Corporate Disclosures by Family Firms: Ashiq Ali, Tai-Yuan Chen, Suresh Radhakrishnan

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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,, 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
Corresponding 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, earnings manipulation due
to Type I agency problems is likely to occur to a greater extent in non-family firms.
Family firms face more severe Type II agency problems because of families’ significant
stock ownership and control over the firms’ board of directors. Family firms’ boards tend
to be less independent and are dominated by family members (Anderson and Reeb, 2003a;
Anderson and Reeb, 2004). Type II agency problems may also lead to manipulation of
accounting earnings, for example, to hide the adverse effects of related party transactions
or to facilitate family members’ entrenchment in management positions. Thus, it is an
empirical question whether family firms have better or worse earnings quality compared to
non-family firms.
We find that compared to non-family firms, family firms exhibit less positive
discretionary accruals, greater ability of earnings components to predict cash flows, and
larger earnings response coefficients. These results are consistent with the notion that the
difference in agency costs across family and non-family firms due to Type I agency
problems dominate the difference in agency costs across family and non-family firms due
to Type II agency problems.
We also examine whether, compared to non-family firms, family firms are more likely to
warn for a given magnitude of bad news. Opportunistic behavior related to both Type I
and Type II agency problems may lead to delays in the disclosure of bad news, i.e.,
1
Compared to non-family firms, family firms in the S&P 500 are more profitable (Anderson and Reeb, 2003a),
have lower cost of debt financing (Anderson et al., 2003), are less diversified, and have similar level of debt
(Anderson and Reeb, 2003b). As in our paper, these studies classify a company as a family firm if the founders or
descendants continue to hold positions in the top management or on the board, or are among the company’s
largest shareholders.
2
Our sample period is 1998–2002, hence our conclusions are applicable to the period prior to Sarbanes Oxley
Act, 2002.
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240 A. Ali et al. / Journal of Accounting and Economics 44 (2007) 238–286
managers of non-family and controlling shareholders of family firms face incentives to

withhold or delay the release of bad news. Managers of non-family firms may withhold
bad news to maximize their equity-based compensation or to facilitate entrenchment. Also,
controlling shareholders of family firms may withhold bad news to reduce scrutiny of their
private benefit seeking activities or to facilitate entrenchment in management positions.
Thus, again it is an empirical question whether family firms are more likely to warn for a
given magnitude of bad news than non-family firms.
We find that family firms are more likely to warn for a given magnitude of bad
news than non-family firms. This result suggests that family firms are subject to less
opportunistic behavior consistent with the notion that the difference in agency costs across
family and non-family firms due to Type I agency problems dominate the difference due to
Type II agency problems.
Next, we examine whether, compared to non-family firms, family firms are less likely to
make voluntary disclosures about their corporate governance practices. Family firms have
incentive to reduce the transparency of corporate governance practices to facilitate getting
family members on boards without interference from non-family shareholders. Consistent
with this argument, we find that family firms tend to disclose less information about their
corporate governance practices in their proxy statements.
Finally, we examine whether better disclosure of financial performance (reported
earnings and bad news warning) benefits family firms in terms of better analyst following,
better analysts’ earnings forecasts, and better market liquidity of their stocks. We find that
compared to non-family firms, family firms have larger analyst following, lower dispersion
of analysts’ forecasts, smaller forecast errors, less volatile forecast revisions, and smaller
bid-ask spreads.
To gain additional confidence that difference in the severity of agency problems across
family and non-family firms drives our results, we analyze subsamples of family firms that
are expected to have different severity of agency problems. Villalonga and Amit (2006)
provide evidence suggesting that family firms with founder CEO have less severe agency
problems than those with descendent CEO. They also provide evidence suggesting that
family firms with dual class shares have more severe agency problems than those without
dual class shares. We repeat our analyses after classifying family firms accordingly. Our
results suggest that family firms with founder CEO (rather than those with descendent
CEO) are primarily responsible for family firms exhibiting better disclosure practices and
better disclosure-related economic consequences as compared to non-family firms. Our
results also suggest that family firms without dual class shares (rather than those with dual
class shares) are primarily responsible for family firms exhibiting better disclosure practices
and better disclosure-related economic consequences as compared to non-family firms.
Overall, our evidence based on the subsamples of family firms suggests that the severity of
agency problems is a likely factor in the difference in disclosure practices we observe across
family and non-family firms.
Our findings contribute to the literature on corporate disclosures. Healy and Palepu
(2001) and Bushman and Smith (2001) note that there is not much evidence in the
literature on the effect of agency problems on corporate disclosures. We contribute
by showing how the difference in the severity of agency problems across family and
non-family firms affect the quality of different types of corporate disclosures.
A contemporaneous study, Wang (2006), also documents the association between family
firm membership and earnings quality. His results are in general consistent with ours.
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However, our study differs from his in several ways. We consider a different set of earnings
quality measures. Furthermore, we examine the likelihood of management’s warning of a
poor earnings report, voluntary disclosure of corporate governance practices, and the
effect of differential disclosure practices of family firms and non-family firms on analyst
following, various characteristics of analysts’ forecasts, and bid-ask spreads.
Our findings also contribute to the literature on family firms. Given the prevalence of
family firms in the US and the unique combination of Type I and Type II agency problems
associated with them, these firms have been the subject of several prior studies (see note 1).
Whether the severity of agency problems of US family firms is greater or less than that of
non-family firms is still debatable however (Anderson and Reeb, 2003a). We contribute to
this debate by documenting the difference in the quality of disclosures between these two
types of firms. Our finding that family firms provide better financial disclosures is
consistent with these firms being subject to less managerial opportunism due to less severe
agency problems. Specifically, the difference in agency costs across family and non-family
firms due to Type I agency problems dominate the difference in agency costs across family
and non-family firms due to Type II agency problems.
The rest of the paper is organized as follows. Section 2 discusses our hypotheses. We
describe the agency problems associated with family firms and predict their effects on
different types of corporate disclosures. Section 3 discusses the sample and Section 4
presents the results. Section 5 concludes the paper.
2. Hypotheses development
2.1. Family firms and agency problems
There are two main types of agency problems in public corporations. The first type of
agency problem arises from the separation of ownership and management (Type I agency
problem). The separation of corporate managers from shareholders may lead to managers
not acting in the best interest of the shareholders. The second type of agency problem
arises from conflicts between controlling and non-controlling shareholders (Type II agency
problem). Controlling shareholders may seek private benefits at the expense of non-
controlling shareholders. Below, we discuss how these two types of agency problems differ
across family and non-family firms.
2.1.1. Separation of ownership and management (Type I agency problem)

There are several characteristics of family firms that reduce the likelihood of managers
not acting in the best interest of shareholders. First, families tend to hold undiversified and
concentrated equity position in their firms. Thus unlike the free rider problem inherent
with small atomistic shareholders, families are likely to have strong incentives to monitor
managers (Demsetz and Lehn, 1985). Second, families have good knowledge about their
firms’ activities, which enables them to provide superior monitoring of managers
(Anderson and Reeb, 2003a). Third, families tend to have much longer investment
horizons as compared to that of other shareholders. Thus, families help mitigate myopic
investment decisions by managers (James, 1999; Kwak, 2003; Stein, 1988, 1989). In
summary, compared to non-family firms, family firms face less severe hidden-action and
hidden-information agency problems due to the separation of ownership and management.
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However, certain factors contribute towards mitigating the difference between family
and non-family firms in the Type I agency problems. Compensating managers based on
observable performance measures help align the interest of the managers and stockholders
(Demski, 1994; Healy and Palepu, 2001; Lambert, 2001; Bushman and Smith, 2001).
Concern about their reputation in the managerial labor market also contributes towards
managers acting in the best interest of the shareholders. In addition, shareholders can
bring lawsuits against managers if the managers defraud the shareholders (La Porta et al.,
1998).
2.1.2. Conflict between controlling and non-controlling shareholders (Type II agency

problem)
In family firms, founding family may enjoy substantial control as a result of their
concentrated equity holding in their firms, their voting rights exceeding their cash flow
rights, and their domination of the board of directors’ membership. This control gives the
family power to seek private benefits at the expense of other shareholders. Controlling
shareholders can seek such private benefits by freezing out minority shareholders (Gilson
and Gordon, 2003), by engaging in related-party transactions (Anderson and Reeb,
2003a), and through managerial entrenchment (Shleifer and Vishny, 1997).
However, certain factors contribute towards mitigating the difference between family
and non-family firms in the Type II agency problems. When families engage in private rent
seeking, their activities may get revealed to the market and they may incur substantial cost
in the form of lower equity value, especially since families have concentrated ownership
and tend to hold their firms’ equities for long periods. In addition, significant legal
protection is accorded to non-controlling shareholders in the United States. La Porta et al.
(1998, 2000) show that US is one of the few countries where the legal system gives minority
shareholders strong protection against dominant shareholders in the corporate decision
making process. For example, provisions such as ‘‘Proxy by Mail’’ makes it easier for
shareholders to cast their votes, ‘‘Cumulative Voting/Proportional Representation’’ gives
minority shareholders more power to put their representatives on the board of directors,
‘‘Class action/Derivative lawsuits’’ enables minority shareholders to challenge directors’
decisions in court and force the company to repurchase shares of minority shareholders
who object to certain corporate decisions.
2.2. Family firms and corporate disclosures
Is the difference in the two types of agency problems across family and non-family firms
associated with the difference in their corporate disclosure practices? In this study, we
examine the following aspects of corporate disclosures: quality of financial statement
numbers, specifically that of earnings, and the voluntary disclosure of bad news through
management earnings forecasts. These features of corporate disclosures have been widely
considered in the literature (see e.g., Francis et al., 2004; Kasznik and Lev, 1995). In
addition, we examine voluntary disclosure of corporate governance practices.
2.2.1. Earnings quality

As discussed earlier, compared to family firms, non-family firms have more severe Type
I agency problems. To mitigate these problems, non-family firms are more likely to
compensate their managers based on observable earnings-based performance measures.
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Founding families, on the other hand, being more effective monitors of management can
reward their managers based on information about managers’ effort obtained through
direct monitoring. Also, when family members holding large amount of stocks are
managers the problem of separation of ownership and management is limited. Thus,
compared to non-family firms, family firms are less likely to compensate their managers
based on observable earnings-based performance measures. Consistent with the above
argument, Chen (2005) provides evidence that earnings-based CEO pay is significantly
smaller for family firms, both in terms of amount as well as in terms of percentage of total
compensation. Since management compensation in family firms is less likely to be tied to
earnings, family firms’ earnings are less likely to be manipulated (Healy and Palepu, 2001;
Fields et al., 2001).
Direct monitoring by the families and their better knowledge of the firms’ business are
additional reasons why managers’ opportunistic behavior is less likely to affect earnings of
family firms. For example, family members’ knowledge of business conditions and
relationship with suppliers and customers will enable them to more effectively detect
whether goods have been shipped early to inflate revenues or unreasonable cuts have been
made to certain discretionary spending.
The above arguments suggest that because of more severe Type I agency problems,
earnings of non-family firms are likely to be of lower quality than that of family firms.
However, certain factors, such as reputation concerns in the managerial labor market and
legal liabilities, help mitigate the difference in Type I agency problems between family and
non-family firms. While these factors mitigate the difference in Type I agency problems
they do not eliminate it. This argument suggests that reported earnings of family firms
should be of better quality than those of non-family firms.
Type II agency problems are also likely to have a differential effect on earnings quality
across family and non-family firms. These agency problems could lead to a greater
manipulation of accounting earning by family firms. This manipulation may be done, for
example, to hide the adverse effect of a related party transaction or to facilitate family
members’ entrenchment in management positions. Moreover, given the high level of
influence family owners have on their firms, if they decide to engage in earnings
manipulation they can more easily do so. However, legal liabilities and reduced stock
prices that may result from the private benefit seeking behavior help mitigate the difference
in Type II agency problems between family and non-family firms.3 Here again, these
factors mitigate the difference in Type II agency problems between family and non-family
firms but do not eliminate it. Thus, the extent to which family firms as compared to non-
family firms are subject to more severe Type II agency problems, the earnings quality of
family firms will be lower.
To summarize, difference in the quality of earnings between family and non-family firms
would depend on the difference in the severity of their Type I and Type II agency
problems. In general, if the difference in Type I agency problems dominates the difference
in Type II agency problems, then the total agency problems would be less for family firms
3
Adelphia Corporation is an example of family owners very aggressively inflating the firm’s reported earnings to
afford Adelphia’s continued access to commercial credit and the capital market, while some of the family members
engaged in extensive self-dealing at the expense of other Adelphia stakeholders (SEC Litigation Release No.
17627). However, these activities were discovered and the family owners were subjected to severe penalties,
causing loss of most of their wealth (Searcey and Yuan, 2005).
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and their earnings quality would be better, and vice versa. Thus, whether family firms’
earnings quality is better or worse than that of non-family firms is an empirical question.
We summarize these arguments in the following hypotheses:4
H1a. Reported earnings of family firms are likely to be of better quality than those of non-
family firms if the difference in their Type I agency problems dominates the difference in
their Type II agency problems.
H1b. Reported earnings of non-family firms are likely to be of better quality than those of
family firms if the difference in their Type II agency problems dominates the difference in
their Type I agency problems.
2.2.2. Management forecasts of earnings

Skinner (1994) notes that firms may incur legal liabilities and reputation costs if they
fail to provide earnings warning prior to an earnings report containing bad news.
Consistent with this argument, Skinner (1994) and Kasznik and Lev (1995) show
that the likelihood of management earnings forecasts increases with the magnitude of
bad news.
However, all firms are not equally likely to provide earnings warning. Opportunistic
behavior related to both Type I and Type II agency problems may lead to managers
withholding bad news. Managers of non-family firms may withhold bad news to maximize
their equity-based compensation or to facilitate entrenchment. Also, controlling share-
holders of family firms may withhold bad news to reduce scrutiny of their private rent
seeking activities or to facilitate entrenchment of family members in management
positions. The following hypotheses summarize our expectations.5
H2a. The association between the likelihood of management earnings forecasts and the
magnitude of bad news is stronger for family firms than for non-family firms if the
difference in their Type I agency problems dominates the difference in their Type II agency
problems.
H2b. The association between the likelihood of management earnings forecasts and the
magnitude of bad news is stronger for non-family firms than for family firms if the
difference in their Type II agency problems dominates the difference in their Type I agency
problems.
4
The arguments leading to the hypothesis consider the effect of opportunistic behavior on earnings quality, and
not the effect of efficient contracting. The efficient contracting perspective suggests that firms would commit to
reporting higher quality earnings to mitigate agency problems (Demski, 1998; Evans and Sridhar, 1996; Fukui,
1996; Arya et al., 1998). Under the efficient contracting perspective, if the difference in Type I agency problems
between family and non-family firms dominates the difference in their Type II agency problems, then the earnings
quality of non-family firms are predicted to be better than that of family firms, and vice versa. However, it is not
clear if there exist mechanisms that can enforce firms’ commitment to make higher quality disclosures regardless
of its content. In fact, Skinner (1993) shows that management opportunism dominates efficient contracting in
explaining observed accounting choices. Thus, we propose our hypotheses (H1a and H1b) based on the
opportunism perspective.
5
Under the efficient contracting perspective, the predictions are opposite of those in hypotheses H2a and H2b:
firms would commit to provide earnings warnings to mitigate agency problems. However, as before, we propose
our hypotheses (H2a and H2b) based on the opportunism perspective.
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2.2.3. Corporate governance related disclosures

