Reporting strategies: What makes family firms beat around the bush? Family-related antecedents of annual report readability

Journal of Family Business Strategy 9 (2018) 142–150

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Journal of Family Business Strategy journal homepage: www.elsevier.com/locate/jfbs

Reporting strategies: What makes family firms beat around the bush? Family-related antecedents of annual report readability☆

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Carlo Dragoa, Gianluca Ginestib, , Claudia Pongellic, Salvatore Sciasciad University of Rome “Niccolò Cusano”, Via Don Carlo Gnocchi 3, 00166 Rome, Italy University of Naples “Federico II”, Monte S. Angelo University Campus, via Cinthia, Napoli, Italy c LUISS University, Viale Romania 32, 00197 Rome, Italy d IULM University, Via Carlo Bo 8, 20143 Milano, Italy a

b

A R T I C L E I N F O

A B S T R A C T

Keywords: Family business Reporting strategies Annual report readability Family power Family name Generational stage

We investigate the heterogeneity of reporting strategies across family firms by focusing on the readability of annual reports. Adopting the socioemotional wealth perspective, we introduce three family-related antecedents of annual report readability to accounting and family business literature: family power, the overlap between family and firm name, and generational stage. Our findings, based on the textual analysis of 288 annual reports of Italian listed family firms, reveal that annual report readability increases at higher levels of family power, decreases at later generational stages, and when the firm carries the family name.

1. Introduction Academic interest in accounting research in the family business field is growing (Prencipe, Bar-Yosef, & Dekker, 2014; Salvato & Moores, 2010; Songini, Gnan, & Malmi, 2013). In recent years, scholars have explored whether family firms differ from non-family firms in their reporting strategies (e.g., Ali, Chen, & Radhakrishnan, 2007; Campopiano & De Massis, 2015; Cascino, Pugliese, Mussolino, & Sansone, 2010; Prencipe, Markarian, & Pozza, 2008; Shujun, Baozhi, & Zili, 2011). However, in light of the fact that the variance among family firms may be even greater than between family and non-family firms (Chrisman & Patel, 2012), the following research question remains unanswered: What drives heterogeneous reporting strategies across family firms? With the aim of moving a step forward in this field of inquiry, and in line with studies on the “readability/reading ease manipulation” in accounting narratives (Brennan, Guillamon-Saorin, & Pierce, 2009; Merkl-Davies & Brennan, 2007), we focus on a key aspect of reporting strategies, i.e., annual report readability (Lawrence, 2013; Lehavy, Li, & Merkley, 2011; Li, 2008; Lo, Ramos, & Rogo, 2017). The notion of “readability” generally refers to the extent to which a document is easy to understand in terms of its composition and text-based style (Courtis, 2004; Merkl-Davies & Brennan, 2007). A growing number of recent studies claim that the readability of annual reports is a key element of communication between managers and stakeholders (De Franco, Hope,

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Authors are listed in alphabetical order (with all authors having contributed equally). Corresponding author. E-mail address: [email protected] (G. Ginesti).

https://doi.org/10.1016/j.jfbs.2017.11.006

Available online 01 December 2017 1877-8585/ © 2017 Elsevier Ltd. All rights reserved.

Vyas, & Zhou, 2015; Lang & Stice-Lawrence, 2015; Lo et al., 2017; Lundholm, Rogo, & Zhang, 2014; Stone, 2011). Managers can help investors reduce processing costs by making information more readable, as disclosure readability increases the investors’ ability to understand the firm’s business strategies, activities, and results (Bonsall & Miller, 2017; Guay et al., 2016; Lang & Stice-Lawrence, 2015; Loughran & McDonald,2014). In addition, financial report readability plays a significant role in improving perceptions of the management’s reliability in the long run (Lawrence, 2013; Lundholm et al., 2014; Rennekamp, 2012). Since the annual report is the primary source of information for external parties (Dawkins & Fraas, 2013; Jeanjean, Lesage, & Stolow, 2010; Jeanjean, Stolow, Erkens, & Yhon, 2015), a natural concern arises when managers deliberately obfuscate some important information to alter stakeholder perceptions (Brennan et al., 2009; Courtis, 2004; Li, 2008; Merkl-Davies & Brennan, 2007; Stanton & Stanton, 2002). Building on the recent theoretical article of Gómez-Mejía, Cruz, and Imperatore (2014), and incorporating the socioemotional wealth (SEW) logic in reporting strategies, we argue that the readability of annual reports among family firms depends on the emphasis placed on the specific dimension of SEW that family principals prioritize, i.e., “family control and influence” vs. “family identity”. Thus, we introduce three family-related antecedents that may enable understanding the variation in annual report readability among family firms: family power, the overlap between firm and family name, and generational stage. Relying

