Patrolling the Securities Laws: Towards the SEC’s Investigation of Founder-CEO Firms

Abstract

Founder-CEO firms are associated with smaller discretionary accruals, higher return on assets, lower stock return volatility, and lower likelihood of shareholder litigation relative to non-founder CEO firms. Yet, we find that founder-CEO firms are 18% more likely than an average firm to be investigated in secrecy by the enforcement division of the Securities and Exchange Commission (SEC). This finding is robust to two instrumental variable regressions and a stacked difference-indifferences design, which alleviate the endogeneity concerns. Our channel analyses support the conjecture that the SEC’s interest in founder CEOs is primarily due to their idiosyncratic attributes, such as power, overconfidence, and risk-taking, highlighting the screening aspect of the SEC investigation as opposed to its punitive aspect. Further analyses show that founder CEOs’ visibility is positively associated with the likelihood of an SEC investigation against their firms. The SEC’s corporation finance division is also more likely to issue comment letters to founder-CEO firms. Overall, our findings are of potential interest to firms and investors interested in learning about SEC investigation risk, regulators concerned about founder-CEO firms, and academics studying SEC surveillance.