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Family status
Does family status impact US
firms sustainability reporting?
Venkataraman Iyer and Ayalew Lulseged
Department of Accounting and Finance, 163
The University of North Carolina at Greensboro,
Greensboro, North Carolina, USA
Abstract
Purpose The primary purpose of this study is to investigate the association between the family
status and corporate social responsibility disclosure (sustainability reporting) of large US companies.
Design/methodology/approach The authors gathered data from GRI database as well as from
Compustat. They use both univariate and multivariate statistical analyses.
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Findings The authors find that there is no statistically significant difference in the likelihood of
sustainability reporting between family and non-family firms of the S&P 500. They document
important associations among the propensity to issue sustainability reports, the level of details of
sustainability reports and certain firm-specific and industry characteristic variables.
Research limitations/implications This study is focused on S&P 500 firms and may not be
generalizable to smaller firms. Differences among family firms such as stock ownership and
management control may affect sustainability reporting and are important topics for future research.
Practical implications Society should be aware of the motivations and incentives that govern
sustainability reporting decisions by both family and non-family firms. The authors show that both
family and non-family companies use voluntary disclosure in general and sustainability reporting in
particular as a way of mitigating regulatory, political and litigation costs.
Originality/value No prior study, to the authors knowledge, has examined the association
between sustainability reporting and the family status of firms. The authors include suggestions for
future research in this area and hope that their study will provide motivation and guidance to
researchers to study this topic further.
Keywords CSR, Sustainability reporting, Disclosure, Family status, Social responsibility, Family firms,
United States of America
Paper type Research paper
Introduction
Family firms are companies that are either managed or controlled by founding families by
way of substantial equity ownership and board memberships. About one-third of S&P 500
or Fortune 500 firms are comprised of family firms (Lee, 2006; Anderson and Reeb, 2003a).
Ali et al. (2007) report that families control about 11 percent of the cash flow rights and
18 percent of the voting rights in family firms. Researchers have examined family firms
financial reporting quality (Chen et al., 2008), earnings management (Yang, 2010),
voluntary disclosure (Ali et al., 2007), and choice of accounting methods (Niehaus, 1989).
Prior research has predominantly used the agency theory (Jensen and Meckling, 1976) to
test these issues because of the unique setting provided by family firms where there is a Sustainability Accounting,
higher risk of minority expropriation by the controlling family on the one hand and the Management and Policy Journal
Vol. 4 No. 2, 2013
familys concern with the survival and reputation of the company on the other. pp. 163-189
Corporate social responsibility (CSR) performance of family firms is a topic that has q Emerald Group Publishing Limited
2040-8021
attracted considerable attention of researchers. CSR refers to a companys voluntary DOI 10.1108/SAMPJ-Nov-2011-0032
SAMPJ contribution to sustainable development beyond what is required by law or regulation.
4,2 Whether businesses have social responsibility has been a subject of heated debate.
Some argue that the only social responsibility of business is profit maximization or
maximization of the long term shareholder value (Friedman, 1970, 2005; Rodgers,
2005). Others contend that businesses should create value to all of their constituencies
because it is good business and works for the long-term-benefit of investors and/or
164 because companies have responsibility to their community and environment (Donaldson
and Preston, 1995; Mackey, 2005). Slowly but surely the balance in the debate seems to be
shifting in favor of the latter view as evidenced by the rapid increase in the number of
companies engaged in and are disclosing their CSR activities.
No prior study, to our knowledge, has looked at the association between family firms
and sustainability reporting. Thus, we rely heavily on results from prior research that
investigates:
.
the association between disclosure, in contexts other than sustainability, and
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Most prior accounting research on the association between disclosure and family firms
relies on agency theory and market-based incentives. In this paper, we also draw from
legitimacy and stakeholder theories in developing the two research questions we address.
Studies that investigate the association between the family status of firms and
disclosure in other contexts have mixed predictions and findings. Some argue that there
is less demand for and thus less voluntary disclosure in family than in non-family firms
because:
.
family firms generally have longer investment horizons and are less fixated on
short-term performance (Anderson and Reeb, 2003a; Villalonga and Amit, 2006);
.
there is lower information asymmetry between the family owners and
management due to the formers active involvement in management (Chen et al.,
2008); and
.
direct monitoring of management by the family owners acts as a substitute for
public disclosure (Bushman et al., 2004).
Others argue that family firms are more likely to and disclose more because family
owners, with concentrated and undiversified ownership, benefit the most from the
reduction in:
.
cost of capital (Dhaliwal et al., 2011); and
.
the costs of litigation and reputation loss that result from enhanced disclosure
(Welker, 1995; Botosan, 1997).
In a study of S&P 1500 firms (family and non-family), Chen et al. (2008) find results
that support both the above views. On one hand, Chen et al. (2008) find that family
firms provide fewer forecasts and conference calls consistent with the view that family
firms are less likely to disclose. On the other hand, Chen et al. (2008) find that family firms
provide more earnings warnings consistent with the view that family owners that have
heightened litigation and reputation cost concerns are more likely to disclose.
Prior studies that examine the association between the family status of companies Family status
and their (CSR) performances also find mixed results. On one hand, Morck and Yeung
(2004) hypothesize and find that family firms are less socially responsible than
non-family firms because they are focused on protecting their own narrow self-interests.
On the other hand, Dyer and Whetten (2006) infer and provide evidence consistent with
their inference that family firms have higher CSR performance than non-family firms
because they are keen on protecting the image and reputation of the family and since a 165
positive reputation in the minds of key stakeholders may serve as a form of social
insurance, protecting the familys assets in times of crisis.