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the advantages and potential drawbacks of decisions on the quality of financial reports depends on which dimension of SEW the family members prioritize. The scholars focus on two dimensions of SEW, i.e., “family control and influence” and “family identity”, which represent not only two different types of non-economic utilities that family members obtain from owning the firm, but also two different reference points that explain heterogeneous behaviors in family firms (Berrone et al., 2012). The “family control and influence” dimension is related to the family principals’ willingness to preserve and pass on to future generations direct or indirect family control and influence over the business. The “family identity” dimension is instead related to the family’s close identification with the firm (Berrone et al., 2012; GómezMejía et al., 2011; Zellweger, Kellermanns, Chrisman, & Chua, 2011; Zellweger, Nason, Nordqvist, & Bush, 2013). According to Gómez-Mejía et al. (2014), the quality of information disclosed is higher (i.e., more verifiable and credible) when family principals prioritize the “family identity” dimension of SEW. Conversely, the quality worsens (i.e., is less verifiable and credible) when family principals prioritize “family control and influence”. The reason lies in the strong role of reputational issues for the owning family when family identity is prioritized: the desire to protect the family’s reputation and promote a positive image gives family members the incentive to disclose more transparent information. By contrast, when family control and influence are prioritized, family principals are assumed to alter non-family stakeholders’ perceptions by engaging in impression management to preserve family control. Impression management refers to the management’s opportunistic use of information disclosure to either improve the perception of corporate achievement or hide information that could negatively affect their position (Hooghiemstra, 2000; Leary & Kowalski, 1990). Accordingly, previous research argues that managers may not present transparent information and are incentivized to manipulate the readability of reports (Brennan et al., 2009; Courtis, 2004; Li, 2008; Merkl-Davies & Brennan, 2007). Hence, the SEW lens enables grasping how and why family members decide to influence annual report readability – as a key aspect of the quality of financial reports – depending on which SEW dimension is emphasized and therefore used as a reference point in their reporting decisions. However, the antecedents that shape the prioritization of one SEW dimension over the other are still unclear. Thus, to understand which factors drive the emphasis on the aforementioned SEW dimensions and consequently influence annual report readability in family firms, our study focuses on three firm-specific antecedents: family power, overlap between firm and family name, and generational stage.

on a hand-collected sample of 288 annual reports of Italian listed family firms in the period 2008–2013, we find that annual report readability increases at higher levels of family power, decreases at later generational stages, and when the firm carries the family name. This study contributes to family business literature by providing evidence of the heterogeneity of family firms in their reporting strategies. We respond to the call for research to grasp the heterogeneity of family firms in any business aspect (Chrisman, Sharma, & Taggar, 2007). In doing so, we contribute to establishing the SEW perspective as an emerging theoretical approach to understand the reporting strategies of family firms (Gómez-Mejía, Cruz, Berrone, & De Castro, 2011). Second, in line with studies on the “readability/reading ease manipulation” in narrative reporting, we also respond to recent calls in accounting literature seeking novel insights on reporting issues in the context of family firms (Gómez-Mejía et al., 2014; Prencipe et al., 2014). Indeed, we propose three new drivers of the variance in the readability of annual reports, contributing to a deeper understanding of reporting strategies in listed family firms. The remainder of the paper is structured as follows. The next section introduces the SEW logic to annual report readability in family firms, followed by a set of three hypotheses. We then describe the research methodology, i.e., the sample, data collection, textual analysis, variables, regression models, and robustness tests. Thereafter, we present the results and discuss our findings and their implications. 2. Theoretical development 2.1. Annual report readability in family firms: a SEW approach In the last decade, the SEW approach has emerged as a new theoretical lens to investigate decision-making in family business and understand the distinctive features of this type of organization. Socioemotional wealth refers to the affective endowments of the family business and includes a variety of potential non-economic returns that family members obtain from owning and managing their firm, such as family control and influence, a sense of shared identity and emotional attachment, the creation and maintenance of social ties, the perpetuation of the family dynasty (Berrone, Cruz, & Gómez-Mejía, 2012; Gómez-Mejía, Haynes, Nuñez-Nickel, Jacobson, & Moyano-Fuentes, 2007; Gómez-Mejía et al., 2011). Grounded in behavioral agency theory (Wiseman & Gómez-Mejía, 1998), the SEW approach contends that family decision-makers consider threats and risks according to a subjective view of what matters to their welfare, rather than drawing on economic evaluations that compare risks against financial returns. Accordingly, SEW preservation is considered the primary reference point for strategic decision-making in family firms. Moving from the seminal article of Gómez-Mejía et al. (2007), scholars have used the concept of SEW preservation to predict various family firm decisions, including accounting practices. Accounting contributions mostly focus on earnings management (Achleitner, Günther, Kaserer, & Siciliano, 2014; Martin, Campbell, & Gómez-Mejía, 2016; Pazzaglia, Mengoli, & Sapienza, 2013; Stockmans, Lybaert, & Voordeckers, 2010) with only scant attention to financial disclosure (for a review, see Prencipe et al., 2014). However, the recent Gómez-Mejía et al. (2014) study has enabled moving a step forward in understanding financial disclosure in family firms by shedding light on the SEW-related mechanisms underlying the decision on the quality of financial reports. Family members consider this type of decision as a gamble in which SEW preservation is used as a reference point to estimate the costs and benefits of the gamble. More precisely, family principals are willing to bear the potential cost of the gamble (e.g., undesired attention of regulators) if they deem that a SEW reward is associated with it (e.g., reputational gains), whereas they are not willing to do so if they perceive that family SEW is under threat (Gómez-Mejía et al., 2014). Specifically, Gómez-Mejía et al. (2014) argue that the evaluation of