Family firms’ boards tend to be less independent, with substantial representation by
family members (Anderson and Reeb, 2003a, 2004).6 Family owners prefer to have family
members as directors because they tend to be proactive and have a collective desire to
maintain unity and preserve their wealth (Business Week, 2003). Maintaining lack of
transparency of corporate governance practices may facilitate getting family members on
board without much interference from non-family shareholders. The resulting concern that
the non-controlling shareholders may have about the lack of transparency in corporate
governance practices of family firms would be reduced to the extent that these firms deliver
superior performance (Anderson and Reeb, 2003a).
Regulatory filings, such as the proxy statement, contain disclosures on corporate
governance practices. However, firms have some discretion on disclosures related to
certain corporate governance practices such as Voting and Shareholder Meeting
Procedures, details of the board committees, and director compensation. Thus, we
propose the following hypothesis:
H3. Compared to non-family firms, family firms are less likely to make voluntary
disclosures about their corporate governance practices in their regulatory filings.
2.2.4. Benefits of better financial disclosures by family firms

Disclosure quality has been shown to be related to capital market benefits. Welker
(1995), Lang and Lundholm (1996), and Healy et al. (1999) show that firms with more
informative disclosures (measured using analysts’ surveys) have larger analyst following,
lower dispersion of analysts’ earnings forecasts, smaller forecast errors, less volatile
forecast revisions, and smaller bid-ask spreads.7 Thus, if earnings quality is better for
family firms (hypothesis H1a) and family firms are more likely to make management
forecasts of bad news (hypothesis H2a), we expect greater disclosure-related benefits will
accrue to family firms. However, if earnings quality is better for non-family firms
(hypothesis H1b) and non-family firms are more likely to make management forecasts of
bad news (hypothesis H2a), we expect greater disclosure-related benefits will accrue to
non-family firms. The following hypotheses summarize our expectations:8
H4a. Compared to non-family firms, family firms are more likely to have larger analyst
following, lower dispersion of analysts’ forecasts, smaller forecast errors, less volatile
6
Anderson and Reeb (2004) report that for the period, 1992–1999, family firms had on average 40% inside
directors, about half of which were family members. On the other hand, non-family firms had only about 22%
inside directors.
7
These prior studies argue that more informative disclosure attracts more analysts because information
acquisition becomes less costly, which results in superior earnings forecasts and buy-sell recommendations,
increasing the demand for analysts’ services. Better disclosure results in lower forecast dispersion because analysts
put more weight on public as compared to private information in forming their forecasts. More informative
disclosure improves analyst forecast accuracy. Also, more timely disclosure results in less extreme revisions.
Finally, more informative disclosure reduces information asymmetry among market participants, thereby
reducing the adverse selection problem and increasing market liquidity.
8
In hypothesis H3, we predict that family firms are less likely to make voluntary disclosures about their
corporate governance practices. These types of disclosures are not related to financial performance and are
therefore unlikely to affect their analyst following and analysts’ earnings forecast properties, but they may
adversely affect their bid-ask spreads.
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forecast revisions, and smaller bid-ask spreads, if these firms disclose better quality
earnings and are more likely to provide warning for poor earnings.
H4b. Compared to family firms, non-family firms are more likely to have larger analyst
following, lower dispersion of analysts’ forecasts, smaller forecast errors, less volatile
forecast revisions, and smaller bid-ask spreads, if these firms disclose better quality
earnings and are more likely to provide warning for poor earnings.
3. Sample
We use the Standard and Poor’s 500 firms for our analyses, because for the year 2002,
BusinessWeek classifies them into family and non-family firms: 177 as family firms and the
remaining as non-family firms. A firm is considered a family firm if the founder and/or
their descendents hold positions in the top management or on the board or are among the
companies’ largest shareholders.9
Considering only S&P 500 firms for our analyses has the benefit of making the sample
somewhat homogeneous with respect to size. However, there are some disadvantages as
well. First, it is likely to reduce the generalizability of our findings. Table 1 reports that
family firms in our sample operate in a broad array of industries, which should help
alleviate to some extent concerns about the generalizability of our results. Second, the
small sample reduces power of our tests and may prevent us from detecting certain effects.
We address this issue by using 5 years of data, 1998–2002, under the assumption that
family firm classification is likely to be sticky. That is, we assume that the year 2002
classification applies to the previous 4 years as well.10
Finally, the test of each of our hypotheses requires data for different sets of variables.
For each test, we include in the sample all firm-year observations spanning from 1998 to
2002 for which required data are available on Compustat, CRSP, or First Call’s Company
Issued Guidance databases. For the test of hypothesis H3, we use the data available from
the Standard and Poor’s Transparency and Disclosure database; these data are available
for only 2002.
3.1. Descriptive statistics of characteristics of family and non-family firms
Panel A of Table 2 provides descriptive statistics on the salient characteristics of family

firms. We obtain this data from the 2002 proxy statements. On average, family members
and/or descendants own 11% of cash flow rights and 18% of voting rights in family firms.
Moreover, 61% of families hold at least 5% cash flow rights and 64% of families hold at
least 5% voting rights. The differences in cash flow rights and voting rights statistics are
9
BusinessWeek adopts this definition of family firms from Anderson and Reeb (2003a). In using this definition
for our analyses, we do not try to exclude firms with limited influence of founding family. There are several
benefits of staying with the BusinessWeek classification. First, it is free of any subjective assessment of family
influence, thus making the results more reliable. Second, to the extent a firm classified as family firm has only a
weak family influence, it would introduce a conservative bias in our results. Finally, this definition of family firm
has been used by several recent academic studies on family firms (Anderson and Reeb, 2003a, b, 2004; Anderson
et al., 2003), thus it makes comparison of our results with these other studies easier.
10
We examine the proxy statements of years 2000 and 2001 and find that firms classified as family firms in 2002
are family firms in years 2000 and 2001 as well.
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Table 1
Number and percent of family and non-family firms by two-digit SIC code in the S&P 500, 2002
SIC Industry description Non-family Family firms Percent of

code firms (n ¼ 323 (n ¼ 177 firms) family firms in
firms) industry (%)
10 Metal mining 1 1 50
13 Oil and gas extraction 12 4 33
14 Manufacturing, quarry nonmaterial 1 0 0
minerals
15 General building contractors 1 1 33
16 Heavy construction, except buildings 0 1 100
20 Food and kindred products 11 7 39
21 Tobacco products 3 0 0
23 Apparel and other textile products 1 3 75
24 Lumber and wood products 3 1 25
25 Furniture and fixtures 1 1 50
26 Paper and allied products 6 4 40
27 Printing and publishing 3 7 70
28 Chemical and allied products 25 11 31
29 Petroleum and coal products 4 2 33
30 Rubber and miscellaneous plastic 3 3 50
products
33 Primary metal industries 5 3 38
34 Fabricated metal products 6 1 14
35 Industrial machinery and equipment 17 10 37
36 Electronic and other electrical 18 19 51
equipment
37 Transportation equipment 15 2 12
38 Instruments and related products 14 9 39
39 Miscellaneous manufacturing products 1 1 50
40 Railroad transportation 4 0 0
42 Trucking and warehousing 1 0 0
44 Water transportation 0 1 100
45 Transportation by air 1 2 67
48 Communications 11 6 55
49 Electric, gas, and sanitary services 33 4 11
50 Wholesale trade—durable goods 1 1 50
51 Wholesale trade—nondurable goods 4 2 33
52 Building materials and gardening 2 1 33
53 General merchandise stores 7 5 42
54 Food stores 3 2 40
55 Auto dealers and service stations 0 2 100
56 Apparel and accessory stores 1 3 75
57 Furniture and home furnishings 2 2 50
58 Eating and drinking places 4 0 0
59 Miscellaneous retail 2 5 71
60 Depositing institutions 27 7 21
61 Nondepositing credit institutions 6 1 14
62 Security & commodity brokers 7 3 30
63 Insurance carriers 23 7 23
64 Insurance agents, brokers & service 1 1 50
67 Holding, other investment offices 1 5 83
70 Hotels and other lodging places 0 3 100
72 Personal services 0 1 100
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Table 1 (continued )
SIC Industry description Non-family Family firms Percent of

code firms (n ¼ 323 (n ¼ 177 firms) family firms in
firms) industry (%)
73 Business services 19 17 47
75 Auto repair, services, and parking 1 0 0
78 Motion pictures 1 0 0
79 Amusement and recreation services 2 0 0
80 Health services 3 2 40
82 Educational services 0 1 100
87 Engineering and management services 1 2 67
99 Non-classification establishment 3 0 0
due to the presence of dual class shares; 11% of family firms have dual class shares. The
difference in voting and cash flow rights leads to greater Type II agency problems
(Villalonga and Amit, 2006). Thus, we separately examine the disclosure practices of
family firms with and without dual class shares as a sensitivity check of our conclusions
about the relation between the severity of agency problems and disclosure practices.
Family member is the CEO in 49% of the family firms: the founder is the CEO in 32%
and descendant in 17% of family firms. The severity of agency problems differs across
these two subsamples (Villalonga and Amit, 2006).11 Thus, we separately examine the
disclosure practices of these two subsamples as another sensitivity check of our conclusions
about the relation between the severity of agency problems and disclosure practices.
Finally, family members can exert their influence by holding other important positions.
A founding family member or a descendant is a top level manager in 63% of family firms,
is the chairperson in 67% of family firms and sits on the board of directors in 99% of
family firms. The above characteristics of family firms suggest that on average family
members exert a non-trivial influence on the firms that we consider as family firms.
Panel B of Table 1 reports for family and non-family firms certain corporate governance
characteristics that have been examined in prior studies (Dechow et al., 1996; Anderson
and Reeb, 2003a). In family firms, officer and directors own on average 12.01% of stocks,
whereas in non-family firms they own only 2.87% of stocks. This result is consistent with
the panel A results that family firms almost always have family members in officer and/or
director positions and family members have concentrated ownership in their firms.
Panel B also shows that the percentage ownership by outside blockholders is 10.18% in
family firms and 12.29% in non-family firms. Moreover, 57% of family firms and 68% of
non-family firms have at least one outside blockholder. Outside blockholders are
unaffiliated owners holding at least 5% of the firm’s outstanding shares. Panel B also
shows that in family firms 63% of directors are independent, whereas in non-family firms
76% are independent. The higher percentage of outside blockholding and independent
directors suggest that these two factors would contribute toward non-family firms having
less severe agency problems. Finally, the CEO is the chairman of the board in 65% of
family firms and in 81% of the non-family firms, suggesting that this factor contributes
11
Villalonga and Amit (2006) do not examine whether the less severe agency problem when founder is the CEO
is because of lower Type I or lower Type II agency problems.
A. Ali et al. / Journal of Accounting and Economics 44 (2007) 238–286
Table 2
Descriptive statistics of family and non-family firms in S&P 500, 2002
Panel A: Ownership and control characteristics of the 177 family firms in S&P 500
ARTICLE IN PRESS
Percentage of cash flow rights controlled by the founding family members or descendents, mean median ¼ 6.26%; first 11%
quartile ¼ 2.21%; third quartile ¼ 14.10%
Percentage of families holding at least 5% cash flow rights 61%
Percentage of voting rights controlled by the founding family members or descendents, mean 18%
Median ¼ 9.40%; first quartile ¼ 3.70%; third quartile ¼ 19.60%
Percentage of families holding at least 5% voting rights 64%
Percentage of family firms with dual class shares 11%
Percentage of family firms in which founder is the CEO 32%
Percentage of family firms in which descendent is the CEO 17%
Percentage of family firms in which hired executive is the CEO 51%
Percentage of family firms in which a founding family member or a descendent is a top executive (including CEO) 63%
Percentage of family firms in which a founding family member or a descendent is the chairperson of the board of directors 67%
Percentage of family firms in which a founding family member or a descendent is a director (including chairperson) 99%
Mean Median
Family firms Non-Family Difference t- Family firms Non-Family Difference z-

firms statistics firms statistics
Panel B: Corporate governance characteristics of family and non-family firms

Officers and directors ownership 12.01% 2.87% 9.95*** 7.31% 1.70% 10.01***
Unaffiliated blockholding 10.18% 12.29% 3.01*** 6.40% 9.25% 4.52***
Percentage of firms with outside 57% 68% 5.11*** 1.00 1.00 4.37***
blockholders
249
250
Mean Median


Percentage of independent 63% 76% 7.82*** 64% 75% 8.62***
directors
CEO ¼ COB 65% 81% 3.55*** 1.00 1.00 3.23***
No. of observations 177 323 177 323
Mean Median
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Panel C: Financial characteristics of family and non-family firms

