A review of Chen, S., X. Chen, and Q. Cheng, 2008, “Do Family Firms Provide More or Less Voluntary Disclosure?,” Journal of Accounting Research 46 (3), 499-536.
I. Research question and its importance
This paper examines the relation between ownership structure and voluntary disclosure practices. Drawing on the literatures of voluntary disclosure and earning quality, this paper reconciles the conflicting incentives to voluntary disclosure of founding family. Compared with nonfamily owners, the authors postulate that family owners have longer investment horizon as well as less information asymmetry for the firms they have founded. Hence, founding family may prefer less voluntary disclosure. Yet, another view pertaining the cost of nondisclosure (e.g., cost of capital or litigation risk) is primarily born by family owners, thus incentivizing them to provide more disclosures. The authors address this discrepancy in a novel way that they extend and refine the sample. For one, they include more midsize and small firms since family firms are predominately smaller in the U.S. (i.e., apart from common scholarly practice using S&P 500, they cover additionally both S&P 400 and 600, for the year 1996 to 2000). For another, they verify and update family ownerships on annual basis (while most other works did not). In brief, this paper contributes to this stream of literature with better quality of data and thus warrants higher external validity.
II. Method, finding, and limitation
The authors measure the independent variable family firm using two alternative sets of definition: continuous family ownership and 5% ownership threshold. They measure the dependent variable voluntary disclosure with two sets of definition: the likelihood of management forecast and holding conference call. For a cross-section analysis, multiple logit regression was employed, with controls for other aspects of ownership structure (e.g., institution owners, etc.). Their findings are similar using either set of definitions. On the one hand, family firms are less likely to provide earning forecast or conference call. This finding is consistent with the argument that family firms in general have longer investment horizon and less asymmetry between manager and owner. On the other hand, family firms are more likely to offer earning warnings, supporting the idea that they bear reputation concerns and litigation risk.
III. Future research
The paper documents the association between ownership structure and voluntary disclosure practices. Its finding opens several avenues for future research. Despite constructing a longitudinal dataset, this paper adopts a cross-sectional research design that inherently fails to address for endogeneity. Future research might adopt an event study methodology that considers “shock” such as switching from family frim to non-family firm, to observe the difference in voluntary disclosure. Besides, as mentioned (yet not empirically tested) by the authors, family firms have longer investment horizon and entrenchment compared to nonfamily ones. Does it imply family firms are more rigid than others? For instance, whether family firms perform worse in resource redeployment owing to entrenchment, such as in the time of pandemic, remains more scholarly examination.