Do Family Firms Issue More Readable Annual Reports? Evidence from the U.S

Using a sample of 22,442 firm-year observations for 3,721 U.S. listed firms, we show that family firms, on average, issue annual reports with higher readability than do nonfamily firms. Higher readability could occur due to lower obfuscation or less information conveyance. By controlling for complexity and choosing readability measures linked to obfuscation, we attribute the higher readability to lower obfuscation. We argue that family insiders’ long-term horizon, incentive to maintain family reputation, and a desire to pass on the firm to family successors, drive the lower obfuscation. We conduct several tests to control endogeneity and test the robustness of our result. Specifically, we use state-level succession tax cuts as an exogenous shock to support the attribution of the higher readability to the family’s increased incentive for succession. Further, we find that the higher readability in family firms is associated with higher informativeness, and is weaker for firms with more earnings manipulation, weaker board governance, and dual-class shares.