2.2. Annual report readability and family power Family power refers to the degree of family involvement in ownership, corporate boards, and leadership (Astrachan, Klein, & Smyrnios, 2002; Klein, Astrachan, & Smyrnios, 2005; Mazzola, Sciascia, & Kellermanns, 2013). Prior research reports that family power is likely to affect accounting performance and financial disclosure (Anderson & Reeb, 2003; Audretsch, Chen, Chen, & Cheng, 2008; Hulsbeck, & Lehmann, 2013; Poutziouris, Savva, & Hadjielias, 2015; Sacristán-Navarro, Gómez-Ansón, & Cabeza-García, 2011; Villalonga & Amit, 2006). We suggest that family power can influence annual report readability in family firms by shaping the prioritization of “family control and influence” vs. “family identity”. We contend that when family power remains at moderate levels, family principals perceive themselves as vulnerable actors within the firm. A recent study suggests that when the family firm is under conditions of vulnerability (e.g., performance under aspiration levels), family principals are willing to deemphasize their family control preservation goals to foster financial goals with the final aim of safeguarding the firm’s longevity and, in turn, their SEW endowment (Gómez-Mejía, Patel, & Zellweger, 2015). However, when the family members’ position within the firm is 143

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H2. The overlap between firm and family name is positively associated with annual report readability in family firms.

vulnerable as opposed to the family business itself, we suggest they will do all they can to protect their control and influence, giving prominent priority to this SEW dimension. Therefore, to preserve their control and influence, and to avoid interference from non-family shareholders and external stakeholders, family principals may be willing to manipulate the readability of the annual report. Indeed, reduced readability in information disclosure would decrease the possibility of checking the information disclosed and the potentially threat to the family’s decisions as well as the family’s influence over the business (Ali et al., 2007; Gómez-Mejía et al., 2014; Mercer, 2004). On the contrary, when family power is high, family principals are assumed to perceive themselves in a safe position within the firm and therefore feel more confident in releasing more readable corporate reports. Hence, we propose that the higher the family power, the higher the annual report readability.

2.4. Annual report readability and generational stage Generational stage can be defined as the generation that controls the family business (Cruz & Nordqvist, 2012; Kellermanns & Eddleston, 2006; Kellermanns, Eddleston, Barnett, & Pearson, 2008). At later generational stages, when the founder no longer has a pivotal position, the overall SEW preservation tendency of family members is found to decrease compared to the goal of increasing economic wealth (GómezMejía et al., 2007; Van Gils, Voordeckers, & Van den Heuvel, 2004). Prior studies relate the de-emphasis of SEW goals across subsequent generations to the emergence of family branches (Sciascia, Mazzola, & Kellermanns, 2014). More precisely, the emergence of family branches is linked to a reduction in the priority given to “family identity”. Indeed, family branches are likely to be committed to their branch-specific goals and priorities, resulting in diluted family ties (Gersick, Davis, Hampton, & Lansberg, 1997; Ensley & Pearson, 2005; Le Breton-Miller & Miller, 2013). Moreover, members of different branches of the family may not be as cohesive as members of the same nuclear family (Le Breton-Miller & Miller, 2013). Thus, family principals start identifying themselves as family nurturers of their own branch rather than perceiving a unique and shared family identity (Sciascia et al., 2014) with the consequence that the SEW priorities stemming from the shared family and business identity may be less important drivers of decisions (Pongelli, Caroli, & Cucculelli, 2016). Their branch-specific nurturer role may lead family members to serve their family branch through the business, sometimes at the expense of non-family shareholders and less active family shareholders belonging to other family branches (Kowalewski, Talavera, & Stetsyuk, 2009; Sciascia & Mazzola, 2008; Sraer & Thesmar, 2007). To reduce the visibility of opportunistic actions, we argue that family principals at later generational stages may be incentivized to develop opaque corporate reports where the information disclosed has a low degree of readability. A reduction in annual report readability may help them conceal decisions made in relation to providing jobs and contracts for relatives (Claessens, Djankov, Fan, & Lang, 2002; Cruz, Gómez-Mejía, & Becerra, 2010; Gómez-Mejía, Nuñez-Nickel, & Gutierrez, 2001; Volpin, 2002) or generous dividend payments that could hinder resource availability for future investments (Bertrand & Schoar, 2006; Bloom & Van Reenen, 2007). Therefore, we propose that the later the generational stage, the lower the annual report readability.