SIZE 8.92 9.01 1.58 8.87 8.92 1.57
MB 5.38 4.28 2.71*** 3.55 2.69 2.71***
ROA 0.06 0.04 3.15*** 0.06 0.04 5.11***
PROA 0.05 0.04 4.76*** 0.04 0.03 5.37***
Variable definitions: Officers and directors ownership is the equity holdings of all officers and directors. Unaffiliated blockholding is the fractional equity stake of
unaffiliated owners holding at least five percent of the firm’s outstanding shares. Percentage of firms with outside blockholders is the percentage of firms with at least
one unaffiliated owner holding at least five percent of the firm’s outstanding shares. Percentage of independent directors is the number of independent directors serving
on the board divided by board size. CEO ¼ COB is a dummy variable which equals one if CEO is also the chairperson of the board and is zero otherwise. SIZE is the
log of market value of equity at the beginning of the fiscal period. MB is a firms’ market-to-book ratio defined as the market value of equity divided by book value of
equity. ROA is earnings before extraordinary item divided by total assets. PROA is the average of prior 5 years’ earnings before extraordinary items divided by the
average of prior 5 years’ total assets. . *** indicates significance at the 0.01 level.
ARTICLE IN PRESS
towards non-family firms having more severe agency problems. The above results raise a
concern that the difference in disclosure practices that we may observe across family and
non-family firms could be driven by these other governance factors. To alleviate this
concern, we check the sensitivity of our results to controlling the effect of these factors on
disclosure practices.
Panel C of Table 1 shows that compared to non-family firms, family firms have better
profitability. Current period’s return on asset (ROA) and the average return on assets for
the prior 5 years (PROA) are significantly greater for family firms (t ¼ 3.15 and 4.76,
respectively). The market to book ratio (MB) is significantly higher for family firms
(t ¼ 2.71), suggesting that the market views these firms to be more profitable (Villalonga
and Amit, 2006). These results are consistent with those reported by Anderson and Reeb
(2003a). They attribute these results to less severity in agency problems in family firms.
They note however that these results are also consistent with the following alternative
explanation: Families have superior information about their firms’ future prospects and
they tend to exit firms with poor prospects. In other words, the better performance
observed for family firms may not be due to less severe agency problems but due to family
members continuing only in firms with better prospects. Given the survivorship bias due to
a firm remaining family firm if performing well and given that better performance is
associated with better disclosure (Miller, 2002), there is a potential for spurious correlation
between family firm membership and disclosure quality. To alleviate this concern, we add
measures of firm performance, ROA and PROA, as control variables in all our models of
disclosure quality. Any association between disclosure quality and the family firm
indicator variable can then be more reliably attributed to the difference in agency problems
across family and non-family firms. Of course, to the extent that performance is not
adequately controlled for by ROA and PROA variables, our results could be spurious.
4. Results
4.1. Earnings quality
We assess the quality of earnings in the following four ways: the level of discretionary
accruals in earnings, the ability of earnings components to predict future cash flows, the
persistence of earnings, and the association of earnings with contemporaneous stock
returns.
4.1.1. Discretionary accruals

We estimate the following models to examine the relation between discretionary accruals
and whether a firm is a family or a non-family firm. The models are similar to that used by
Ashbaugh et al. (2003). To their model, we add the family firm membership variable and
control variables used in other studies (e.g. Warfield et al., 1995).
ABSPADCA ¼ a þ b1 FAMILYFIRM þ b2 L1ACCRUAL þ b3 SIZE þ b4 MA
þ b5 FINANCING þ b6 LITIGATION þ b7 LEVERAGE þ b8 MB
þ b9 LOSS þ b10 CFO þ b11 INSTITUTION þ b12 VAR þ b13 BETA
X
þ b14 ROA þ b15 PROA þ ri INDUSTRY i þ error, ð1Þ
ARTICLE IN PRESS
PADCA ¼¼ a þ b1 FAMILYFIRM þ b2 L1ACCRUAL þ b3 SIZE þ b4 MA

þ b5 FINANCING þ b6 LITIGATION þ b7 LEVERAGE
þ b8 MB þ b9 LOSS þ b10 CFO þ b11 INSTITUTION
þ b12 VAR þ b13 BETA þ b14 ROA þ b15 PROA
X
þ ri INDUSTRY i þ error. ð2Þ
The dependent variable in Eq. (1) is ABSPADCA, which stands for absolute value of
performance adjusted discretionary accruals. The dependent variable in Eq. (2), PADCA,
is the same as ABSPADCA, except that it is not transformed to absolute value. We follow
Kothari et al. (2005) for measuring PADCA. We first estimate the modified Jones model
cross-sectionally using all firm-year observations in the same two-digit SIC code.
Discretionary accruals from this model are then differenced with discretionary accruals
of a firm with the same two-digit SIC code and with the closest return on assets in the
current year.
Other variables are defined as follows. FAMILYFIRM is a dummy variable which
equals one for family firms, and zero otherwise; L1ACCRUAL is last year’s total current
accruals and equals net income before extraordinary items plus depreciation and
amortization minus operating cash flow scaled by beginning of year total assets. This
variable captures the reversal of accruals over time. SIZE is the log of a firm’s market
capitalization. MA is 1 if the firm has engaged in a merger and acquisition, and 0
otherwise. FINANCING is 1 if MA is not equal to 1 and number of outstanding shares
increased by at least 10%, or long-term debts increased at least 20%, or the firm first
appears on the CRSP monthly returns database during the fiscal year, and 0 otherwise.
LITIGATION is 1 if the firm operates in a high-litigation industry, and 0 otherwise;
LEVERAGE is the ratio of total debt to total assets at the beginning of the fiscal period;
MB is market-to-book ratio; LOSS is 1 if the firm reports a net loss for the fiscal period,
and 0 otherwise; CFO is cash flow from operations scaled by beginning of year total assets;
INSTITUTION is the percentage of stocks held by institutional investors; VAR is the
standard deviation of quarterly earnings for the period 1997–2002; BETA is systematic
risk; ROA is current year’s return on assets; PROA is prior 5 years’ return on assets; and
INDUSTRYi is a dummy variable for industry membership. We use the 12 industry groups
in Fama and French (1997).12
Panel A of Table 3 reports the descriptive statistics of the variables in Eqs. (1) and (2).
ABSPADCA is significantly greater for family firms (t ¼ 1.96, z ¼ 2.25). However,
PADCA is significantly smaller for family firms (t ¼ 4.31, z ¼ 4.44). Many of the
control variables are significantly different across family and non-family firms. Thus, it is
important to control for these variables to draw proper conclusion about the relation
between discretionary accruals and family firm membership.
12
For estimating discretionary accruals and the predictability of cash flows (Section 4.1.2), we use industry
groups based on the two-digit SIC codes. Prior studies have done the same. We use all the firms in the
COMPUSTAT for which the required data is available in the estimation process and therefore have a reasonable
number of firms in each industry group. However, when estimating the difference in disclosure practices across
family and non-family firms, our sample is limited to S&P500 firms. Using two-digit SIC codes for defining
industry results in too few firms in some of the industry groups. Thus, we use the Fama-French industry definition
for these tests.
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Panel B of Table 3 presents the regression estimates of Eqs. (1) and (2).13 The coefficient
on FAMILYFIRM is insignificant in the ABSPADCA model (0.64, t ¼ 0.05) and is
negative and significant in the PADCA model (1.36, t ¼ 1.98).14 The coefficients on the
control variables, whenever significant, are consistent with the signs predicted by prior
studies (Ashbaugh et al., 2003; Warfield et al., 1995).15 Overall, the results suggest that
discretionary accruals are more negative for family firms as compared to non-family firms.
Assuming that on average mangers have incentives to increase income, this result seems
consistent with less opportunistic behavior in family firms.16
The greater negative accruals by family firms may also be motivated by the desire to
minimize tax or reduce political costs. If these factors drive the result then it would lead to
lower quality of earnings in terms of value relevance. However, in the subsequent tests if
we find that family firms’ earnings are better at predicting future cash flows, have higher
persistence, and have higher association with contemporaneous returns, then it would
suggest that less severe opportunistic behavior is primarily responsible for the more
negative discretionary accruals in family firms.
4.1.2. Predictability of cash flows

Following Dechow et al. (1998), Barth et al. (2001), and Cohen (2004), we assess the
quality of reported earnings by examining the ability of its components to predict future
cash flows. Specifically, we use the residuals obtained from the regression of future cash
flow from operations on prior period’s earnings components. We estimate the following
equation:
CF Oitþ1 ¼ a0 þ a1 CF Oit þ a2 DARit þ a3 DINV it þ a4 DAPit
þ a5 DEPRit þ a6 OTHERit þ eitþ1 , ð3Þ
13
For all model estimations in the paper, we use the Huber-White procedure. Also, throughout the paper, our
conclusions about the effect of family firm membership are robust to outlier deletions as well as the use of binary
transformation of control variables. Finally for all the models in the paper, we carry out year-by-year estimations.
We find that the year-by-year coefficients in most cases have signs consistent with that reported for the pooled
regression. In the few cases where the
ffi Psigns are
pffiffiffiffi not consistent, the coefficients are never statistically significant. We
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
also compute Z-statistic ¼ ð1= N Þ N j¼1 tj = kj =kj2 , where t is t-statistic, k is the degrees of freedom for year j,
and N is the number of years. This statistic controls for the effect of time-series correlation of the variables. Our
conclusions remain unaffected.
14
If family firms have younger assets, these firms may report higher depreciation and/or amortization expenses.
To the extent that the property, plant, and equipment variable in the Jones model does not completely control for
this effect, family firms’ discretionary accruals estimates would be more negative. To alleviate this concern, we
repeat our analysis after adding depreciation and amortization expenses to total accruals. The results lead to the
same conclusion.
15
We ran all the analysis in the paper with the corporate governance variables as additional controls.
Specifically, we include the following variables: the percentage of stocks held by outside blockholders (or an
indicator variable for a large outside blockholder), percentage of directors who are independent, and an indicator
variable on whether the CEO is also the chairman of the Board of Directors. Given that we have only three years
(2000–2002) of data for these variables readily available to us, we estimate our models for the three years. We find
that our conclusions with respect to the FAMILYFIRM variable remain unchanged. Moreover, none of these
additional control variables are significant in any of the models. Given that we do not have data for these
additional variables for all the five sample years, we do not report these results in the text.
16
A more compelling test for opportunistic behavior would be to identify situations (firm-years) where there
would be income increasing or income decreasing incentives and then examine separately for each category the
difference in discretionary accruals across family and non-family firms.
254
Table 3
Family firms and discretionary accruals, 1998–2002
Mean Median
Family firms Non-family firms Difference t-stat. Family firms Non-family firms Difference z-stat.

Panel A: Descriptive statistics
ABSPADCA (%) 7.55 6.99 1.96** 5.55 4.68 2.25**
PADCA (%) 3.11 1.12 4.31*** 2.57 1.07 4.44***
L1ACCRUAL 7.14 4.32 1.97** 1.97 1.21 1.59
SIZE 8.89 8.94 1.51 8.86 8.91 1.01
MA 0.25 0.20 2.01** 0.00 0.00 2.09**
ARTICLE IN PRESS
FINANCING 0.16 0.24 3.65*** 0.00 0.00 3.62***
LITIGATION 0.38 0.23 5.72*** 0.00 0.00 5.85***
LEVERAGE 0.23 0.29 7.30*** 0.20 0.29 8.01***
MB 5.61 4.31 5.72*** 3.71 2.85 6.63***
LOSS 0.13 0.14 0.57 0.00 0.00 0.57
CFO 0.15 0.13 4.44*** 0.14 0.12 4.49***
INSTITUTION 0.61 0.67 3.58*** 0.62 0.69 3.71***
VAR 0.41 0.54 5.11*** 0.27 0.40 7.29***
BETA 1.07 0.84 7.51*** 0.96 0.80 8.22***
ROA 0.06 0.04 4.24*** 0.06 0.04 5.01***
PROA 0.05 0.04 4.76*** 0.04 0.03 5.37***
No. of Observations 593 1009 593 1009
Variables Predicted sign Dependant var. ¼ ABSPADCA Dependant var. ¼ PADCA
Coeff. t-stat. Predicted sign Coeff. t-stat.
Panel B: Regression estimates

Intercept ? 5.41 2.23** ? 2.62 0.75
FAMILYFIRM ? 0.64 0.05 ? 1.36 1.98**
L1ACCRUAL 1.02 1.33 2.35 1.43
SIZE 0.01 0.03 0.01 0.11
MA + 0.46 0.78 + 1.11 1.12
FINANCING + 0.92 1.68* + 0.35 0.08
LITIGATION + 1.69 1.41 + 1.00 0.52
LEVERAGE 1.97 1.20 1.37 0.52
MB + 0.27 4.72*** + 0.03 0.55
LOSS + 0.82 3.01*** 1.28 1.31
CFO 7.78 1.49 27.75 8.21***
INSTITUTION 1.15 0.21 1.01 0.35
VAR + 0.47 3.38*** ? 0.19 1.25
BETA + 0.38 1.45 ? 0.37 0.62

ROA ? 7.22 1.54 ? 8.42 1.56
PROA ? 0.05 0.02 ? 3.60 0.32
Adjusted R2 (%) 12.81 5.62
No. of observations 1602 1602
Variable definitions: PADCA is the performance-matched modified-Jones model discretionary accruals. ABSPADCA is the absolute value of PADCA;
ARTICLE IN PRESS
FAMILYFIRM is a dummy variable which equals one for family firms, and zero otherwise; L1ACCRUAL is last year’s total current accruals scaled by beginning of
year total assets. SIZE is the log of a firm’s market capitalization. MA is 1 if the firm has engaged in a merger and acquisition, and 0 otherwise. FINANCING is 1 if
MA is not equal to 1 and number of outstanding shares increased by at least 10%, or long-term debts increased at least 20%, or the firm first appears on the CRSP
monthly returns database during the fiscal year, and 0 otherwise. LITIGATION is 1 if the firm operates in a high-litigation industry (SIC codes of 2833–2836,
3570–3577, 3600–3674, 5200–5961, and 7370), and 0 otherwise. LEVERAGE is the ratio of total debt to total assets at the beginning of the fiscal period. MB is a firms’
market-to-book ratio. LOSS is 1 if it reports a net loss in the fiscal period, and 0 otherwise. CFO is cash flow from operations scaled by beginning of year total assets.
INSTITUTION is the percentage of stocks held by institutional investors. VAR is the standard deviation of quarterly earnings for the period 1997–2002; BETA is
systematic risk. ROA is earnings before extraordinary item divided by total assets. PROA is the average of prior 5 years’ earnings before extraordinary items divided
by the average of prior 5 years’ total assets.
The regression model includes dummy variables for industry membership. We use the Fama-French definition of industry. For brevity, we do not report the industry
dummy coefficients. The predicted signs on the control variables are based on prior studies. The t-statistics are corrected using the Huber-White procedure. ***
indicates significance at the 0.01 level, ** indicates significance at 0.05 level, and * indicates significance at the 0.10 level.
255
ARTICLE IN PRESS
where CFOit is the cash flow from operations for firm i in year t minus the accrual portion
of extraordinary items and discontinued operations; DARit is change in accounts
receivable; DINVit is change in inventory; DAPit is change in accounts payable and
accrued liabilities; DEPRit is depreciation and amortization expense; and OTHERit is net
of all other accruals, calculated as (EARN(CFO+DAR+DINVDAPDEPR)), where
EARN is income before extraordinary items and discontinued operations.
We estimate Eq. (3) for each fiscal year separately from 1998 to 2002 for each two-digit
SIC industry code with at least 20 observations, and use the estimated coefficients to
calculate firm-specific residuals. The empirical measure of reporting quality is the absolute
value of these residuals: RES ¼ |eit+1|. These residuals reflect the magnitude of future
operating cash flows unrelated to current disaggregated earnings. Lower absolute values of
the residuals indicate higher quality financial reporting.17
To examine the association between earnings quality and family firm membership, we
estimate the following equation. The control variables in this model are from Cohen
(2004). They capture the various costs and benefits associated with disclosing high-quality
financial information.
QUALITY ¼ a þ b1 FAMILYFIRM þ b2 OWNER þ b3 CAPITAL

