This paper examines the association between family firms and SEC comment letters, addressing a significant gap in the literature. Our inquiry is motivated by the argument that SEC comment letters offer insights about financial reporting quality as assessed by a regulator. Hence, whether family firms exhibit higher or lower financial reporting quality should be observed through the number of comment letters received, the extent of issues received in the comment letters and the remediation costs of comment letters.
Using a large dataset of US publicly listed firms between 2004 and 2018, we examine whether family firms are more or less likely to receive SEC 10-K comment letters compared to non-family firms.
We find that compared to non-family firms, family firms are significantly associated with the propensity of receiving SEC 10-K comment letters. We also show that family firms are associated with lower remediation costs. Finally, we show that among family firms, firms that are controlled by heirs rather than founders are driving the positive association between family firms and comment letters.
Our findings have important implications for regulators, investors and family firms themselves, offering a better understanding of how ownership structures influence financial reporting quality and regulatory outcomes.
While previous studies have documented factors affecting the probability of receiving 10-K comment letters, the extent of comments received and the cost of remediation, the influence of ownership structures on these variables remains underexplored. Understanding how family ownership impacts the propensity of receiving SEC comment letters is critical due to the unique characteristics and significant presence of family firms in the market.
