Do Family Firms Issue More Readable Annual Reports? Evidence from the U.S.

58 Pages Posted: 30 Jun 2016 Last revised: 12 Jul 2022

See all articles by Qunfeng Liao

Qunfeng Liao

Oakland University-Department of Accounting and Finance

Bin Srinidhi

City University of Hong Kong (CityU) - Department of Accountancy; University of Texas at Arlington - Department of Accounting

Ke Wang

University of Alberta - School of Business

Date Written: July 11, 2022

Abstract

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

Liao, Qunfeng and Srinidhi, Bin and Srinidhi, Bin and Wang, Ke, Do Family Firms Issue More Readable Annual Reports? Evidence from the U.S. (July 11, 2022). Available at SSRN: https://ssrn.com/abstract=2800834 or http://dx.doi.org/10.2139/ssrn.2800834

Qunfeng Liao

Oakland University-Department of Accounting and Finance ( email )

275 Varner Drive
Rochester, MI 48309-4485
United States
248-370-4289 (Phone)

Bin Srinidhi (Contact Author)

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

Ke Wang

University of Alberta - School of Business ( email )

3-23 Business Building
Edmonton, Alberta T6G 2R6
Canada
+1 780-492-1630 (Phone)

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