þ b4 HERFINDEX þ b5 SALESGROW
þ b6 MARGIN þ b7 LEVERAGE þ b8 OC
þ b9 SEGMENT þ b10 SIZE þ b11 ROA
X
þ b12 PROA þ ri INDUSTRY i þ error, ð4Þ
where the dependent variable, QUALITY, is a binary variable which equals 1 if RES
is less than the median value of RES. FAMILYFIRM is a binary variable which
equals 1 if the firm is a family firm, and 0 otherwise. OWNER is the natural log
of the number of shareholders of a firm minus the natural log of median number of
shareholders for the same two-digit SIC code; CAPITAL is net plant, property
and equipment divided by total assets; HERFINDEX is the Herfindahl Index,
calculated as the sum of squares of market shares of the firms in the industry (two-digit
SIC code); SALESGROW is current year’s growth in sales; MARGIN is gross
margin percentage; LEVERAGE is long term debt plus debt in current liabilities divided
by total assets; OC is operating cycle (in days) and is calculated as [(ARt+ARt1)/
2C(SALES/360)]+[(INVt+INVt1)/2C(COGS/360)] where AR is the firm’s accounts
receivable, INV is inventory, and COGS is cost of goods sold; SEGMENT is the
number of two-digit SIC industry codes the firm operates in; SIZE is natural logarithm
of market capitalization at the end of the fiscal year; ROA is current year’s return
on assets; PROA is prior 5 years’ return on assets; and INDUSTRY is a dummy
variable for industry membership. We use the 12 industry groups in Fama and French
(1997).
17
The mean (median) number of observations per industry to estimate Eq. (3) for industries represented by
family firms is 602 (264) and for industries represented by non-family firms is 657 (281). The average number of
observations per industry is large and is of similar order of magnitude across the two groups. Thus, it is unlikely
that our results are driven by the downward bias in the RES variable for one of the group, because of an over fit of
Eq. (3) due to too few observations in some of the industries represented by that group.
ARTICLE IN PRESS
Cohen (2004) provides the following arguments for the explanatory variables in Eq. (2).
OWNER and LEVERAGE capture the higher demand for firm-specific information.
CAPITAL, HERFINDEX, SALESGROW and MARGIN capture proprietary costs of
disclosures. OC captures the predictability of future cash flows resulting from the length of
operating cycle. SEGMENT captures the effect of the complexity of the firm’s operating
environment on information quality. SIZE captures the difference in firms’ information
environment along with other aspects. Finally, ROA and PROA control for the effect of
profitability.
Table 4, panel A provides the descriptive statistics of the variables in Eq. (4). QUALITY
is not significantly different across family and non-family firms in the univariate tests.
However, several of the control variables are significantly different across family and non-
family firms. Thus, it is important to control for these variables to draw proper conclusions
on the relation between earnings quality and family firm membership.
The results of estimating Eq. (4) are presented in panel B of Table 4. The coefficient on
the FAMILYFIRM is positive and significant (0.21, w2 ¼ 3.81). The coefficients on the
control variables, when significant, have the signs as predicted by prior studies (Cohen,
2004); the only exception is SALESGROW.18 Overall, the results suggest that compared to
non-family firms, family firms’ earnings components are significantly better at predicting
future cash flows.
4.1.3. Earnings persistence

Another commonly used measure of earnings quality is its persistence. We measure
earnings persistence for a firm by estimating the following time-series model for the period
1995–2002:
DEPS t ¼ l0 þ l1 DEPS t1 þ error, (5)
where DEPSt is the change of earnings before extraordinary items divided by the number
of outstanding shares. The slope coefficient, l1, represents the persistence of earnings,
referred to as PERSISTENCE.
To examine whether PERSISTENCE varies across family and non-family firms, we
estimate the following model.
PERSISTENCE ¼ a þ b1 FAMILYFIRM þ b2 SIZE þ b3 ROA
X
þ b4 PROA þ ri INDUSTRY i þ error. ð6Þ
The control variables in this model are based on Lev (1983). He shows that earnings
persistence is associated with firm size and various industry characteristics, such as, type of
products, degree of competition, and operating leverage. We use industry membership
indicator variable to capture the industry characteristics. We use 12 industry groups as in
Fama and French (1997). ROA and PROA, defined earlier, control for the effect of
profitability on PERSISTENCE.
Panel A of Table 5 reports descriptive statistics of the variables in Eq. (6). The
mean value of PERSISTENCE is significantly greater for family firms (t ¼ 1.97).
Panel B of Table 5 reports the regression estimate of Eq. (6). The coefficient on
18
The coefficient on FAMILYFIRM remains significant when one control variable at a time is excluded from
Eq. (4). This result suggests that the insignificant difference in QUALITY across family and non-family firms in
the univariate tests is due to a correlated omitted variable bias associated with a combination of variables.
ARTICLE IN PRESS
Table 4
Family firms and predictability of future cash flows, 1998–2002
Mean Median
Family firm Non-family Difference Family firm Non-family Difference

firm t-stat. firm z-stat.

QUALITY 0.52 0.49 0.97 1.00 0.00 0.97
OWNER 2.38 3.30 9.58*** 2.27 3.35 11.78***
CAPITAL 0.30 0.36 5.63*** 0.24 0.30 6.22***
HERFINDEX 0.06 0.06 0.65 0.04 0.04 1.85*
SALESGROW (%) 11.03 7.77 3.30*** 11.04 6.71 5.73***
MARGIN (%) 41.22 37.96 3.37*** 37.91 35.27 2.86**
LEVERAGE 0.23 0.29 7.30*** 0.20 0.29 8.01***
OC 142.62 231.77 2.77*** 105.70 106.78 0.81
SEGMENT 5.07 5.92 6.14*** 5.00 6.00 7.31***
SIZE 8.83 9.01 1.55 8.93 8.86 1.25
ROA 0.06 0.04 4.24*** 0.06 0.04 5.01***
PROA 0.05 0.04 4.76*** 0.04 0.03 5.37***
Dependent var. ¼ QUALITY
Variables Predicted sign Coeff. Wald w2 Marginal probability
Panel B: Logistic model estimates

Intercept ? 0.73 1.96
FAMILYFIRM ? 0.21 3.81** 0.12
OWNER + 0.02 0.33 0.00
CAPITAL + 1.34 22.17*** 0.28
HERFINDEX ? 2.46 6.21** 0.51
SALESGROW 0.46 3.08* 0.10
MARGIN ? 1.11 12.41*** 0.23
LEVERAGE + 0.71 3.33** 0.15
OC 0.01 0.81 0.00
SEGMENT ? 0.03 2.21 0.01
SIZE + 0.14 6.11** 0.03
ROA ? 4.44 28.66*** 0.92
PROA ? 4.05 7.91*** 0.16
Likelihood ratio 358.64

(p-value) 0.00
No. of observations 1836
Variable definitions: QUALITY is a binary variable which equals 1 if RES is less than the median value of RES,
where RES is the absolute value of the residual obtained from a regression of future cash flow from operation on
prior period’s earnings components (see Eq. (1)); FAMILYFIRM is a dummy variable which equals one for family
firms, and zero otherwise; OWNER is the natural log of the number of shareholders of a firm minus the natural
log of median number of shareholders for the same two-digit SIC code; CAPITAL is net plant, property and
equipment divided by total assets; HERFINDEX is the Herfindahl Index, calculated as the sum of squares of
market shares of the firms in the industry (two-digit SIC code); SALESGROW is current year’s growth in sales;
MARGIN is gross margin percentage; LEVERAGE is long term debt plus debt in current liabilities divided by
total assets; OC is operating cycle (in days) and is calculated as [(ARt+ARt1)/2C(SALES/360)]+[(IN-
Vt+INVt1)/2C(COGS/360)], where AR is accounts receivable, INV is inventory , and COGS is cost of goods
sold; SEGMENT is the number of two-digit SIC industry codes the firm operates in; SIZE is natural logarithm of
market capitalization at the end of the fiscal year. ROA is earnings before extraordinary item divided by total
assets. PROA is the average of prior 5 years’ earnings before extraordinary items divided by the average of prior 5
years’ total assets.
The regression model includes dummy variables for industry membership. We use the Fama-French definition of
industry. For brevity, we do not report the industry dummy coefficients. The predicted signs on the control
variables are based on prior studies. The w2s are corrected using the Huber-White procedure. *** indicates
significance at the 0.01 level, ** indicates significance at 0.05 level, and * indicates significance at the 0.10 level.
ARTICLE IN PRESS
Table 5
Family firms and earnings persistence, 1998–2002
Mean Median
Family Non-family Difference Family Non-family Difference

firms firms t-stat. firms firms z-stat.

PERSISTENCE 0.21 0.32 1.97** 0.27 0.33 1.31
SIZE 8.89 8.94 1.51 8.87 8.91 1.33
ROA 0.06 0.04 3.71*** 0.06 0.04 4.84***
PROA 0.05 0.04 4.21*** 0.04 0.03 4.67***
Variables Dependent var. ¼ PERSISTENCE
Predicted sign Coeff. t-stat.

Intercept ? 0.38 2.06**
FAMILYFIRM ? 0.09 1.52
SIZE + 0.02 1.33
ROA ? 0.71 1.97**
PROA ? 0.25 0.35
Adjusted R2 (%) 3.32
No. of observations 487
Variable definitions: FAMILYFIRM is a dummy variable which equals one for family firms, and zero otherwise;
PERSISTENCE is the slope coefficient, l1, from the following time-series model: DEPSt ¼ l0+l1-
DEPSt1+error; DEPSt is the change of earnings before extraordinary items divided by the number of
outstanding shares. The model is estimated from 1995 to 2002 to yield firm-specific l1; SIZE is the log of market
value of equity at the beginning of the fiscal period. ROA is earnings before extraordinary item divided by total
assets. PROA is the average of prior 5 years’ earnings before extraordinary items divided by the average of prior 5
years’ total assets.
The regression model includes dummy variables for industry membership. We use the Fama-French definition of
industry. For brevity, we do not report the industry dummy coefficients. The predicted signs on the control
variables are based on prior studies. The t-statistics are corrected using the Huber-White procedure. *** indicates
significance at the 0.01 level, ** indicates significance at 0.05 level, and * indicates significance at the 0.10 level.
FAMILYFIRM is positive but not significant (0.09, t ¼ 1.52). Even the coefficient
on SIZE is not significant. Given that prior studies find a significantly positive coefficient
on SIZE, the insignificant results we obtain could be due to the lack of power of our
test.
4.1.4. Earnings response coefficient

In the above sections, we measure earnings quality in terms of the predictability
of only next period’s cash flows or persistence with respect to only next period’s
earnings. Earnings response coefficient (ERC) captures the ability of earnings to predict
future cash flows and the persistence of earnings more comprehensively. To test the
difference between ERCs of family and non-family firms, we estimate the following
ARTICLE IN PRESS
equation:
RETURN ¼ a þ b1 EARNINGS þ b2 FAMILYFIRM þ b3 EARNINGS
FAMILYFIRM þ b4 EARNINGS VAR þ b5 EARNINGS
LEVERAGE þ b6 EARNINGS MB þ b7 EARNINGS
SIZE þ b8 EARNINGS BETA þ b9 EARNINGS ROA
X
þ b10 EARNINGS PROA þ b11 EARNINGS
INDUSTRY i þ error, ð7Þ
where RETURN is the cumulative abnormal return for the 12-month period ending 3
months after the fiscal year end; FAMILYFIRM is a dummy variable which equals one for
family firms, and zero otherwise; EARNINGS is the annual change in earnings per share
deflated by the price at the beginning of the return accumulation period; VAR is the
standard deviation of quarterly earnings for the period 1997–2002;19 LEVERAGE is the
ratio of total debt to total assets at the beginning of the fiscal period; MB is market-to-
book ratio at the beginning of the fiscal period; SIZE is the log of market value of equity at
the beginning of the fiscal period; BETA is systematic risk; ROA is current year’s return on
assets; PROA is prior 5 years’ return on assets; and INDUSTRY is a dummy variable for
industry membership. We use 12 industry groups as in Fama and French (1997).
We predict that b3 will be positive, indicating that the ERC of family firms is greater
than that of non-family firms. Other interaction variables in Eq. (7) control for previously
identified determinants of ERCs (see, e.g., Collins and Kothari, 1989; Kothari, 2001).
The descriptive statistics of the variables in Eq. (7) are presented in panel A of Table 6.
All of the determinants of ERC are significantly different across family and non-family
firms. Thus, it is important to control for these variables. The regression results are
presented in panel B of Table 6. The ERC of family firms is significantly higher than that
of non-family firms both with and without the control variables. For the full model, the
coefficient on the interaction term, EARNINGS FAMILYFIRM is 1.25 (t ¼ 4.37). The
coefficients on the control variables, when significant, have the predicted signs, except for
the coefficient on EARNINGS BETA. The results in this table are consistent with that in
Tables 3–5, suggesting that as compared to non-family firms, family firms’ earnings are of
higher quality, thereby providing support to hypothesis H1a.
4.2. Management forecasts of earnings
We examine the likelihood of management issuing quarterly earnings forecasts across

family and non-family firms. For this purpose, we use the data on quarterly earnings
guidance obtained from Thompson First Call’s, Company Issued Guidance (CIG) file. We
use a model similar to that in Kasznik and Lev (1995).
MGMT_FORECAST ¼ a þ b1 CHEPS þ b2 FAMILYFIRM þ b3 CHEPS
FAMILYFIRM þ b4 SIZE þ b5 BM þ b6 HIGHTECH
þ b7 REGULATION þ b8 ROA þ b9 PROA þ error, ð8Þ
19
We use the standard deviation of the prior sixteen quarters’ earnings to measure VAR and find qualitatively
similar results.
Table 6
Family firms and earnings response coefficients, 1998–2002
Mean Median
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Family firms Non-family firms t-stat. Family firms Non-family firms z-stat.

RETURN 0.00 0.00 0.45 0.05 0.05 0.12
EARNING 0.01 0.01 0.37 0.00 0.00 0.58
VAR 0.41 0.54 5.11*** 0.27 0.40 9.29***
LEVERAGE 0.23 0.29 12.11*** 0.23 0.28 12.63***
MB 5.04 3.90 5.82*** 3.61 2.69 6.63***
SIZE 8.95 9.02 1.98** 8.92 8.91 2.03**
BETA 1.07 0.84 7.51*** 0.96 0.80 7.22***
ROA 0.06 0.04 4.24*** 0.06 0.04 5.01***
PROA 0.05 0.04 4.76*** 0.04 0.03 5.37***
Dependent var. ¼ RETURN Dependent var. ¼ RETURN Dependent var. ¼ RETURN
Variables Predicted sign Coeff. t-stat. Coeff. t-stat. Coeff. t-stat.