H1. High family power is positively associated with annual report readability in family firms. 2.3. Annual report readability and the overlap between firm and family name The names of private family firms very often include or derive from the controlling family’s surname. When there is an overlap between the family and the firm name, the family is strongly associated with the business and highly visible within the firm (Craig, Dibrell, & Davis, 2008). The higher the visibility of the family in the firm, the more the boundaries between the family and the firm are blurred, so that the identity of family members within the family business is inseparable from the firm’s (Deephouse & Jaskiewicz, 2013; Zellweger et al., 2013). The company name is an important component of the firm’s identity (Glynn & Abzug, 2002) and internal as well as external stakeholders consequently consider the firm an extension of the family itself. Dyer and Whetten (2006) find that family owners with their “name on the building” scarcely distance themselves from the firm and perceive a greater responsibility to guarantee that the firm’s behaviors do not harm the family’s reputation. In other words, family identity is the glue that binds the group members under the common goal and pride in fulfilling family firm obligations (Berrone et al., 2012; Zellweger, Eddleston, & Kellermanns, 2010; Zellweger et al., 2013). When the firm carries the family name, the family and the organization are especially intermeshed, with the consequence that the firm’s behaviors will have strong repercussions on the family’s image and reputation (Binz, Hair, Pieper, & Baldauf, 2013; De Massis, Kotlar, Mazzola, Minola, & Sciascia, 2016). The family’s personification with the business influences the firm’s communication decisions. For instance, this is especially visible in branding strategies where family members have to choose the specific elements they want to communicate to external stakeholders, i.e., the values, beliefs, and norms that constitute the family’s identity and which they seek to mirror in their family business brand (Craig et al., 2008; Krappe, Goutas & von Schlippe, 2011; IFB Research Foundation, 2015; Micelotta & Raynard, 2011). Similarly, we contend that the overlap between the firm and the family name, reinforcing the “family identity” as a reference point in decision-making, makes family members especially careful about the image they convey to external stakeholders through the annual report, with positive consequences on its readability. Indeed, preserving the family’s reputation becomes a key goal of the firm, and the family principals will be more willing to disclose readable information as the lack of transparency in corporate reports may endanger their reputation (Gómez-Mejía et al., 2014). Conversely, when the firm does not carry the family name, the family principals may act in relative anonymity and the firm’s strategies may therefore not necessarily affect their personal reputation (Dyer & Whetten, 2006). Hence, the “family identity” SEW dimension is de-emphasized and the incentive to guarantee annual report readability may lose relevance.

H3. Later generational stages are negatively associated with annual report readability in family firms. Fig. 1 presents the proposed model summarizing the three hypotheses.

Fig. 1. Our proposed model on the drivers of annual report readability in family firms.

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Table 1 Description of the variables. Variables

Measurement

Readability measures FOG

0.4 * (words_per_sentence + percentage_of_complex_words)

FLESCH FILE_SIZE READ_IND Firms specific factors TASSET (size) LEV (leverage) ROA (profitability) F_AGE (firm age) EAR_VOL (volatility of business) GEO_SEG (complexity of operations) BUS_SEG (complexity of operations) BIG_4 (auditor type) Family-related variables FAM_LEAD (family leadership) FAM_BD (family involvement in board) FAM_OW (family involvement in ownership) FAM_NAME (family name) FAM_GEN (generation that controls and manages the family business)

Source

Open source readability software (11.8 * number of syllables/number of words) + (0.39 * number of words/number of Open source sentences) − 15.59. readability software The natural logarithm of the annual report file size in megabytes Authors’ calculation Index that comprises the standardized values of FOG and FILE_SIZE (i.e., The natural Authors’ calculation logarithm of the file size of the annual report file in megabytes) in equal weight. Natural logarithm of total assets Long-term debt to total assets Net income to total assets Number of years since firm’s foundation Standard deviation of the operating earnings in the previous three fiscal years Logarithm of the number of geographic segments Logarithm of the number of business segments Dummy variable equal to 1 (one) if the firm is audited by one of the big four accounting firms, 0 (zero) otherwise Dummy variable equal to 1 (one) when the CEO is from the owning family, 0 (zero) otherwise. Percentage of family members on the board of directors Percentage of family held shares Dummy variable equal to 1 (one) when the family's name is included in the firm's name, 0 (zero) otherwise Generational stage of owners and managers

Literature

Li (2008) Laksmana, Tietz, and Yang (2012) Loughran and McDonald (2014) Nardo et al. (2005)

Amadeus BVD Amadeus BVD Amadeus BVD Annual report/Google Search Amadeus BVD Annual report Annual report Amadeus BVD

Li (2008) Li (2008) Li (2008) Inchausti (1997)

CONSOB Database

Poutziouris et al. (2015)

CONSOB Database CONSOB Database Authors’ calculation

Audretsch et al. (2013) Chen et al. (2008) Deephouse and Jaskiewicz (2013) Sciascia et al. (2014)

Annual Reports/ Google Search

Lehavy et al. (2011) Gul et al. (2011) Lawrence (2013) Li (2008)

and checked them to remove file errors. Thereafter, we processed the annual report texts using readability software.2

