Do Family Firms Issue More Readable Annual Reports? Evidence from the U.S.
58 Pages Posted: 30 Jun 2016 Last revised: 12 Jul 2022
Date Written: July 11, 2022
Using a sample of 22,442 firm-year observations for 3,721 U.S. listed firms, we show that family firms, on average, issue annual reports with higher readability than nonfamily firms. Higher readability could occur due to lower obfuscation or less information conveyance. By controlling for complexity and choosing readability measures linked to obfuscation, we attribute the higher readability to lower obfuscation. Our investigation into the heterogeneity in family firms shows that the positive effect of family control on reporting readability exists for family firms managed by founders and heirs but not those managed by outsiders. We also find that eponymous family firms issue more readable 10-K reports than nonfamily firms, but non-eponymous family firms do not exhibit such a difference. Further, we use state-level succession tax cuts as an exogenous shock to link the higher readability to family insiders’ incentives and preferences. These results are consistent with the view that family insiders’ incentive to maintain family reputation contributes to lower obfuscation. Additional analyses show that investors perceive family firms’ annual reports with higher readability to be more informative. Finally, the difference between family and nonfamily firms in reporting readability diminishes for firms with more earnings manipulation, weaker board governance, and dual-class shares.
Keywords: family firm, readability, reputation cost, agency cost
JEL Classification: M41, G32
Suggested Citation: Suggested Citation