Intercept ? 0.19 3.39*** 0.20 4.38*** 0.19 7.23***
EARNINGS + 0.79 15.51*** 0.74 13.92*** 0.78 0.82
FAMILYFIRM ? 0.01 0.62 0.01 0.06
EARNINGS FAMILYFIRM ? 0.92 3.44*** 1.25 4.37***
261
262
Dependent var. ¼ RETURN Dependent var. ¼ RETURN Dependent var. ¼ RETURN
Variables Predicted sign Coeff. t-stat. Coeff. t-stat. Coeff. t-stat.
EARNINGS VAR 0.11 1.39

EARNINGS LEVERAGE 0.62 0.83
EARNINGS MB + 0.19 2.86***
EARNINGS SIZE + 0.14 0.76
EARNINGS BETA 0.12 1.41
EARNINGS ROA ? 2.09 1.42
EARNINGS PROA ? 6.42 1.51
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Adjusted R2 (%) 20.81 21.01 24.79
No. of observations 2302 2302 2302
Variable definitions: RETURN is the cumulative abnormal return for the 12–month period ending three months after the fiscal year end; FAMILYFIRM is a dummy
variable which equals one for family firms, and zero otherwise; EARNINGS is the annual change in earnings per share deflated by the price at the beginning of the
return accumulation period; VAR is the standard deviation of quarterly earnings for the period 1997–2002; LEVERAGE is the ratio of total debt to total assets at the
beginning of the fiscal period; MB is market-to-book ratio at the beginning of the fiscal period; SIZE is the log of market value of equity at the beginning of the fiscal
period; BETA is systematic risk. ROA is earnings before extraordinary item divided by total assets. PROA is the average of prior 5 years’ earnings before
extraordinary items divided by the average of prior 5 years’ total assets.
The full regression model includes interaction of EARNINGS with dummy variables for industry membership (see Eq. (7)). We use the Fama-French definition of
industry. For brevity, we do not report the coefficients on the industry dummy interaction variables. The predicted signs on the control variables are based on prior
studies. The t-statistics are corrected using the Huber-White procedure. *** indicates significance at the 0.01 level, ** indicates significance at 0.05 level, and *
indicates significance at the 0.10 level.
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where MGMT_FORECAST is an indicator variable that takes the value of one if the
managers make an earnings forecast of quarterly earnings, and zero otherwise, CHEPS is
the change in earnings per share from that of the same quarter in the previous fiscal year,
deflated by stock price at the beginning of the quarter; SIZE is the natural log of market
capitalization at the beginning of the fiscal quarter; BM is the natural log of the book-to-
market ratio at the beginning of the quarter; HIGHTECH is an indicator variable that
takes a value of one if the firm operates in any of the following industries: Drugs,
Computers, Electronics, Programming, R&D services, and is zero otherwise; REGULA-
TION is an indicator variable that takes on a value of one if the firm operates in any of the
following industries: Telephone, TV, Cable, Communications, Gas, Electricity, Water, and
is zero otherwise; ROA is current year’s return on assets; PROA is prior five years’ return
on assets.
Kasznik and Lev (1995) estimate their model (Eq. (8) without the FAMILYFIRM and
CHEPS FAMILYFIRM variables) separately for good news (positive CHEPS) and bad
news (negative CHEPS) firms. They obtain a significantly negative coefficient on CHEPS
for bad news firms. Their result suggests that the likelihood of management earnings
forecasts increases with the magnitude of bad news. Moreover, they do not find a
significant coefficient on CHEPS for good news firms. We predict that the strength of the
relation between the likelihood of management forecast and the magnitude of bad news
would differ across family and non-family firms. Thus, we expect that the coefficient b3 will
be either negative (hypothesis H2a) or positive (hypothesis H2b) when Eq. (8) is estimated
using observations with CHEPSo0.
The other variables in Eq. (8) are control variables, similar to that used in Kasznik and
Lev (1995). SIZE is found to be positively related to the likelihood of management
forecasts, probably because of economies of scale (Lang and Lundholm, 1993). BM is
included to control for risk as well as growth. HIGHTECH is expected to have a positive
coefficient, reflecting exposure to larger risk of shareholder lawsuits due to larger price
fluctuations. Finally, REGULATION is expected to have a negative coefficient, reflecting a
smaller demand for management forecasts because of regulated firms’ practice of
providing considerable amount of information to the regulatory body and therefore
indirectly to the investors. Finally, ROA and PROA control for the effect of profitability
on the likelihood of management forecast.
The descriptive statistics of the variables in Eq. (8) are presented in panel A of Table 7.
The likelihood of family firms making management forecasts is greater than that for non-
family firms both when CHEPS40 and CHEPSo0. However, most of the control
variables have significantly different values across family and non-family firms. Thus, to
draw proper conclusions, it is important to control for these variables. The results from
estimating Eq. (8) are presented in panel B of Table 7. We first estimate the models without
the FAMILYFIRM variables and obtain results similar to that in Kasznik and Lev (1995).
Coefficient on CHEPS is insignificant for the good news case and is negative and
significant for the bad news case, 1.97 (p-valueo0.01). For bad news firms, the results of
the full model show that the coefficient on CHEPS FAMILYFIRM is negative and
significant, 2.71 (p-valueo0.05). The coefficients on the control variables, when
significant, are consistent with the predictions in prior studies (Kasznik and Lev, 1995).
Overall, the results suggest that the association between the likelihood of management
forecast of earnings and the magnitude of bad news is stronger for family firms as
compared to non-family firms, consistent with hypothesis H2a.
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4.3. Voluntary disclosure of corporate governance practices
To examine whether family firms are less likely to make voluntary disclosures related to
corporate governance practices (hypothesis H3), we use the Transparency and Disclosure
(T&D) database.20 It provides transparency and disclosure scores collected by Standard
and Poor’s for the S&P 500 firms. The scores are computed using the company’s annual
report and regulatory filings, such as the 10-K and proxy statements. The scores are
available for 98 questions organized in 12 groups (Patel and Dallas, 2002). For each
question that is answered in the affirmative, the company receives a score of one, and
receives a score of zero otherwise. In general, an affirmative answer to a question indicates
the presence of a disclosure item. These questions are listed in Appendix A.
In panel A of Table 8, we consider those groups of questions that are related to
shareholder rights and corporate governance structure and practices. The score for each
group indicates the average number of questions answered in the affirmative within that
group. For two of these groups, Information on Auditors (#8) and Board Structure and
Composition (#9), almost all firms have an affirmative answer, probably because there is
no discretion available, i.e., information pertaining to these aspects are mandatory. For the
remaining groups, firms seem to have some discretion. For four of these groups,
Concentration of Ownership (#2), Voting and Shareholder Meeting Procedures (#3), Role
of Board (#10), and Director Training and Compensation (#11), the scores for family firms
are significantly different than that for non-family firms, with t-statistics of 4.51, 4.42,
4.69 and 2.61, respectively. To better understand the reasons for these differences, we
list the scores of all the questions in each of these four groups (panel B of Table 8).
The category, Concentration of Ownership, have higher scores for family firms than
non-family firms. However, this may simply reflect that these questions are more relevant
for family firms, and so these companies are more likely to respond. Thus, family firms end
up getting a higher score than non-family firms in this category. In other words, this result
does not indicate greater voluntary disclosure of Concentration of Ownership by family
firms.21
For the other three groups related to corporate governance practices, the disclosure
scores are significantly less for family firms than for non-family firms. For the group
Voting and Shareholder Meeting Procedures, the questions for which family firms provide
significantly less disclosure are: how shareholders convene an extraordinary general
meeting (t ¼ 1.86), how shareholders nominate directors to board (t ¼ 2.76) and does
the annual report refer to or publish the corporate governance charter (t ¼ 3.49). For the
group Role of the Board, the questions for which family firms provide significantly less
disclosure are: is there a list of board committees (t ¼ 1.86), is there a nomination
committee (t ¼ 3.31), disclosure of names on nomination committee (t ¼ 3.40), other
20
Khanna et al. (2004) use this database to examine differences in disclosure practices of companies across
countries.
21
It is possible that the response to questions in some of the other categories may also be affected by whether the
particular issue is relevant for the firm or not. For example, the group Related Party Structure and Transaction is
more relevant for family firms and less so for non-family firms. In Panel A of Table 8, we find that the score is not
significantly different across the family and non-family firms. The insignificant difference could be due to the
offsetting effect of family firms’ unwillingness to voluntarily disclose information about these transactions. It is
difficult to control for this type of problem in our analyses of the T&D data. Our results should therefore be
interpreted with caution.
Table 7
Family firms and voluntary management forecasts, 1998–2002
Mean Median

I. Good news firms (CHEPS40)

MGMT_FORECAST 0.14 0.12 1.75* 0.00 0.00 1.74*
CHEPS 0.01 0.02 3.97*** 0.00 0.00 5.93***
SIZE 8.96 9.05 2.11** 8.88 8.89 2.11**
BM 0.35 0.42 7.51*** 0.26 0.36 11.21***
HIGHTECH 0.26 0.12 12.16*** 0.00 0.00 12.86***
REGULATION 0.08 0.09 1.65* 0.00 0.00 1.62
ROA 0.05 0.03 3.99*** 0.06 0.04 4.21***
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PROA 0.07 0.04 4.82*** 0.05 0.03 5.21***
II. Bad news firms (CHEPSo0)

MGMT_FORECAST 0.18 0.16 1.65* 0.00 0.00 1.02
CHEPS 0.02 0.02 0.78 0.00 0.00 4.21***
SIZE 8.98 9.01 0.65 8.88 8.81 0.39
BM 0.35 0.47 10.63*** 0.26 0.40 12.91***
HIGHTECH 0.28 0.11 14.60*** 0.00 0.00 14.26***
REGULATION 0.07 0.11 4.57*** 0.00 0.00 4.56***
ROA 0.01 0.00 3.12*** 0.01 0.00 3.96***
PROA 0.05 0.03 4.28*** 0.05 0.03 4.99***
Dependent Var. ¼ MGMT_FORECAST Dependent Var. ¼ MGMT_FORECAST
Variables Predicted sign Coeff. w2 Coeff. w2 Marginal

probability
Panel B: Logistic model estimates

I. Good news firms (CHEPS40)
Intercept ? 2.63 55.19*** 2.67 55.64***
CHEPS ? 0.26 0.14 1.07 0.84 0.24
FAMILYFIRM ? 0.13 1.54 0.04
265
CHEPS FAMILYFIRM ? 1.91 1.59 0.44
266
Dependent Var. ¼ MGMT_FORECAST Dependent Var. ¼ MGMT_FORECAST
Variables Predicted sign Coeff. w2 Coeff. w2 Marginal

probability

SIZE + 0.08 7.53*** 0.11 6.86*** 0.03
BM + 0.08 0.14 0.06 0.24 0.01
HIGHTECH + 0.17 2.93* 0.15 1.96 0.03
REGULATION 0.07 0.08 0.05 0.11 0.01
ROA ? 0.34 0.31 0.33 0.27 0.07
PROA ? 3.34 0.79 3.30 0.78 0.13
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Likelihood ratio 11.36 15.38
(p-value) 0.05 0.03
II. Bad news firms (CHEPSo0)

Intercept ? 2.88 54.98*** 2.90 54.33***
CHEPS 1.97 6.42*** 0.96 1.21 0.18
FAMILYFIRM ? 0.01 0.02 0.00
CHEPS FAMILYFIRM ? 2.71 3.78** 0.51
SIZE + 0.12 7.72*** 0.11 7.31*** 0.03
BM + 0.19 1.46 0.16 1.27 0.03
HIGHTECH + 0.19 2.02 0.17 2.00 0.03
REGULATION 0.08 0.21 0.07 0.26 0.01
ROA ? 0.06 0.02 0.05 0.01 0.01
PROA ? 0.92 0.19 0.90 0.17 0.04
Likelihood ratio 23.15 28.41

(p-value) 0.00 0.00
Variable definitions: MGMT_FORECAST is an indicator variable which equals one if the managers make an earnings forecast of quarterly earnings, and zero
otherwise, FAMILYFIRM is a dummy variable which equals one for family firms, and zero otherwise; CHEPS is the change in earnings per share from that of the
same quarter in the previous fiscal year, deflated by stock price at the beginning of the quarter; SIZE is the natural log of market capitalization at the beginning of the
fiscal quarter; BM is the natural log of the book-to-market ratio, computed using the book value of equity at the beginning of the quarter divided by the market
capitalization at the beginning of the quarter; HIGHTECH is an indicator variable that takes on a value of one if the firm operates in any of the following industries:
Drugs, Computers, Electronics, Programming, R&D services, and is zero otherwise; REGULATION is an indicator variable that takes on a value of one if the firm
operates in any of the following industries: Telephone, TV, Cable, Communications, Gas, Electricity, Water, and is zero otherwise. ROA is earnings before
extraordinary item divided by total assets. PROA is the average of prior 5 years’ earnings before extraordinary items divided by the average of prior 5 years’ total
assets.
Table 8
Family firms and Standards & Poor’s Transparency and Disclosure data, 2002
(T&D group#) T & D group name Number of Mean of number of questions answered (Mean of percentage of questions answered)
questions

All firms Family firms Non-family firms (N ¼ 290) Difference
(N ¼ 451) (N ¼ 161) t-statistics
Panel A: Transparency and disclosure groups related to corporate governance practices

(1) Transparency of Ownership 11 8.02 (73%) 7.96 (72%) 8.06 (72%) 0.77
(2) Concentration of Ownership 8 2.48 (31%) 2.90 (36%) 2.24 (28%) 4.51**
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(3) Voting and Shareholder Meeting 9 3.68 (41%) 3.34 (37%) 3.87 (43%) 4.42***
Procedures
(7) Related Party Structure and 4 1.03 (26%) 1.07 (27%) 1.01 (25%) 0.69
Transaction
(8) Information on Auditors 4 4.00 (100%) 4.00 (100%) 4.00 (100%) .
(9) Board Structure and 8 7.93 (99%) 7.93 (99%) 7.94 (99%) 0.41
Composition
(10) Role of the Board 12 9.19 (77%) 8.81 (73%) 9.39 (78%) 4.69***
(11) Director Training and 6 3.10 (52%) 3.02 (50%) 3.15 (53%) 2.61***
Compensation
(12) Executive Compensation and 9 7.25 (81%) 7.17 (80%) 7.30 (81%) 1.60
Evaluation
T & D group Question Fraction of firms that answer the question
All firms (N ¼ 451) Family firms Non-family firms Difference