3. Research methodology 3.1. Sample, data collection, and text analysis

3.2. Variables The present study relies on data collected from various sources. We obtained accounting data from Amadeus – Bureau van Dijk and collected family board structure data from the Italian Security Exchange Commission (CONSOB). We also manually collected data for firm age and family generation by searching the annual reports or via Google. Our initial sample consisted of the 83 non-financial Italian listed firms in (1) the Amadeus – Bureau van Dijk database that (2) made their annual reports available in English, and (3) provided complete data for the period 2008–2013. To identify family firms, we turned to extant literature and found mixed guidelines. The overwhelming majority of studies identify family firms using both the fraction of family ownership and the presence of family members on the board of directors (Prencipe et al., 2014). However, the thresholds used in literature vary significantly (Mazzi, 2011). In this study, we followed the more restricted definition of family firms of Cascino et al. (2010) where a company is considered a family firm if the family owns at least 50% of the voting rights or outstanding shares1 and one of its members is on the board of directors. This choice was driven by the need for consistency, as we adopt the same empirical context as Cascino et al. (2010), i.e., nonfinancial Italian listed firms characterized by higher levels of ownership concentration compared to US firms. Following this criterion, our final sample consists of 48 family firms (288 firm-year observations). We manually collected from the corporate websites a total of 288 annual reports published in English from 2008 to 2013, analyzed in line with international literature on the readability of corporate reporting. To calculate the readability of the annual reports, we adopted the following procedure. First, we converted all annual reports into Word files

3.2.1. Dependent variable To examine the degree of readability of the annual reports, we used the FOG index widely proposed in several recent studies (Ginesti, Sannino, & Drago, 2017; Guay et al., 2016; Lang & Stice-Lawrence, 2015; Lawrence, 2013; Lundholm et al., 2014) and deemed suitable for the syntactic analysis of corporate documents (Courtis, 1995; Gunning, 1968). Developed in 1952 by Robert Gunning to help corporate staff improve their writing, the FOG formula was then proposed by Christopher Cox, former SEC Chairman, to judge the level of compliance of corporate disclosure with the Plain English rules (Cox, 2007). The FOG index is calculated as follows: 0.4 * (words_per_sentence + percent_of_complex_words) where complex words are defined as words with three or more syllables. A FOG readability score of over 17 means that the text is very complex; a score between 14 and 17 indicates that the text is complex; a score between 12 and 14 indicates that the text is simple; a score below 10 indicates that the text is very simple. 3.2.2. Independent variables Following Klein et al. (2005) and Mazzola et al. (2013), we measured “family power” as the percentage of family involvement in ownership (FAM_OW), the percentage of family board members (FAM_BD), and the presence of a family member as CEO (FAM_LEAD). Following Deephouse and Jaskiewicz (2013), the overlap between

1 To identify this threshold, we also considered the existence of shareholders’ agreements in favour of family owners.

2

org.

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family and firm name was measured with a dummy variable that takes the value of 1 if the family name is present in the firm name, 0 otherwise (FAM_NAME). In line with Sciascia et al. (2014), the generational stage was measured as the generation owning and managing the business (FAM_GEN). Our models also include a set of firm-level characteristics commonly used in corporate reporting literature. We controlled for firm size (TASSET), firm profitability (ROA), leverage (LEV), and auditor type (BIG_4), given that scholars argue that these variables are likely to affect corporate disclosure decisions (DeAngelo, 1981; Guenther, Guenther, Schiemann, & Weber, 2016; Gul, Bin Srinidhi, & Ng, 2011; Inchausti, 1997; Lawrence, 2013; Lehavy et al., 2011; Robb, Single, & Zarzeski, 2001). Following Li (2008) and Lawrence (2013), we also include firm age (F_AGE), business volatility (EAR_VOL), and the complexity of operations (BUS_SEG and GEO_SEG). Table 1 reports the description and measurement of our variables.

Table 2 Descriptive statistics. Variables

Mean

Median

Standard Dev.

Obs. 288 FOG

14.9

14.7

1.82

Firms specific factors TASSET ROA LEV BIG_4 F_AGE EAR_VOL GEO_SEG BUS_SEG

13.91 3.33 0.19 0.92 55.18 0.03 1.41 1.06

13.85 2.88 0.18 1 48 0.02 1.39 1.09

1.39 6.79 0.14 0.28 36.99 0.05 0.54 0.56

Family- related variables FAM_LEAD FAM_BD FAM_OW FAM_NAME FAM_GEN

0.51 0.26 56.91 0.25 2

1 0.25 56.7 0.43 2

0.50 0.11 11.66 0.43 0.67

3.3. Panel data analysis and regression model To determine whether the fixed-effect (FE) model, random effect (RE)

Refer to Table 1 for the description of the variables.

Table 3 Pearson coefficient correlation matrix.

FOG TASSET ROA LEV BIG_4 F_AGE BUS_SEG GEO_SEG EAR_VOL FAM_LEAD FAM_BD FAM_OW FAM_NAME FAM_GEN

FOG

TASSET

ROA

LEV

BIG_4

F_AGE

BUS_SEG

GEO_SEG

EAR_VOL

FAM_LEAD

FAM_BD

FAM_OW

FAM_NAME

−0.26a −0.05 −0.05 −0.04 −1.11 0.21a −0.16a 0.20a −0.05 0.08 -0.16a 0.09 −0.04

−0.04 0.40a 0.22a 0.40a 0.19a 0.17a −0.15a −0.05 −0.16a −0.24a −0.14a 0.35a

−0.25a −0.05 0.01 −0.11 −0.04 −0.30a 0.07 −0.15a 0.16a −0.07 0.16a

−0.12a 0.28a 0.047 −0.01 0.34a −0.25a −0.16a −0.30a 0.06 0.10

0.15a 0.20a 0.14a 0.06 0.01 −0.01 −0.20a 0.00 −0.09

0.04 0.11 −0.09 −0.02 −0.10 −0.17a −0.24a 0.44a

−0.02 0.14a −0.06 −0.01 −0.23a −0.35a 0.07

−0.26a −0.00 0.07 −0.14a 0.20a −0.07

0.02 −0.08 −0.34a 0.00 −0.17a

0.31a −0.03 −0.14a −0.01

0.22a 0.10 0.19a

0.06 0.12a

−0.06

FAM_GEN

Refer to Table 1 for the description of the variables. a Denotes significance below the 5% level.

