Corporate Disclosures by Family Firms

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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
a

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: ashiq.ali@utdallas.edu (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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A. Ali et al. / Journal of Accounting and Economics 44 (2007) 238–286 239

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,...
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