Panel B: Details of T&D groups with significantly different response across family and non-family firms
(2)Concentration of Top 1 shareholder disclosed? 0.82 0.89 0.78 3.01***
Ownership Top 3 shareholders disclosed? 0.40 0.50 0.34 2.96***
Top 5 shareholders disclosed? 0.09 0.15 0.05 3.57***
Top 10 shareholders disclosed? 0.02 0.03 0.01 1.12
Shareholders owning more than 3% is 0.06 0.12 0.03 3.64***
267
disclosed?
268
T & D group Question Fraction of firms that answer the question
All firms (N ¼ 451) Family firms Non-family firms Difference


Shareholders owning more than 5% is 0.72 0.77 0.69 1.57
disclosed?
Shareholders owning more than 10% is 0.45 0.54 0.41 2.45**
disclosed?
Does the company disclose percentage 0.02 0.02 0.03 0.92
of cross-ownership?
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(3) Voting and Is there a calendar of important 0.97 0.96 0.97 0.95
Shareholder shareholder dates?
Meeting Procedures Review of shareholder meetings (could 0.03 0.01 0.04 1.31
be minutes)?
Describe procedure for proposals at 0.97 0.95 0.97 0.91
shareholder meetings?
How shareholders convene an 0.13 0.10 0.16 1.86*
extraordinary general meeting?
How shareholders nominate directors 0.74 0.66 0.79 2.76***
to board?
Describe the process of putting inquiry 0.08 0.06 0.09 0.82
to board?
Does the annual report refer to or 0.56 0.46 0.61 3.49***
publish Corporate Governance
Charter?
Does the annual report refer to or 0.09 0.08 0.09 0.47
publish Code of Best Practice?
Are the Articles of Association or 0.20 0.15 0.23 1.51
Charter Articles of Incorporation
published?
(10) Role of the Details about role of the board of 0.95 0.93 0.96 1.25
Board directors at the company?
Is there disclosed a list of matters 0.13 0.11 0.14 0.98
reserved for the board?
Is there a list of board committees? 0.99 0.99 1.00 1.86*
Review last board meeting (could be 0.02 0.02 0.02 0.04
minutes)?
Is there an audit committee? 1.00 1.00 1.00 .
Disclosure of names on audit 1.00 1.00 1.00 .

committee?
Is there a remuneration/compensation 0.99 0.99 1.00 1.31
committee?
Names on remuneration/compensation 0.99 0.99 0.99 0.38
committee)?
Is there a nomination committee? 0.83 0.74 0.87 3.31***
Disclosure of names on nomination 0.81 0.72 0.87 3.40***
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committee?
Other internal audit functions besides 0.84 0.89 0.96 2.38**
audit committee?
Is there a strategy/investment/finance 0.50 0.42 0.55 2.35**
committee?
(11) Director Disclose whether they provide director 0.00 0.00 0.00 0.75
Training and training?
Compensation Disclose the number of shares in the 0.98 0.98 0.98 0.34
company held by directors?
Discuss decision-making process of 0.09 0.06 0.11 1.71*
directors’ pay?
Are specifics of directors’ salaries 0.97 0.94 0.98 1.91*
disclosed (numbers)?
Form of directors’ salaries disclosed 0.98 0.97 0.99 1.12
(cash, shares, etc.)?
Specifics disclosed on performance- 0.07 0.06 0.08 0.95
related pay for directors?
In panel A, for T&D Group 1, 8.02 (73%) represents the mean across all firms of the number (percentage) of 11 questions to which they provide an answer. Appendix
A lists all the S&P transparency and disclosure practice questions. The difference column provides the t-statistic of the difference across family firms and non-family
firms. *** indicates significance at the 0.01 level, ** indicates significance at 0.05 level, and * indicates significance at the 0.10 level.
269
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internal audit function besides audit committee (t ¼ 2.38), and is there a strategy/
investment/finance committee (t ¼ 2.35). For the group director training and compensa-
tion, the questions for which family firms provide significantly less disclosure are:
discuss decision-making process of directors’ pay (t ¼ 1.71) and are specifics of directors’
salaries disclosed (t ¼ 1.91). Overall, the results in Table 8 suggest that family firms
provide less disclosure about their corporate governance practices. This evidence supports
hypothesis H3.
4.4. Analyst following, analysts’ forecast properties and bid-ask spreads
Since we find that family firms disclose higher quality earnings and are more likely to
provide warning for bad news, we test for hypothesis H4a and not H4b. We investigate
how family and non-family firms differ on analyst coverage, dispersion in analysts’
forecasts, analyst forecast accuracy, volatility in forecast revisions, and bid-ask spread. For
this examination, we adopt the models used in Lang and Lundholm (1996) and Healy et al.
(1999).
4.4.1. Analyst following

We estimate the following equation.
COVERAGE ¼ a0 þ a1 FAMILYFIRM þ a2 SIZE þ a3 STDROE þ a4 CORR
þ a5 INVPRICE þ a6 RETVAR þ a7 RD þ a8 EFFORT
þ a9 BROKER þ a10 ROA þ a11 PROA þ error ð9Þ
The dependent variable analyst coverage, COVERAGE, is defined as the 12-month
average of the number of analysts who issued annual earnings forecasts in IBES. Our main
independent variable, family firm membership, is denoted by FAMILYFIRM.
Following Lang and Lundholm (1996), we include the following control variables.
SIZE, defined as the natural logarithm of market value of equity at the beginning of the
fiscal year, is predicted to have a positive coefficient. Bhushan (1989) argues that larger
firms are more widely held with more potential transaction business for analysts’
brokerage houses. STDROE, defined as the standard deviation of return-on-equity during
the preceding 10-year period, is predicted to have a positive coefficient. Bhushan (1989)
explains that expected trading benefits based on private information is higher for a firm
with higher return variability because it increases the conditional expected returns. CORR,
defined as the Pearson correlation between ROE and annual stock return in the preceding
10-year period, is predicted to have a positive coefficient. Bhushan (1989) argues that it is
easier for analysts to predict future stock price for firms with higher return-earnings
correlations.
We include the following additional control variables beyond those included in Lang
and Lundholm (1996). INVPRICE, defined as the inverse of stock price at the beginning of
the year, is predicted to have a positive coefficient. Brennan and Hughes (1991) argue that
inverse of stock price proxies for the rate of the brokerage commission and the higher the
brokerage commission the greater will be analysts’ incentive to follow the firm. RETVAR,
defined as daily stock return variance estimated over the last 200 days prior to end of the
year, is predicted to have a positive coefficient. RETVAR is an additional measure for
return variability and hence the reason for the prediction is the same as that discussed
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above for STDROE. RD, defined as the annual research and development expense divided
by total assets at the beginning of the fiscal year, is predicted to have a positive coefficient.
Barth et al. (2001) argue that intangible assets typically are not recognized, making
financial statements less informative and providing greater incentive for analysts to follow
firms with greater research and development expenses. EFFORT is defined as the negative
of the average number of firms followed by the firm’s analysts in a particular year divided
by the number of analysts covering the firm in that year. This variable captures the notion
that if a particular firm requires more effort to cover it, then the firm’s analysts will cover
fewer firms (Barth et al., 2001). BROKER is defined as the average number of analysts
employed by the brokerage houses that employ the firm’s analysts. Larger brokerage
houses have greater resources and can therefore follow more firms. The inclusion of
BROKER in the model controls for cross-sectional difference in EFFORT that is related to
the size of the brokerage houses, thereby making the EFFORT variable more effective
(Barth et al., 2001). Finally, ROA and PROA, defined earlier, control for the effect of
profitability on analyst coverage.
4.4.2. Forecast dispersion, forecast accuracy, and revision volatility

To investigate how family and non-family firms differ in terms of dispersion in analysts’
earnings forecasts, forecast accuracy, and volatility in forecast revisions, we use the
following equations. The control variables are primarily from Lang and Lundholm (1996):
DISP ¼ a0 þ a1 FAMILYFIRM þ a2 SIZE þ a3 STDROE þ a4 CORR
þ a5 ACHEPS þ a6 RD þ a7 ROA þ a8 PROA þ error, ð10Þ
FERROR ¼ a0 þ a1 FAMILYFIRM þ a2 SIZE þ a3 STDROE þ a4 CORR

REVISION ¼ a0 þ a1 FAMILYFIRM þ a2 SIZE þ a3 STDROE þ a4 CORR

In Eq. (10), the dependent variable, DISP, is dispersion in individual analyst earnings
forecasts, defined as 12-month average of the standard deviation of analysts’ forecasts. In
Eq. (11), the dependent variable, FERROR, is the absolute value of 12-month average of
analyst forecast error defined as actual earnings minus the median analyst forecast. For
both DISP and FERROR, we compute a simple average across the twelve months
corresponding to the firm’s fiscal year. We also deflate both the variables by beginning of
fiscal year stock price. In Eq. (12), the dependent variable, REVISION, is volatility in
forecast revisions, defined as the standard deviation of monthly forecast revisions over the
fiscal year, deflated by the beginning of fiscal year price, where forecast revision is defined
as current month median forecast minus previous month median forecast. Eqs. (10)–(12)
include SIZE, STDROE, CORR, and RD as control variables. As discussed before, these
variables represent factors that affect analysts’ incentives to collect information and are
therefore likely to affect the properties of their forecasts. In these models, we also control
for ACHEPS, defined as the absolute value of annual change in earnings per share deflated
by the beginning of fiscal year price. It controls for the fact that dispersion in analysts’
earnings forecasts, forecast errors, and volatility in forecast revisions are likely to increase
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with the magnitude of the forthcoming earnings information. Finally, ROA and PROA,
defined earlier, control for the effect of profitability on the three forecast properties.
4.4.3. Bid-ask spread

Finally, to examine the difference in bid-ask spread between family and non-family
firms, we use the following equation:
SPREAD ¼ a0 þ a1 FAMILYFIRM þ a2 SIZE þ a3 LTURNOVER
þ a4 LPRICE þ a5 ROA þ a6 PROA þ error. ð13Þ
Eq. (13) is similar to that in Healy et al. (1999). SPREAD is defined as the annual
average of the daily closing bid-ask spread as a percentage of daily closing price. SIZE and
LTURNOVER, defined as the natural logarithm of the annual median value of daily
trading volume divided by total shares outstanding, are included to control for the
possibility that bid-ask spreads are narrower for larger firms or for firms whose shares are
traded more often. LPRICE, defined as the natural logarithm of the beginning of year
stock price, is included because fixed order costs are spread across more dollars in stocks
that have a higher price and consequently the percentage spread is lower for these stocks
(Stoll, 1978). Finally, ROA and PROA, defined earlier, control for the effect of profitability
on bid-ask spreads.
4.4.4. Results
Panel A of Table 9 presents descriptive statistics for all the dependent and independent
variables in Eqs. (9)–(13) and panel B presents the regression estimates of these models.
The coefficient on FAMILYFIRM is positive and significant for the analyst coverage
model (0.94, t ¼ 3.46), suggesting that family firms enjoy greater analyst coverage than
non-family firms. The coefficient on FAMILYFIRM is negative and significant for the
forecast dispersion model (0.08, t ¼ 4.24), suggesting that for family firms there is less
disagreement on earnings forecasts among analysts. The coefficient on FAMILYFIRM is
negative and significant for the forecast error model (0.12, t ¼ 2.47), suggesting that
for family firms analysts’ forecasts tend to be more accurate. The coefficient on
FAMILYFIRM is negative and significant for the volatility of forecast revision model
(0.06, t ¼ 3.01), suggesting that forecast revisions for family firms are less extreme. The
coefficient on FAMILYFIRM is negative and significant for the bid-ask spread model
(0.66, t ¼ 3.17), suggesting that family firms enjoy greater liquidity. The control
variables in all models, when significant, have the predicted signs, except in two cases. The
coefficients on CORR and RD have the opposite signs in the forecast dispersion, forecast
error and forecast revision models.
Overall, the results in Table 9 are consistent with hypothesis H4a, suggesting that family
firms enjoy larger analyst following, better analysts’ forecast properties and greater
liquidity, probably due to better quality of their reported earnings and because of their
reputation of disclosing bad news through management forecasts.
4.5. Family firm subsamples
To gain additional confidence that difference in the severity of agency problems across
family and non-family firms are responsible for our results, we analyze subsamples of
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family firms that are expected to have difference in the severity of agency problems.
Specifically, we classify family firms into those with founder CEO versus descendent CEO.
We also classify family firms into those with dual class shares versus those without dual
class shares. These classifications are motivated by the findings of Villalonga and Amit
(2006).
4.5.1. Family firms with founder CEO versus descendent CEO

Villalonga and Amit (2006) find that Tobin’s q of family firms with founder CEO is
significantly greater than that of family firms with descendent CEO. They conclude from
the result that family firms with founder CEO have less severe agency problems than
family firms with descendent CEO. Villalonga and Amit (2006) conclusions are consistent
with the findings of Morck et al. (1988), Palia and Ravid (2002), Adams et al. (2003) and
Fahlenbrach (2004), who show that as compared to other firms, founder-CEO firms trade
at a premium. Their conclusion is also consistent with the findings of Smith and Amoako-
Adu (1999) and Pérez-González (2001), who show that stock market reacts negatively to
the news of family heirs appointment as managers.
Thus, we repeat our analyses after classifying family firms into the following three
groups: those with founder CEO, those with descendent CEO, and those with hired CEO.
Specifically, we estimate all the models in the paper after replacing the family firm
indicator variable, FAMILYFIRM, with the following indicator variables: FAMILY-
FIRM_FOUNDER, FAMILYFIRM_DESCENDENT, and FAMILYFIRM_HIRED.
FAMILYFIRM_FOUNDER takes the value of one for family firms with founder CEO,
and zero otherwise, and so on. Table 10 reports abbreviated results from estimating
the models. Specifically, it reports coefficient on the three main variables of interest:
FAMILYFIRM_FOUNDER, FAMILYFIRM_DESCENDENT, and FAMILYFIRM_
HIRED. Panel A reports results for models on earnings quality, panel B reports results
for models on management forecast, and panel C reports results for models on analyst
following, forecast properties, and bid-ask spreads. The results show that in each of the
models the coefficient on FAMILYFIRM_FOUNDER has the same sign as that on the
coefficient on FAMILYFIRM in the corresponding model, reported in previous tables.
Moreover, the coefficients on FAMILYFIRM_FOUNDER are statistically significant in all
the models, except one, the REVISION model. On the other hand, the coefficients on
FAMILYFIRM_DESCENDENT are significant in only two models out of ten.22 Overall,
these results suggest that family firms with founder CEO (rather than family firms with
descendent CEO) are primarily responsible for family firms exhibiting better disclosure
practices and better disclosure-related economic consequences as compared to non-family
firms. Thus, the severity of agency problems seems to be a likely factor in the difference in
disclosure practices we observe across family and non-family firms.
4.5.2. Family firms with and without dual class shares