model, or pooled OLS model is more appropriate with panel data (Agusman, Monroe, Gasbarro, & Zumwalt, 2008), we performed several specific diagnostic tests, i.e., the Hausman test (HT) and the Breusch-Pagan LM test (BP). The results of the HT and BP tests were not significant, suggesting that an OLS model is more efficient. Therefore, to empirically test our hypotheses, we estimated an OLS regression model with robust standard errors. To investigate the determinants of annual report readability in family firms, we first entered the control variables and ran Model (1):

Table 4 Regression results. Dependent variable: FOG

TASSET ROA LEV BIG_4 F_AGE BUS_SEG GEO_SEG EAR_VOL FAM_LEAD FAM_BD FAM_OW FAM_NAME FAM_GEN INTERCEPT No. of Obs. R2_Adj

Model (1)

Model (2)

−0.36*** −0.00 0.14 −0.15 0.00 0.81*** −0.27 3.48

−0.37*** 0.00 −0.38 −0.20 −0.06 0.88*** −0.26 1.89

19.51*** 288 0.13

−0.24 0.90 −0.03** 0.83** 0.36* 20.91*** 288 0.19

FOG = β0 + β1TASSET + β2ROA + β3LEV Model (1) + β4BIG_4 + β5F_AGE + β6GEO_SEG + β7BUS_SEG + β8EAR_VOL + ε Thereafter, we explored the impact of the proposed family-related factors by introducing further variables to Model (1): FOG = β0 + β1TASSET + β2ROA + β3LEV Model (2) + β4BIG_4 + β5F_AGE + β6GEO_SEG + β7BUS_SEG + β8EAR_VOL + β9FAM_LEAD + β10 FAM_BD + β11FAM_OW + β12 FAM_GEN + β13 FAM_NAME + ε (See Table 1 for the description of the variables used in the regression equations.)

Refer to Table 1 for the description of the variables. * P < 0.05. ** P < 0.01. *** P < 0.001.

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tests.3 First, we re-calculated the FOG index with alternative open source software and then re-estimated Model (2) via an OLS regression with robust standard errors (see Model (3) in Table 5).4 Thereafter, we re-estimated Model (2) using three further and different measures of readability. First, we used the Flesch Kincaid grade level (FLESCH) as an alternative textual readability measure (Laksmana et al., 2012). Second, according to recent international literature (Hwang & Kim, 2017; Loughran & McDonald, 2014, 2016), we used the file size (FILE_SIZE) of the annual report text file as a novel non-textual proxy of readability (since larger annual reports – in terms of file size – provide less readable information). As Loughran and McDonald (2014, 2016) suggest, this measure is useful in case of long corporate documents, such as annual reports, and has several advantages: it is simple to calculate and replicate, and is not prone to the measurement errors of the readability formulas. Third, drawing on the arguments of the seminal work of Loughran and McDonald (2014, 2016), we created a composite readability index (READ_IND) that includes FOG and FILE_SIZE weighted equally5: this index balances the pros and cons of the most popular measure of textual readability (i.e., FOG) with the pros and cons of the most recent non-textual measure of readability (i.e., FILE_SIZE). Models (4), (5), and (6) in Table 5 report the results of these three additional measures of readability. In sum, Table 5 shows that the expected effect of family power is confirmed in all models and the expected effect of generational stage is confirmed in three out of four models. We can therefore conclude these two findings are robust. The unexpected effect of the overlap between firm and family name is confirmed in two out of four models, we therefore cannot conclude this result is robust. Last, we controlled for possible non-linear effects of the non-dummy family-related variables (i.e., FAM_OW, FAM_BD and FAM_GEN) on readability (measured by FOG, FLESCH, FILE_SIZE and READ_INDEX). Our results exclude any non-linear effect.

Table 5 Regression results for robustness tests.

Model (3)

Dependent variable: FLESCH Model (4)

Dependent variable: FILE_SIZE Model (5)

Dependent variable: READ_IND Model (6)

TASSET ROA LEV BIG_4 F_AGE BUS_SEG GEO_SEG EAR_VOL

−0.07 −0.06 −0.92 −0.32 0.00 0.15 0.06 4.51*

−0.05 −0.01 −1.47 0.13 0.01 0.14 −0.11 3.20

0.05 −0.01 −0.77 −0.02 0.00 0.06 0.08 −2.29**

−0.06 −0.01 −0.60 −0.07 −0.00 0.28*** −0.02 −1.07

FAM_LEAD FAM_BD FAM_OW FAM_NAME FAM_GEN No. of Obs. R2_Adj

−0.22 0.91 −0.03*** 0.74* 0.36* 288 0.06

−0.25 1.41 −0.03** 0.13 −0.06 288 0.04

0.15 0.25 −0.02*** −0.03 0.17* 288 0.14

0.04 0.42 −0.02*** 0.20* 0.20** 288 0.13

Dependent variable: FOG

Refer to Table 1 for the description of the variables * P < 0.05. ** P < 0.01. *** P < 0.001.

