Family Firms and Disclosure Tone - A quantitative study on the impact of family ownership on disclosure tone

Abstract: Background: Qualitative disclosures in annual reports, i.e. disclosure narratives, such as the CEO-letter, are important complements to the quantitative aspects of corporate disclosure. How readers perceive the narrative information, and thereby how they perceive the firm’s performances and image, may influence investors’ business decisions. Since there are few or no explicit rules as to what narrative disclosures should cover and how it should be written, firms have the possibility to influence the readers perception through tone management. If a family holds a high degree of voting shares in a firm, it can obtain and maintain considerable control and may thereby also have the ability to influence disclosure practises. Purpose: The purpose of this study is to test whether there is a correlation between the degree of family ownership in terms of voting rights and the tone used in the disclosure narratives. Furthermore, the study seeks to test if having a family member as CEO and/or chairman of the board affects the tone used. By testing for these correlations, this thesis seeks to investigate if family ownership has an impact on the tone used in disclosure narratives and thereby tell if family firms are more or less inclined to use tone management. Delimitations: The scope of this study focuses on the annual reports of 100 companies noted on the Swedish stock exchange, Nasdaq OMX Stockholm. This thesis concerns the narrative parts of the annual reports, more specifically the CEO-letter. The annual reports studied are from the year of 2013 and published in Swedish. Methodology: This thesis takes on a quantitative approach. Tone in CEO-letters have been quantified through word counts based on positive and negative words occurring in a pre-set wordlist. The firms studied have been dichotomously segmented into family and non-family firms and further divided into two groups; (1) family firms where a member of the controlling family holds the position as CEO and/or chairman of the board, and (2) non-family firms or family firms without a family member as CEO and/or chairman. The hypotheses have been tested through statistical tests of differences and correlation. Findings and Conclusions: The empirical results indicate no statistically significant correlation between the degree of family ownership and tone in CEO-letters. However, the results suggest a tendency for firms that are considered family firms to present a slightly less positive tone than non-family firms do. Furthermore, when a member of a controlling family serves as CEO or chairman of the board, the tone used in the CEO-letter tends to decline further. Although the empirical evidence of the associations were not statically significant, a different definition of family firms or a larger sample may change the outcome of the tests and thus, further research is therefore necessary in order to make a general conclusion on the impact of family ownership on disclosure tone.