Do Family Firms Issue More Readable Annual Reports? Evidence From the United States

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 non-family firms. Higher readability could occur due to lower obfuscation or less information conveyance. By controlling complexity and choosing readability measures linked to obfuscation, we attribute the higher readability to lower obfuscation. Our investigation into the heterogeneity in family firms shows that the positive effect of family control on reporting readability exists for eponymous family firms but not for non-eponymous family firms. We also find that family firms managed by founders or heirs issue more readable 10-K reports than non-family firms, but family firms managed by outsiders do not exhibit such a difference. Cross-sectional analyses show that the difference in readability between family and non-family firms diminishes for firms with more earnings manipulation, weaker board governance, and dual-class shares. Further, we find that investors perceive family firms' annual reports with higher readability to be more informative. Finally, we use state-level succession tax cuts as an exogenous shock to link the higher readability to family insiders' incentives and preferences. Our findings are consistent with the view that family insiders' incentive to maintain family reputation contributes to lower obfuscation in 10-K narrative disclosures.