Quality of Accounting Disclosures by Family Firms in Japan

Abstract

We investigate the quality of the accounting disclosures of publicly traded family firms in Japan. Family firms have strong incentives to create a long-term orientation and to bequeath their businesses to their descendants. This long-term orientation eliminates opportunistic earnings management and protects the firm’s reputation. These characteristics of family firms increase the effectiveness of monitoring and thus improve earnings quality. We find that, compared with non-family firms, family firms have high earnings quality on average. This finding is consistent with family firms’ effective monitoring, which stems from their above-described long-term orientation. We also find that the earnings quality of family firms in which the founder has executive authority over the firm is almost the same as it is for non-family firms. However, the long-term orientation of the founder could be different to that of the second generation.