3.4. Results Table 2 reports the descriptive statistics and shows that the annual reports of Italian listed family firms are generally difficult to read with an average FOG index of 14.9. Overall, our sample is composed of family firms that on average are at the second generation stage. One company out of four carries the family name and half are led by a family member. The average percentage of family members involved in the board of directors is 26%, while the average level of family ownership is around 57%. Table 3 reports the correlations matrix. As predicted in H1, a significant and negative association is found between FAM_OW and FOG. We also performed multicollinearity diagnostics using the variance inflation factor (VIF). The results of the VIF analysis did not show any evident multicollinearity problems. Table 4 shows the regression results. In Model (1), contrary to the predictions in prior literature (Li, 2008), we find a negative and significant coefficient for TASSET (p < 0.001), meaning that larger firms tend to have annual reports that are easier to read. Conversely, and as expected, the BUS_SEG coefficient is positively and significantly associated with FOG (p < 0.001), meaning that family firms with more complex operations tend to have annual reports that are more complex to read. The other variables did not show significant coefficients. Model (2) confirms the results obtained in Model (1) for TASSET and BUS_SEG, and a significant increase of R2_adj (0.19). In line with the prediction of H1, FAM_OW shows a negative and significant relationship with FOG (p < 0.01). Differently from what we predict in H2, FAM_NAME shows a positive and significant coefficient (p < 0.01), meaning that in the case of an overlap between family and firm name, the family firm is more likely to provide less transparent annual reports. Similarly, but in line with the prediction of H3, FAMGEN shows a positive and significant coefficient (p < 0.05): family firms at later generational stages are more likely to provide less transparent annual reports.

4. Discussion Our study aims to extend extant accounting research in the family business field by focusing on reporting strategies, and more precisely, on annual report readability as a key aspect of financial disclosure quality (Lang & Stice-Lawrence, 2015; Lawrence, 2013; Li, 2008). In line with the recent Gómez-Mejía et al. (2014) article, and integrating the SEW logic in financial disclosure decisions, we argue that annual report readability in family firms may be influenced by the specific SEW dimension that family principals prioritize, i.e., “family control and influence” vs. “family identity”. We contend that prioritizing one SEW dimension over the other is influenced by family-related factors and specifically the level of family power, the overlap between family and firm name, and the generational stage. In particular, we predicted that high family power and the overlap between firm and family name induce family principals to prioritize the “family identity” dimension with positive effects on annual report readability. We also predicted that at later generational stages, family principals are more willing to prioritize “family control and influence” with detrimental effects on annual report readability. Our findings support the predictions on the effects of family power and generational stage. Specifically, we find that the information disclosed in the annual report is clearer when the owning family holds strong power and is at earlier generational stages, whereas the annual reports are less readable when the owning family holds weak power and is at later generational stages. This is in line with our argument that family principals tend to obfuscate the annual report to preserve their

3.5. Robustness analysis

3 We thank the editor, the associate editor, and an anonymous reviewer for suggesting these tests. 4 We re-calculated the FOG index using the software available at: www.readable.io. 5 The FOG and FILE_SIZE variables were standardized and have equal weight in the composite index − for further details, see Nardo et al. (2005).

