Idiosyncratic risk, information flow, and earnings informativeness for family businesses

Many previous studies find that family firms are prevalent among the U.S. firms. In particular, more than 35 percent of the S&P 500 firms consist of family firms in which families control about 18 percent of their firms’ shares. According to agency theory, the characteristics of a firm’s ownership, governance, and control play a critical role in the firm’s risk-taking activities and information flow to the market. Our study aims to investigate two controversies in the family business literature: whether family firms undertake fewer or more risks than non-family firms do, and whether family firms exhibit higher or lower information flow, reflected in their stock price informativeness and earnings informativeness, to the market. Using a sample of the S&P 500 companies as of 2003 for the period 2003-2007, we find that compared with non-family firms, the stock prices of family firms have more firm specific information impounded and the accounting earnings of family firms are more informative and thereby have more explanatory power for stock returns. These results are robust to different model specifications and variable proxies. In terms of risk-taking levels in corporate investment, our results indicate that family firms, on average, undertake fewer risks than non-family firms do. In particular, we find that although G-index is negatively associated with corporate risk-taking in non-family firms as previous studies (e.g. John et al., 2008) find for general firms, governance provisions do not have any influence on corporate risk-taking decisions in family firms. Numerous additional sensitivity tests using different corporate risk-taking proxies confirm the robustness of the findings