Founders, Heirs, and Corporate Opacity in the U.S.

Abstract

We argue that information about firm activities can vary substantially in the presence of founder or heir ownership, thereby influencing the risks borne by minority investors. We explore two hypotheses with regard to these controlling shareholders and corporate transparency, focusing on their role as monitor in-place and their potential to exploit firm opacity to accrue private benefits of control. To test these notions, we create an opacity index that ranks the relative transparency of the 2,000 largest industrial U.S. firms and find founder and heir ownership in 22% and 25% of these firms, respectively. Our analysis indicates that in large, publicly-traded companies, both founder and heir firms are significantly more opaque than diffuse shareholder firms. We also find that founder- and heir-controlled firms exhibit a negative relation to performance in all but the most transparent firms. Surprisingly, additional tests reveal that concerns about divergences in ownership versus control, management type, dual class shares, and board influence appear to be substantially less important than corporate opacity in explaining the performance impacts of founder and heir control. Finally, we decompose corporate opacity into disclosure and market scrutiny components, finding that the disclosure quality component appears to be of greater importance to investors. However, irrespective of whether these controlling shareholders create and/or stay in the firm because of corporate opacity, our analysis suggests that founders and heirs in large, publicly-traded firms exploit opacity to extract private benefits at the expense of minority investors.

JEL Classification: D82, G12, G34, M41, M43, M45, G32