We assessed the robustness of our results with several additional

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readability of annual reports, either directly or as moderators of the studied relationships. Specifically, we suggest future studies deepen the investigation on the role of family power by taking into account family involvement in the top management team (Mazzola et al., 2013) as another potential antecedent that reduces the emphasis on the “family control and influence” SEW dimension and may thus positively affect annual report readability. The unexpected and less robust findings on the effect of the overlap between firm and family name opens the way to further inquiries on the annual report readability antecedents that may emphasize the “family identity” SEW dimension. For example, future research may explore the effects of more general family branding strategies at the corporate level, i.e., the extent to which the owningfamily decides to transfer and communicate its history, values, and identity (Gallucci, Santulli, & Calabrò, 2015), rather than only focusing on the overlap between firm and family name. In addition, controlling families may use their name to not only label their company but also their products, i.e., adopting a family branding strategy at the product level (Gallucci et al., 2015). Future studies could explore the effects of this variable that is expected to emphasize the “family identity” SEW dimension. We also suggest investigating whether family conflicts may hamper annual report readability, as we expect such conflicts could deemphasize the “family identity” SEW dimension, similarly to what occurs at later generational stages. Thus, the possibility that different types of conflicts could variously influence annual report readability may be worth investigating (Kellermanns & Eddleston, 2004). Third, the generalizability of our findings requires some caution, since we focus only on Italian firms: these firms translate their annual reports into English and readability may be therefore be affected by the quality of the translation. More generally, future research in other geographical contexts is encouraged, not only to see if our findings hold in other countries, but also to examine whether the impact of familyrelated factors on disclosure readability is moderated by specific country-level variables, since they may influence the salience of the different SEW dimensions. Examples of these variables are country distance from the capital market (Lundholm et al., 2014), legislation on the protection of shareholders and creditors (La Porta, Lopez-deSilanes, Shleifer, & Vishny, 1998), and cultural dimensions (Hofstede, 2001). We also propose three additional fruitful avenues for future research that are unrelated to the limitations of the present study. First, we suggest examining the variation in the economic consequences of annual report readability among family firms by assessing whether readability may influence capital market outcomes. In particular, it may be interesting to investigate whether family firms that publish more readable corporate documents have higher value accounting information relevance, more international investors, lower external financing costs, and lower probability of stock price crash risk (Bonsall & Miller, 2017; Ertugrul, Lei, Qiu, & Wan, 2017; Lundholm et al., 2014). Second, we invite scholars to develop not only readability, but also thematic manipulation (tone) analyses (Guillamon-Saorin, Isidro, & Marques, 2017). Indeed, it would be interesting to apply both analyses on corporate documents published around major corporate events (e.g., mergers and acquisitions, bond issues, cross-listings on foreign stock exchanges, CEO succession, etc.) to gauge whether family owners manage information opportunistically. Third, in the case of multinational family firms, it would be interesting to explore whether corporate documents have different levels of readability depending on the country in which they are published. We may expect that in the home country, where family members are highly committed to reputation preservation, family members may be more willing to disclose transparent information (Campopiano & De Massis, 2015). In a geographically and culturally distant country instead (Berry, Guillén, & Zhou, 2010), family members may be less careful about reputational gains and be incentivized to act opportunistically, therefore obfuscating corporate documents to conceal such actions. In conclusion, we hope to have offered novel information with this

control (when they perceive themselves as vulnerable due to low family power) or when their identification with the firm declines (when family branches emerge at later generational stages). Contrary to our predictions, the results reveal that family firms carrying the family name exhibit a lower degree of annual report readability, indicating that higher emphasis on the “family identity” dimension does not necessarily foster virtuous communication by family principals. In other words, the concern that the firm’s actions may have direct repercussions on the family’s image and reputation may induce family principals to obfuscate the information disclosed in annual reports rather that enhance its readability. This result expands prior studies by challenging the idea that family principals who prioritize the “family identity” dimension of SEW are more inclined to disclose transparent information for fear of being seen as imprecise and unreliable by external stakeholders (Gómez-Mejía et al., 2014). However, considering that this finding is not particularly robust, we leave this intriguing phenomenon to future investigations. Last, worth noting is the unexpected result of one of our control variables: firm size seems to have a positive effect on annual report readability. We interpret this result in relation to our empirical context, i.e., Italian firms: smaller family firms are more likely to have a reduced (i.e., local) investor audience and may hence be less incentivized to improve annual report readability (i.e., a more readable English translation). The contribution of our study is twofold. First, we add to the debate on family business heterogeneity according to which the variance among family firms may be even greater than the variance between family firms and non-family firms (Chrisman & Patel, 2012). Specifically, we provide evidence on the variance in reporting strategies and isolate three family-related antecedents of such variance. Our study can also be considered a first attempt to empirically test – in the specific setting of annual report readability – the theoretical insights of Gómez-Mejía et al. (2014) with respect to SEW dimensions and financial disclosure. Thus, we contribute to establishing the SEW perspective as a key theoretical approach that can help us understand family firm reporting strategies (Gómez-Mejía et al., 2011). Second, we contribute to accounting literature by focusing on annual report readability in family firms. Despite that prior research on “readability/reading ease manipulation” offers important insights to understand the implications of annual report readability, to the best of our knowledge, scholars have thus far overlooked family firms. This is surprising given the distinctive nature of family firms compared to other organization forms and their relevance in the world economy (Gómez-Mejía et al., 2011; Hutton, 2007). Further, the topic of corporate reporting in family firms has garnered increasing attention in recent years (Chrisman, Chua, De Massis, Minola, & Vismara, 2016; Gómez-Mejía et al., 2014; Ma, Ma, & Tian, 2015;) based on the assumption that family firms raise interesting issues and new challenges for future research in this field (Hutton, 2007; Prencipe et al., 2014; Salvato & Moore, 2010). 5. Limitations and future research directions This paper has at least three limitations that we hope will induce future research efforts. First, our study is not free of the imprecisions that affect textual analyses in accounting and finance research (Loughran & McDonald, 2016). Although our use of different software programs and diverse measures of readability (of a textual and nontextual nature) mitigates this concern, replication studies are encouraged. We also invite scholars to explore the effects of family-related variables on the readability of others forms of regulated and unregulated financial disclosure, e.g., earnings press releases and investors presentations. Second, our paper investigates the role of only three antecedents of annual report readability and although we consider three major sources of variance in family firms, additional variables may affect the 148

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study to help non-family stakeholders become more aware of the internal drivers that may lead family firms to alter the readability of their corporate annual reports. Specifically, this paper may be beneficial for investors to understand what types of family firms are susceptible to greater oversight of managerial actions.

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