Journal of Accounting and Economics 44 (2007) 238–286 www.elsevier.com/locate/jae
Corporate disclosures by family ﬁrms
Ashiq Alia,Ã, Tai-Yuan Chenb, Suresh Radhakrishnana
School of Management, SM41, The University of Texas at Dallas, Richardson, TX 75083-0688, USA b Hong Kong University of Science and Technology, Kowloon, Hong Kong Available online 6 February 2007
Abstract Compared to non-family ﬁrms, family ﬁrms face less severe agency problems due to the separation of ownership and management, but more severe agency problems that arise between controlling and non-controlling shareholders. These characteristics of family ﬁrms affect their corporate disclosure practices. For S&P 500 ﬁrms, we show that family ﬁrms report better quality earnings, are more likely to warn for a given magnitude of bad news, but make fewer disclosures about their corporate governance practices. Consistent with family ﬁrms making better ﬁnancial disclosures, we ﬁnd that family ﬁrms have larger analyst following, more informative analysts’ forecasts, and smaller bid-ask spreads. r 2007 Elsevier B.V. All rights reserved. JEL classiﬁcation: G32; M41; M43; M45 Keywords: US family ﬁrms; Corporate disclosure; Earnings quality; Corporate governance disclosure; Management forecasts
1. Introduction Firms that are managed or controlled by founding families, hereafter, referred to as family ﬁrms, constitute about one-third of the S&P 500, and operate in a broad array of industries (Anderson and Reeb, 2003a). On average, families own 11% of their ﬁrms’ cash ﬂow rights, representing a signiﬁcant proportion of the US stock market capitalization, and 18% of their ﬁrms’ voting rights. Also, family members serve as top executives or CEO in 63% of family ﬁrms and serve on the board as directors or chairperson in 99% of the ÃCorresponding author. Tel.: +1 972 883 6360; fax: +1 972 883 6811.
E-mail address: email@example.com (A. Ali). 0165-4101/$ - see front matter r 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.jacceco.2007.01.006
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family ﬁrms. In their survey of corporate governance literature, Shleifer and Vishny (1997) emphasize the importance of studying the characteristics of such ﬁrms to better understand the economic efﬁciency of different corporate governance mechanisms. As such, several recent papers examine various aspects of US family ﬁrms.1 Compared to non-family ﬁrms, family ﬁrms in the US face less severe agency problems that arise from the separation of ownership and management (Type I agency problems). However, they are characterized by more severe agency problems that arise between controlling and non-controlling shareholders (Type II agency problems) (Gilson and Gordon, 2003). These characteristics of family ﬁrms raise interesting issues about their corporate disclosure practices. In this paper, we examine how these differences in agency problems across family and non-family ﬁrms inﬂuence corporate disclosures. We consider the following aspects of corporate disclosures: quality of reported earnings, voluntary disclosure of bad news through management earnings forecasts, and voluntary disclosure of corporate governance practices in regulatory ﬁlings.2 We examine whether reported earnings of family ﬁrms are of better quality than those of non-family ﬁrms. Family ﬁrms face less severe Type I agency problems because of their ability to directly monitor the managers (Demsetz and Lehn, 1985). This enables family ﬁrms to tie less of management compensation to accounting based performance measures (Chen, 2005), thus their reported numbers are less likely to be manipulated due to managerial opportunism. Moreover, better knowledge of the ﬁrm’s business activities by family owners (Anderson and Reeb, 2003a) enables them to detect manipulation of reported numbers, thereby keeping this activity in check. Thus,...