Friday, July 20, 2007

Do family firms disclosure more? or less?

Quick--more or less?

Answer: less.

If you said "less" you are correct. And will enjoy the article knowing you got it right!
If you said "more" you are incorrect and will get alot out of the article!

Chen, Chen, and Cheng examine"family firms:
" important organization form, it accounts for approximately 46% of the S&P 1500 firms.1 Family firms are characterized by the founding family’s concentrated ownership and the founding family members’ active involvement in firms’ management either as top executives or as directors."
There are many reasons why family firms may release information less differently than other firms. Again in the authors' words:
"Family firms’ unique ownership structure has important implications for their voluntary disclosure practices. First, family owners have longer investment horizons than other shareholders... This implies that: (1) the benefits of accelerating timely information...accrue less to family owners, and (2) family owners stand to bear the potential cost, such as proprietary costs or costs arising from managers’ emphasis on short-term rather than long-term performance.

Second, family owners’ active involvement in firms’ management results in lower information asymmetry between themselves and managers...the demand for information from non-family owners to monitor managers is lower due to the substitutive relation between direct monitoring and public disclosure....

The above arguments thus imply that family owners prefer less public voluntary disclosure."
The findings support the hypothesis for less voluntary disclosure:
"Based on 4,415 firm-years from the S&P1500 firms in the period 1996-2000, we find that family firms exhibit a lower likelihood of providing management forecasts than non-family firms. Specifically, the likelihood of voluntary management forecasts is 8.1 percentage points lower for family firms than for non-family firms, ceteris paribus. The lower propensity of voluntary disclosure in family firms is evident in both good news forecasts (9.0 percentage points lower) and bad news forecasts (5.4 percentage points lower)."
While fairly convincing, there is another explanation. I will call it the Adelphia Experience where the firm discloses less because the owners do not want to disclose anything and due to their large stake, they do not need to. Of course given the relative valuations of family firms this cynical view appears to be the important exception.

As many of you know my family owns a very small chain of grocery stores, what you may not know is that the owners (my dad and uncles) are also notoriously secretive about every financial number. So this one hits close to home.

Good read.

Chen, Shuping, Chen, Xia and Cheng, Qiang, "Do Family Firms Provide More or Less Voluntary Disclosure?" (May 2007). Available at SSRN:

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