We study the disclosure incentives for family firms by examining the characteristics of their quarterly earnings forecasts and analysts’ and investors’ responses to them. Forecasts offered before the fiscal quarter-end (guidance) by S&P 500 family firms are generally more specific and timely than those offered by S&P 500 non-family firms, particularly when they convey bad news or confirm analysts’ current expectations. Further, family firm guidance elicits a stronger response from both analysts and investors. While many of these differences largely disappear when the forecasts are offered after the quarter-end but before the earnings announcement itself (preannouncements), family firm preannouncements still tend to be more specific when they contain bad news. These more specific preannouncements also generate a significantly stronger response from analysts. Overall, our results suggest that large, visible family firms use manager-generated earnings forecasts to create a more transparent information environment, and that these forecasts are likely to be most useful in reducing information asymmetry and agency costs when they are issued as guidance.
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Key Words: Management earnings forecasts, family firms, preannouncements, earnings warnings.
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Family firms are generally defined as companies that are significantly influenced by founding family members or their descendants, through large shareholdings and/or operational control.
Anderson and Reeb (2003a, 2003b) report that family members hold approximately 18% of the equity of the family firms in the S&P 500, on average, and control 45% of the CEO positions. In addition, family members often hold seats on the board of directors or are part of upper-level management in these firms (“Family Inc.”, Business Week, November 10, 2003). The structure inherent in these family firms gives rise to different agency problems than those in firms with much greater separation of ownership and control. Specifically, the family firm structure significantly limits the agency problems that arise from the separation of ownership and control (often referred to as Type I agency problems) while exacerbating those that arise in the conflict between controlling and non-controlling shareholders (often referred to as Type II agency problems, see Ali et al. 2007, Chen et al. 2007, Wang 2006 and Anderson and Reeb 2003a). It is well known that the second type of agency problem can be partially mitigated by frequent and transparent disclosure. However, it is also possible that reputational concerns may arise from the long-term nature of family members’ investment in their firm, mitigating this problem and reducing the need for more frequent and transparent disclosure (Wang 2006).
The purpose of this paper is to add to our understanding of these competing incentives for differential disclosure by examining the characteristics of quarterly earnings forecasts issued by the management of family firms and the response of sell-side analysts and investors to them.
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