财务报告质量与投资决策：来自新兴市场家族企业的证据

The Association between Financial Reporting Quality and Investment Decisions for Family Firms in an Emerging Market

Chan-Jane Lin

Department and Graduate Institute of Accounting

National Taiwan University

Taipei, 106 Taiwan

cjlin@.tw

Tawei Wang†

School of Accountancy

Shidler College of Business

University of Hawaii at Manoa

Honolulu, HI 96822

twwang@

Chao-Jung Pan

Department and Graduate Institute of Accounting

National Taiwan University

Taipei, 106 Taiwan

d9*******@.tw

†Corresponding author

Investment Decisions for Family Firms in an Emerging Market

Abstract

This paper investigates the relation between financial reporting quality and investment inefficiency for family firms in an emerging market. Building on prior literature regarding family firms’ financial reporting quality and investment behavior, we hypothesize that family firms are more likely to under-invest and financial reporting quality can help alleviate such behavior. Using a sample of listed firms in Taiwan from 1996 to 2009, we show that, comparing to non-family firms, financial reporting quality can reduce family firms’ inefficient investment behavior, especially for under-investment. In addition, for family firms, when the deviation of control from ownership and uncertainty are high, such effect is more pronounced.

Keywords: investment inefficiency; financial reporting quality; family firm

JEL Classifications: M41, G31, D81

Investment Decisions for Family Firms in an Emerging Market

1. Introduction

Prior literature has documented large shareholders’ impact on a firm’s investment decisions. For example, Fama and Jensen (1985) state that large, undiversified shareholders may invest based on their own risk preferences. Differently, Edmans (2009) shows that blockholders can reduce managerial incentives to pursue myopic investment decisions. Our study also focuses on investment decisions but on a particular class of large shareholders, family owners. Family controlled firms are prevalent in the world, especially in Europe and in Asia (Faccio and Lang, 2002; Anderson and Reeb, 2003), and have contributed a significant portion to the world’s GDP (Fan et al., 2011). Family firms’ investment decisions, different from non-family firms, are shaped by the commitment of the family (Carlock, 2010). In addition, as family owners’ interests are linked tightly to the firm’s performance, family owners need to make sure not to endanger the existing family business and the long-term survival of the firm when making investment decisions (e.g., Carlock, 2010; Klein and Ward, 2012). The above mentioned factors raise the concern of investment inefficiency of family firms. Investment inefficiency is defined as a firm gives up investment projects that can otherwise increase its value or invest in projects that do not increase its value (e.g., Biddle et al., 2009).

A number of recent studies have investigated the relation between financial reporting quality and investing decisions (e.g. Bushman et al., 2006; McNichols and Stubben, 2008; Li and Tang, 2008; Biddle et al., 2009; Kedia and Philippon, 2009). These studies claim that, different from other governance mechanisms, financial reporting quality has important economic implications for investment decisions by reducing the agency conflicts between