What are the implications of family control and ownership on a firm's voluntary disclosure practices? Are there any warning signs that investors should look out for?
A family firm is one where members of the founding family continue to hold positions in top management, are on the board, or are blockholders (owners of large blocks of shares) of the company. Family firms are characterised by the founding family’s concentrated ownership and the founding family members’ active involvement in the firms’ management either as top executives or as directors.
Lee Kong Chian Professor of Accounting, Chen Xia, shares about why it is important to better understand the unique characteristics of family ownership, and how it affects their financial disclosure choices.
Financial analysts; Institutional investors; Family firms; Earnings restatements
We examine the voluntary disclosure practices of family firms. We find that, compared to nonfamily firms, family firms provide fewer earnings forecasts and conference calls, but more earnings warnings. Whereas the former is consistent with family owners having a longer investment horizon, better monitoring of management, and lower information asymmetry between owners and managers, the higher likelihood of earnings warnings is consistent with family owners having greater litigation and reputation cost concerns. We also document that family ownership dominates nonfamily insider ownership and concentrated institutional ownership in explaining the likelihood of voluntary disclosure. Using alternative proxies for the founding family’s presence in the firm leads to similar results.
This paper investigates the impact of the founding family’s presence on CEO turnover decisions. We find that family firms managed by CEOs outside the founding family (i.e., professional CEO family firms) have higher CEO turnover-performance sensitivity than family firms managed by family members (i.e., family CEO firms) or non-family firms. These results are robust to alternative performance measures and CEO turnover definitions. Additional analyses indicate that higher family ownership leads to even higher (lower) turnover-performance sensitivity in professional CEO family firms (family CEO firms). These results indicate that, with regard to CEO turnover decisions, better monitoring of CEOs by family owners leads to the alleviation of agency conflicts, but the power of family CEOs leads to potential family entrenchment.
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Keywords: accounting, corporate reporting, disclosure, founding family, equity ownership, voluntary disclosure, earnings forecasts, earnings warnings