Family Firms and Information Asymmetry

• In Event: Financial Reporting

Abstract

We investigate the impact of family firms’ ownership and management on information asymmetry in the secondary market trading around the release of 10K filings using intraday trades and quotes data. Prior literature suggests that family firms have smaller information asymmetry as they face less severe agency problems and better reporting qualities. However, by examining all S&P 500 firms from 1996 to 2018, we find that family firms’ ownership is negatively associated with information asymmetry. The liquidity is lower for the family firms around the 10K release and higher when the family firms change to non-family ownership and non-family board members. We provide evidence that insider ownership in family firms is associated with wider spreads, as they have a higher ability to exploit outsiders. Next, we explore the tone complexity of disclosure quality and find that family firm disclosures are less complex and overall complexity does not worsen the illiquidity of family firms. Following Bushee, Gow, and Taylor (2018), we further decompose complexity into its two components: obfuscation and information. We find that information dominates obfuscation in family firms, which actually improves liquidity, somewhat offsetting the information asymmetry.

Authors

• Youjia Xu, The University of Memphis

• Jing-Chi Chen, The University of Memphis

• Pankaj Jain, The University of Memphis

• Li-Yu Chen, University of Exeter