Villalonga and Amit (2006) also report that Tobin’s q of family firms with control
enhancing mechanism is significantly lower than that of family firms without control
22
Villalonga and Amit (2006) findings also suggest that the severity of agency problems for family firms with
hired CEO lies in between that of family firms with founder CEO and family firms with descendent CEO. Our
results in Table 10 seem consistent with this notion. The coefficient on FAMILYFIRM_HIRED is significant in
five out of ten cases.
274
Table 9
Family firms, analyst following, forecast dispersion, forecast accuracy, variability of forecast revisions, and bid-ask spreads, 1998–2002
Mean Median

COVERAGE 17.41 16.11 3.55*** 16.62 15.42 3.28***
DISP 0.14 0.21 5.23*** 0.07 0.11 7.34***
FERROR 0.43 0.59 2.83*** 0.12 0.21 4.03***
REVISION 0.27 0.35 3.54*** 0.16 0.20 5.86***
SIZE 8.94 8.94 0.04 8.81 8.78 0.19
STDROE 0.08 0.19 0.20 0.07 0.07 0.51
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CORR 0.16 0.11 2.47** 0.20 0.14 2.39**
INVPRICE 0.03 0.03 0.10 0.02 0.03 0.28
RETVAR 102 0.12 0.09 6.64*** 0.07 0.06 8.83***
ACHEPS 0.03 0.04 1.38 0.01 0.02 4.28***
RD 0.04 0.03 2.10** 0.01 0.01 0.44
EFFORT 13.91 15.58 6.29*** 13.17 14.66 6.15***
BROKER 83.71 86.40 2.43** 80.29 82.90 2.48**
ROA 0.06 0.04 4.24*** 0.06 0.04 5.01***
PROA 0.05 0.04 4.76*** 0.04 0.03 5.37***
SPREAD 4.27 5.31 3.41*** 3.62 5.38 4.59***

LTURNOVER 1.76 1.54 3.84*** 1.65 1.44 3.41***
LPRICE 3.74 3.64 2.19** 3.79 3.66 1.96**
Dependant var. ¼ Dependant var. ¼ Dependant var. ¼ Dependant var. ¼ Dependant var. ¼
COVERAGE DISP FERROR REVISION SPREAD
Pred. Coeff. t-stat. Pred. Coeff. t-stat. Pred. Coeff. t-stat. Pred. Coeff. t-stat. Pred. Coeff. t-stat.
Sign sign sign sign sign
Panel B: Regression results

Intercept ? 4.43 2.82** ? 0.55 11.49*** ? 0.84 4.45*** 0 0.57 8.14*** ? 7.18 8.54***
FAMILYFIRM + 0.94 3.46*** 0.08 4.24*** 0.12 2.47** 0.06 3.01*** 0.66 3.17***
SIZE + 3.22 25.86*** 0.04 8.92*** 0.09 4.21*** 0.04 5.87*** 0.07 0.99
STDROE + 0.02 1.01 + 0.05 0.11 + 0.03 0.45 + 0.02 0.71
CORR + 0.19 0.15 0.07 2.25** 0.06 1.02 0.04 1.82*
INVPRICE + 28.56 4.01***
RETVAR 102 + 1.09 0.91
ACHEPS + 1.37 16.01*** + 5.44 15.69*** + 2.15 19.35***
RD + 11.42 3.82*** + 0.42 5.21*** + 1.23 2.49*** + 0.32 1.68*

EFFORT 0.02 1.42
BROKER 0.15 17.22***
LTURNOVER 1.25 6.43***
LPRICE 0.68 2.84***
ROA ? 0.45 0.26 ? 0.33 5.15*** ? 1.82 7.52*** ? 1.01 8.33*** ? 0.79 0.29
PROA ? 6.90 2.44** ? 0.60 4.23*** ? 0.05 0.02 ? 0.75 3.83*** ? 8.55 2.66***
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Adjusted R2 (%) 54.93 21.82 19.21 27.01 18.15
N 1905 1905 1905 1905 1639
Variable definitions: COVERAGE is 12-month average of number of analysts who issued annual earnings forecasts in IBES. DISP is 12-month average of standard
deviation of analysts’ forecasts, deflated by stock price at the beginning of fiscal year. FERROR is the absolute value of 12-month average of forecast errors defined as
actual earnings minus median forecast, deflated by stock price at the beginning of fiscal year. REVISION is the standard deviation of forecast revisions deflated by
stock price at the beginning of fiscal year, where forecast revision is defined as current month median forecast minus previous month median forecast. SPREAD is the
annual average of daily closing bid-ask spread as a percentage of daily closing price. FAMILYFIRM is a dummy variable which equals one for family firms, and zero
otherwise; SIZE is the natural logarithm of market value of equity at the beginning of the fiscal year. STDROE is the standard deviation of ROE in the preceding 10-
year period. CORR is the Pearson correlation between ROE and annual stock return in the preceding 10-year period. INVPRICE is the inverse of stock price at the
beginning of the fiscal year. RETVAR is daily stock return variance estimated over the 200 days prior to the year end. ACHEPS is absolute value of annual change in
earnings per share deflated by stock price at the beginning of the fiscal year. RD is research and development expense deflated by total assets at the beginning of the
fiscal year. EFFORT is the negative of the average number of firms followed by the firm’s analysts in a particular year divided by the number of analysts covering the
firm in that year. BROKER is the average number of analysts employed by the brokerage houses that employ the firm’s analysts. LTURNOVER is the natural
logarithm of the annual median value of daily trading volume divided by total shares outstanding. LPRICE is the natural logarithm of stock price at the beginning of
the fiscal year. ROA is earnings before extraordinary item divided by total assets. PROA is the average of prior 5 years’ earnings before extraordinary items divided by
the average of prior 5 years’ total assets.
The predicted signs on the control variables are based on prior studies. The t-statistics are corrected using the Huber-White procedure. *** indicates significance at the
0.01 level, ** indicates significance at 0.05 level, and * indicates significance at the 0.10 level.
275
ARTICLE IN PRESS
enhancing mechanisms. They conclude from this result that family firms without control
enhancing mechanism have less severe Type II agency problems than those with control
enhancing mechanisms.23 Villalonga and Amit (2006) define control-enhancing mechan-
isms to include voting structures that enable the family’s voting rights to exceed cash flow
rights, such as multiple share classes, pyramids, cross-holdings, and voting agreements.
However, sufficient data is not available in proxy statements on pyramids, cross-holding,
and voting agreements, so we consider only dual class shares in our analysis.
We conduct our analyses after classifying family firms into those with dual class shares
and those without. Specifically, we estimate all the models in the paper after replacing the
family firm indicator, FAMILYFIRM, with the following two indicator variables:
FAMILYFIRM_NODUAL and FAMILYFIRM_DUAL. FAMILYFIRM_NODUAL
takes the value of one for family firms with no dual class shares and is zero otherwise;
FAMILYFIRM_DUAL takes the value of one for family firms with dual class shares and is
zero otherwise. Table 11 reports abbreviated results in the same format as in Table 10. The
results show that in each of the models, the coefficient on FAMILYFIRM_NODUAL has
the same sign as the coefficient on FAMILYFIRM in the corresponding models, reported
in the earlier tables. Moreover, the coefficients on FAMILYFIRM_NODUAL are
statistically significant in all the models. On the other hand, the coefficients on
FAMILYFIRM_DUAL are significant in only two models out of ten.24 These results
suggest that family firms without dual class shares (rather than family firms with dual class
shares) are primarily responsible for family firms exhibiting better disclosure practices and
better disclosure-related consequences as compared to non-family firms. Thus, the severity
of agency problems seems to be a likely factor in the difference in disclosure practices we
observe across family and non-family firms.25
5. Conclusions
In this paper, we examine the corporate disclosures of US family and non-family firms in
the S&P 500. Compared to non-family firms, family firms face less severe agency problems
from the separation of ownership and management (Type I agency problems), but more
severe agency problems from conflicts between controlling and non-controlling share-
holders (Type II agency problems). We predict that these agency problem differences
influence certain corporate disclosure practices across family and non-family firms. 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.
23
Villalonga and Amit (2006) conclusion is also consistent with the findings of Francis et al. (2005), who show
that earnings informativeness decreases as the difference between voting and cash flow rights increases.
24
The number of observations with nonzero value for FAMILYFIRM_DUAL is relatively small (see Table 11).
The lack of significance of the coefficient on this variable could be partly due to this reason.
25
In proposing hypotheses H1a, H1b, H2a, and H2b, we assume that the effect of opportunistic behavior on
disclosure practices dominates the effect of efficient contracting on disclosure practices. We justify this assumption
on the basis of the evidence in Skinner (1993). Our results in Section 4.5 provide further support to this
assumption. For example, family firms without dual class shares have less Type II agency problems than family
firms with dual class shares. Our results that disclosure practices of family firms without dual class shares are of
better quality suggest that the opportunistic behavior effect is dominant. If the efficient contracting effect were
dominant then firms with dual class shares, which have more severe agency problems, would have exhibited better
disclosure practices.
Table 10
Abbreviated results for subsamples of family firms: firms with founder CEO, descendent CEO, and hired CEO, 1998–2002
Dependent variable
PADCA () QUALITY (+) PERSISTENCE (+) ERC (+)

Panel A: Earnings quality
FAMILYFIRM_FOUNDER 2.35 0.53 0.17 1.64
(2.45)** (8.21)*** (2.33)** (3.55)***
[190] [207] [56] [264]
FAMILYFIRM_DESCENDENT 1.34 0.32 0.03 0.81
(0.15) (2.21) (0.22) (0.79)
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[89] [115] [28] [136]
FAMILYFIRM_HIRED 0.93 0.18 0.03 1.18
(1.35) (2.20) (0.75) (2.68)***
[314] [349] [89] [452]
Dependent variable
MGMT_FORECAST () (CHEPSo0)
Panel B: Voluntary management forecast

FAMILYFIRM_FOUNDER 3.51
(4.55)**
[437]
FAMILYFIRM_DESCENDENT 0.68
(0.05)
[248]
FAMILYFIRM_HIRED 1.52
(0.12)
[773]
277
278
Table 10 (continued)
Dependent variable
COVERAGE (+) DISP () FERROR () REVISION () SPREAD ()

Panel C: Analyst following, forecast dispersion, forecast accuracy, variability of forecast revisions, and bid-ask spreads
FAMILYFIRM_FOUNDER 2.15 0.09 0.25 0.03 0.67
(6.01)*** (5.28)*** (2.21)** (1.21) (1.91)*
[223] [223] [223] [223] [193]
FAMILYFIRM_DESCENDENT 0.72 0.05 0.07 0.06 0.23
(1.44) (2.38)** (0.61) (1.05) (1.34)
ARTICLE IN PRESS
[120] [120] [120] [120] [104]
FAMILYFIRM_HIRED 0.61 0.06 0.08 0.08 0.72
(1.86)* (2.41)** (1.44) (3.37)*** (2.26)**
[363] [363] [363] [363] [326]
Variable definitions: FAMILYFIRM_FOUNDER is a dummy variable which equals one when the firm’s founder serves as the CEO in a given firm year, and zero
otherwise; FAMILYFIRM_DESCENDENT is a dummy variable which equals one when descendents of the firm’s founder serves as the CEO in a given firm year, and
zero otherwise; FAMILYFIRM_HIRED is a dummy variable which equals one when the family firm’s CEO is a hired CEO in a given firm year, and zero otherwise;
PADCA is the performance-matched modified-Jones model discretionary accruals. ABSPADCA is the absolute value of PADCA. QUALITY is a binary variable
which equals 1 if RES is less than the median value of RES, where RES is the absolute value of the residual obtained from a regression of future cash flow from
operation on prior period’s earnings components (see Eq. (1)); PERSISTENCE is the slope coefficient, l1, from the following time-series model:
DEPSt ¼ l0+l1DEPSt1+error; DEPSt is the change of earnings before extraordinary items divided by the number of outstanding shares. The model is estimated
from 1995 to 2002 to yield firm-specific l1; MGMT_FORECAST is an indicator variable which equals one if the managers make an earnings forecast of quarterly
earnings, and zero otherwise; COVERAGE is 12-month average of number of analysts who issued annual earnings forecasts in IBES. DISP is 12-month average of
standard deviation of analysts’ forecasts, deflated by stock price at the beginning of fiscal year. FERROR is the absolute value of 12-month average of forecast errors
defined as actual earnings minus median forecast, deflated by stock price at the beginning of fiscal year. REVISION is the standard deviation of forecast revisions
deflated by stock price at the beginning of fiscal year, where forecast revision is defined as current month median forecast minus previous month median forecast.
SPREAD is the annual average of daily closing bid-ask spread as a percentage of daily closing price.
The models in Tables 3–7, and 9 are reestimated after replacing the FAMILYFIRM variable with FAMILYFIRM_FOUNDER, FAMILYFIRM_DESCENDENT,
and FAMILYFIRM_HIRED variables. Coefficient estimates of these three variables are reported in the table. Parentheses next to the dependent variables indicate the
signs of the coefficient estimates on the FAMILYFIRM variable, as reported in earlier tables.
For dependent variables QUALITY and MGMT_FORECAST, the numbers in parentheses are w2 statistics, otherwise the numbers in parentheses are t-statistics. The
t-statistics and w2s are corrected using the Huber-White procedure. *** indicates significance at the 0.01 level, ** indicates significance at 0.05 level, and * indicates
significance at the 0.10 level. The number in the square brackets is the number of observations with non-zero values for the explanatory variable.
Table 11
Abbreviated results for subsamples of family firms: firms with and without dual class shares, 1998–2002
Dependent variable

PADCA () QUALITY (+) PERSISTENCE (+) ERC (+)
Panel A: Earnings quality

FAMILYFIRM_NODUAL 1.46 0.22 0.11 1.47
(2.01)** (3.67)** (1.90)* (4.07)***
[532] [603] [157] [769]
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FAMILYFIRM_DUAL 0.72 0.18 0.04 0.42
(0.73) (1.04) (1.31) (1.39)
[61] [68] [16] [83]
Dependent variable
MGMT_FORECAST () (CHEPSo0)
Panel B: Voluntary management forecast

