizing. (shrink)