FAMILYFIRM_NODUAL 2.81
(3.82)**
[1300]
FAMILYFIRM_DUAL 0.42
(0.08)
[158]
Dependent variable
Panel C: Analyst following, forecast dispersion, forecast accuracy, variability of forecast revisions, and bid-ask spreads
FAMILYFIRM_NODUAL 1.15 0.09 0.13 0.06 0.89
(4.26)*** (4.15)*** (1.99)** (3.11)*** (3.21)***
[638] [638] [638] [638] [562]
279
280
Dependent variable
FAMILYFIRM_DUAL 1.12 0.04 0.06 0.06 0.18

(1.87)* (1.18) (1.47) (1.38) (2.53)**
[68] [68] [68] [68] [61]
Variable definitions: FAMILYFIRM_NODUAL is a dummy variable which equals one for family firms with only one class of common stocks;
FAMILYFIRM_DUAL is a dummy variable which equals one for family firms with two classes of common stocks; PADCA is the performance-matched
modified-Jones model discretionary accruals. ABSPADCA is the absolute value of PADCA. QUALITY is a binary variable which equals 1 if RES is less than the
ARTICLE IN PRESS
median value of RES, where RES is the absolute value of the residual obtained from a regression of future cash flow from operation on prior period’s earnings
components (see Eq. (1)); PERSISTENCE is the slope coefficient, l1, from the following time-series model: DEPSt ¼ l0+l1DEPSt1+error; DEPSt is the change of
earnings before extraordinary items divided by the number of outstanding shares. The model is estimated from 1995 to 2002 to yield firm-specific l1;
MGMT_FORECAST is an indicator variable which equals one if the managers make an earnings forecast of quarterly earnings, and zero otherwise; COVERAGE is
12-month average of number of analysts who issued annual earnings forecasts in IBES. DISP is 12-month average of standard deviation of analysts’ forecasts,
deflated by stock price at the beginning of fiscal year. FERROR is the absolute value of 12-month average of forecast errors defined as actual earnings minus median
forecast, deflated by stock price at the beginning of fiscal year. REVISION is the standard deviation of forecast revisions deflated by stock price at the beginning of
fiscal year, where forecast revision is defined as current month median forecast minus previous month median forecast. SPREAD is the annual average of daily closing
bid-ask spread as a percentage of daily closing price.
The models in Tables 3–7, and 9 are reestimated after replacing the FAMILYFIRM variable with FAMILYFIRM_NODUAL and FAMILYFIRM_DUAL variables.
Coefficient estimates of these two variables are reported in the table. Parentheses next to the dependent variables indicate the signs of the coefficient estimates on the
FAMILYFIRM variable, as reported in earlier tables.
For dependent variables QUALITY and MGMT_FORECAST, the numbers in parentheses are w2 statistics, otherwise the numbers in parentheses are t-statistics. The
t-statistics and w2s are corrected using the Huber-White procedure. *** indicates significance at the 0.01 level, ** indicates significance at 0.05 level, and * indicates
significance at the 0.10 level. The number in the square brackets is the number of observations with non-zero values for the explanatory variable.
ARTICLE IN PRESS
We find that reported earnings are of better quality for family firms as compared to non-
family firms. We measure earnings quality by the level of discretionary accruals in
earnings, the ability of earnings’ components to predict future cash flows, the persistence of
earnings, and earnings response coefficient. Our finding is consistent with the notion that
family firms face less severe Type I agency problems and more severe Type II agency
problem, but overall they face less severe agency problems than non-family firms. Less
severe agency problems lead to less manipulation of earnings for opportunistic reasons and
thereby higher earnings quality.
We also find that compared to non-family firms, family firms are more likely to warn
about poor earnings through management earnings forecasts. This finding is also
consistent with the notion that compared to non-family firms, family firms face less severe
agency problems, leading to less opportunistic behavior in terms of withholding bad news.
Next, we find that compared to non-family firms, family firms make less voluntary
disclosure about corporate governance practices in their regulatory filings. This result is
consistent with the notion that family firms have incentive to reduce the transparency of
corporate governance practices to facilitate getting family members on boards without
interference from non-family shareholders.
We also find that compared to non-family firms, family firms have greater analyst
following, lower dispersion in analysts’ forecasts, smaller forecast errors, less volatile
forecast revisions, and smaller bid-ask spreads. These results are consistent with the notion
that since family firms make better disclosure about their financial performance, these types
of benefits are likely to accrue to a greater extent to family firms than non-family firms.
Finally, we find that family firms with founder CEO, rather than family firms with
descendent CEO, are primarily responsible for family firms exhibiting better disclosure
practices and disclosure-related consequences as compared to non-family firms. We also
find that family firms without dual class shares, rather than family firms with dual class
shares, are primarily responsible for family firms exhibiting better disclosure practices and
disclosure-related consequences as compared to non-family firms. Villalonga and Amit
(2006) suggest that family firms with founder CEO as compared to those with descendent
CEO and family firms without dual class shares as compared to those with dual class
shares have less severe agency problems. Thus, our results increase our confidence in the
conclusion that the difference in the severity of agency problems is a likely reason for the
difference in disclosure practices we observe across family and non-family firms.
Family ownership and control is dominant among publicly traded firms throughout the
world (Burkart et al., 2003). Note however that the comparison we provide between the
disclosure practices of US family and non-family firms may not apply to firms in other
countries. There are many institutional differences across countries that need to be
considered. For example, the legal rules covering protection of shareholders and the
quality of their enforcement vary considerably across countries (La Porta et al., 1998,
2000). Accordingly, the difference in the severity of agency problems and therefore the
difference in the disclosure practices across family and non-family firms would vary across
countries.
Acknowledgments
We are grateful for helpful comments from Amy Hutton (the reviewer and the
discussant), S.P. Kothari (the editor), participants at the 2005 JAE Conference on
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Corporate Governance, and workshop participants at Texas Christian University. We are

also thankful to Standards and Poor’s for providing the Transparency and Disclosure
(T&D) data and to Ian Byrne and Bruce Hamann for assistance with the data.
Appendix A. S&P transparency and disclosure practice questions

Transparency of Ownership (11 questions)
1. Provide a description of share classes?
2. Provide a review of shareholders by type?
3. Provide the number of issued and authorized but non-issued ordinary shares? (2
questions)
4. Provide the par value of issued and authorized but non-issued ordinary shares? (2
questions)
5. Provide the number of issued and authorized but non-issued shares of preferred,
nonvoting, and other classes? (2 questions)
6. Provide the par value of issued and authorized but non-issued shares of preferred, non-
voting, and other classes? (2 questions)
7. Does the company disclose the voting rights for each class of shares?
Concentration of Ownership (8 questions)
1. Top 1, 3, 5, or 10 shareholders disclosed? (4 questions)
2. Shareholders owning more than 10, 5, or 3 percent is disclosed? (3 questions)
3. Does the company disclose percentage of cross-ownership?
Voting and Shareholder Meeting Procedures (9 questions)
1. Is there a calendar of important shareholder dates?
2. Review of shareholder meetings (could be minutes)?
3. Describe procedure for proposals at shareholder meetings?
4. How shareholders convene an extraordinary general meeting?
5. How shareholders nominate directors to board?
6. Describe the process of putting inquiry to board?
7. Does the annual report refer to or publish Corporate Governance Charter or Code of
Best Practice? (2 questions)
8. Are the Articles of Association or Charter Articles of Incorporation published?
Business Focus (15 questions)
1. Is there a discussion of corporate strategy?
2. Report details of the kind of business it is in?
3. Does the company give an overview of trends in its industry?
4. Report details of the products or services produced/provided?
5. Provide a segment analysis, broken down by business line?
6. Does the company disclose its market share for any or all of its businesses?
7. Does the company report basic earnings forecast of any kind? In details? (2 questions)
8. Disclose output in physical terms?
9. Does the company give an output forecast of any kind?
10. Does the company give characteristics of assets employed?
11. Does the company provide efficiency indicators (ROA, ROE, etc.)?
12. Does the company provide any industry-specific ratios?
13. Does the company disclose its plans for investment in the coming years?
ARTICLE IN PRESS
14. Does the company disclose details of its investment plans in the coming years?
Accounting Policy Review (9 questions)
1. Provide financial information on a quarterly basis?
2. Does the company discuss its accounting policy?
3. Does the company disclose accounting standards it uses for its accounts?
4. Does the company provide accounts according to the local accounting standards?
5. Does the company provide accounts in alternate internationally recognized accounting
method?
6. Does the company provide each of the balance sheet, income statement, and cash-flow
statement by internationally recognized methods? (3 questions)
7. Does the company provide a reconciliation of its domestic accounts to internationally
recognized methods?
Accounting Policy Details (3 questions)
1. Does the company disclose methods of asset valuation?
2. Does the company disclose information on method of fixed assets depreciation?
3. Does the company produce consolidated financial statements?
Related party Structure and Transactions (4 questions)
1. Provide a list of affiliates in which it holds a minority stake?
2. Does the company disclose the ownership structure of affiliates?
3. Is there a list/register of related party transactions?
4. Is there a list/register of group transactions?
Information on Auditors (4 questions)
1. Does the company disclose the name of its auditing firm?
2. Does the company reproduce the auditors’ report?
3. Disclose how much it pays in audit fees to the auditor?
4. Disclose any non-audit fees paid to auditor?
Board Structure and Composition (8 questions)
1. Is there a chairman listed?
2. Detail about the chairman (other than name/title)?
3. Is there a list of board members (names)?
4. Are there details about directors (other than name/title)?
5. Details about current employment/position of directors provided?
6. Are details about previous employment/positions provided?
7. Disclose when each of the directors joined the board?
8. Classifies directors as an executive or an outside director?
Role of the Board (12 questions)
1. Details about role of the board of directors at the company?
2. Is there disclosed a list of matters reserved for the board?
3. Is there a list of board committees?
4. Review last board meeting (could be minutes)?
5. Is there an audit committee?
6. Disclosure of names on audit committee?
7. Is there a remuneration/compensation committee?
8. Names on remuneration/compensation committee)?
ARTICLE IN PRESS
9. Is there a nomination committee?

10. Disclosure of names on nomination committee?
11. Other internal audit functions besides audit committee?
12. Is there a strategy/investment/finance committee?
Director training and compensation (6 questions)
1. Disclose whether they provide director training?
2. Disclose the number of shares in the company held by directors?
3. Discuss decision-making process of directors’ pay?
4. Are specifics of directors’ salaries disclosed (numbers)?
5. Form of directors’ salaries disclosed (cash, shares, etc.)?
6. Specifics disclosed on performance-related pay for directors?
Executive Compensation and Evaluation (9 questions)
1. List of the senior managers (not on the board of directors)?
2. Backgrounds of senior managers disclosed?
3. Number of shares held by the senior managers disclosed?
4. Disclose the number of shares held in other affiliated companies by managers?
5. Discuss the decision-making of managers’ (not board) pay?
6. Numbers of managers’ (not on board) salaries disclosed?
7. Form of managers’ (not on board) salaries disclosed?
8. Specifics disclosed on performance-related pay for managers?
9. Details of the CEO’s contract disclosed?
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Corporate Disclosures by Family Firms: Ashiq Ali, Tai-Yuan Chen, Suresh Radhakrishnan

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ARTICLE IN PRESS

Journal of Accounting and Economics 44 (2007) 238–286

Corporate disclosures by family ﬁrms

JEL classification: G32; M41; M43; M45

Firms that are managed or controlled by founding families, hereafter, referred to as

managers of non-family and controlling shareholders of family ﬁrms face incentives to

2.1. Family firms and agency problems

2.1.1. Separation of ownership and management (Type I agency problem)

2.1.2. Conflict between controlling and non-controlling shareholders (Type II agency

2.2. Family firms and corporate disclosures

2.2.1. Earnings quality

2.2.2. Management forecasts of earnings

2.2.3. Corporate governance related disclosures

2.2.4. Benefits of better financial disclosures by family firms

3.1. Descriptive statistics of characteristics of family and non-family firms

Panel A of Table 2 provides descriptive statistics on the salient characteristics of family

SIC Industry description Non-family Family ﬁrms Percent of

SIC Industry description Non-family Family ﬁrms Percent of

Family ﬁrms Non-Family Difference t- Family ﬁrms Non-Family Difference z-

Panel B: Corporate governance characteristics of family and non-family firms

Family ﬁrms Non-Family Difference t- Family ﬁrms Non-Family Difference z-

A. Ali et al. / Journal of Accounting and Economics 44 (2007) 238–286

Panel C: Financial characteristics of family and non-family firms

No. of observations 177 323 177 323

4.1. Earnings quality

4.1.1. Discretionary accruals

PADCA ¼¼ a þ b1 FAMILYFIRM þ b2 L1ACCRUAL þ b3 SIZE þ b4 MA

4.1.2. Predictability of cash flows

A. Ali et al. / Journal of Accounting and Economics 44 (2007) 238–286

Variables Predicted sign Dependant var. ¼ ABSPADCA Dependant var. ¼ PADCA

Coeff. t-stat. Predicted sign Coeff. t-stat.

Panel B: Regression estimates

A. Ali et al. / Journal of Accounting and Economics 44 (2007) 238–286

QUALITY ¼ a þ b1 FAMILYFIRM þ b2 OWNER þ b3 CAPITAL

4.1.3. Earnings persistence

Family ﬁrm Non-family Difference Family ﬁrm Non-family Difference

Panel A: Descriptive statistics

No. of observations 671 1165 671 1165

Dependent var. ¼ QUALITY

Variables Predicted sign Coeff. Wald w2 Marginal probability

Panel B: Logistic model estimates

Likelihood ratio 358.64

No. of observations 1836

Family Non-family Difference Family Non-family Difference

Panel A: Descriptive statistics

Variables Dependent var. ¼ PERSISTENCE

Predicted sign Coeff. t-stat.

Panel B: Regression estimates

4.1.4. Earnings response coefficient

4.2. Management forecasts of earnings

We examine the likelihood of management issuing quarterly earnings forecasts across

Panel A: Descriptive statistics

No. of observations 852 1450 852 1450

Dependent var. ¼ RETURN Dependent var. ¼ RETURN Dependent var. ¼ RETURN

Variables Predicted sign Coeff. t-stat. Coeff. t-stat. Coeff. t-stat.

Panel B: Regression estimates

Dependent var. ¼ RETURN Dependent var. ¼ RETURN Dependent var. ¼ RETURN

Variables Predicted sign Coeff. t-stat. Coeff. t-stat. Coeff. t-stat.

EARNINGS VAR 0.11 1.39

A. Ali et al. / Journal of Accounting and Economics 44 (2007) 238–286

4.3. Voluntary disclosure of corporate governance practices

Panel A: Descriptive statistics

A. Ali et al. / Journal of Accounting and Economics 44 (2007) 238–286

SPREAD 4.27 5.31 3.41* 3.62 5.38 4.59*