In summary, results from the extant research on the relation among disclosure,
sustainability performance, and the family status of firms are mixed and heavily driven
by agency theory and market-based incentives of companies, with few exceptions (Dyer
and Whetten, 2006). However, legitimacy theory and stakeholder theory have also been
proposed to explain the incentives of organizations to disclose their sustainability
practices. Legitimacy theory relies upon the:
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[. . .] notion of a social contract and on the maintained assumption that managers will adopt
strategies, inclusive of disclosure strategies, that show society that the organisation is
attempting to comply with societys expectations (as incorporated within the social contract)
(Deegan et al., 2002, p. 319).
While the focus of legitimacy theory is society in general, the interests of particular
stakeholder groups are the focal point in stakeholder theory (Deegan and Blomquist,
2006). Legitimacy theory posits that organizations try to ensure that there is congruence
between their value systems and the value system which is generally shared by the
wider community (Mathews, 1993). Organizations try to project an image which has a
strong base of social legitimacy. In this vein, companies try to gain legitimacy by social
and environmental disclosures (Deegan, 2007). Corporate sustainability disclosures can
be used by companies as a strategy to respond to their stakeholders expectations
(Gray et al., 1995).
Given the close alignment of firms reputation with the familys reputation, it is
reasonable to expect that the family firms are much more sensitive to the expectations of
their stakeholders than are non-family firms. Family firms are very much concerned
about the reputation of the firm due to greater visibility of the family in the firm and the
long-term orientation of the family in the business (Zellweger et al., 2011; Dyer and
Whetten, 2006; Niehm et al., 2008). Carney (2005) observes that family firms may enjoy
long-term relationships with internal and external stakeholders and through them
develop and accumulate social capital. Taken together these studies suggest that family
firms are more likely to issue sustainability reports.
In this study, we investigate the association between CSR disclosure (widely known
as sustainability reporting) and the family status of S&P 500 firms[1]. Specifically, we
address two broad research questions. First, do family firms have a higher propensity to
issue sustainability reports than non-family firms? Second, do family firms issue
sustainability reports with higher level of details? Our study extends three areas of prior
research. First we complement studies that examine the association between CSR
activities and the family status of companies. While prior research in this area has been
focused on the actual CSR activities of companies, in this paper we focus on CSR
disclosure, which is related to but distinct from CSR activities. Although only companies
engaged in CSR activities can disclose their CSR activities, not all firms engaged in CSR
SAMPJ activities may choose to disclose their CSR activities since disclosure decisions involve
4,2 tradeoffs between costs and benefits, not necessarily reflected in the decision to engage
in CSR activities or not. Second, we extend the disclosure literature that examines the
association between disclosure and the family status of firms to the new and upcoming
important area of sustainability reporting. Third, we extend prior studies that examine
the characteristics of companies that voluntarily report their sustainability practices by
166 investigating the incremental impact of the family status of firms, after controlling for
variables that prior research finds to be related to sustainability reporting.
Using the company listing available in the sustainability disclosure database of the
Global Reporting Initiative (GRI) (2006) and the classification of family firms by
BusinessWeek (2003), we investigate the association between sustainability reporting
and the family status of S&P 500 firms. Business Week defines family firm as firms in
which founders or descendants continue to hold positions in top management, on the
board, or among the companys largest stockholders. This classification yields
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177 family companies in the S&P 500-stock index as of July, 2003. According to the GRI
database, 32 of the family and 79 of the non-family companies in the S&P 500 voluntarily
disclosed their sustainability information using the GRI framework in 2010[2].
In a univariate mean difference (t-test) and non-parametric median tests, we do not find
a statistically significant difference between the likelihood of sustainability reporting by
family and non-family firms in our sample. We also do not find any significant difference
in the level of details of sustainability reports issued by family and non-family firms.
Moreover, the coefficient of the family status indicator variable, in a logistic regression
model that estimates the likelihood of firms voluntarily filing their sustainability reports
with GRI as a function of their family status and other control variables, such as size and
leverage, is statistically insignificant. Likewise, the family status indicator variable is
insignificantly different from zero, in an ordinal probit regression model that relates the
level of sustainability reports (A, B, C, Below C, or Not reporting) to the family status of
firms and other firm-specific and industry control variables, such as size, profitability,
leverage, etc. We cannot reject the null hypothesis that there is no difference between
family and non-family companies in their likelihood of issuing sustainability reports and
in the level of details of the sustainability reports they issue.
Although not the primary focus of our study, we also find results that corroborate
findings in prior research regarding the characteristics of companies (both family and
non-family) that choose to voluntarily provide sustainability reports. More specifically,
we find that:
.
larger firms, firms with larger proportion of assets in place (i.e. low growth),
firms with high operating performance (ROA) and high capital intensity firms
are more likely to voluntarily issue sustainability reports;
.
firms in the oil and chemical, utilities, manufacturing, regulated and high
litigation industries are more likely to voluntarily issue sustainability reports,
consistent with the view that higher litigation and reputation loss concerns drive
firms to engage in more voluntary disclosure; and
.
larger firms, low growth firms, better performing firms (those with higher ROA),
firms with higher capital intensity, firms in the oil and gas, chemical, utilities and
manufacturing industries and firms in the regulated and high litigations
industries tend to issue higher level sustainability reports.
By empirically documenting the significant influence of firm level characteristics Family status
(size, growth, performance, capital intensity, etc.), industry, regulatory and litigation
environments on companies decisions to voluntarily issue sustainability reports and the
levels of their sustainability reports, our study provides valuable information to public
policy makers, investors, employees, customers, other stakeholders and society at large.
First, public policy makers deciding what to regulate will benefit greatly from
understanding the differences in companies incentives and motivations to voluntarily 167
issue sustainability reports. A one size fits all approach to regulating sustainability
reporting that ignores these differences in companies incentives and motivations is
likely to be ineffective and costly. Second, understanding the different incentives and
motivations companies have to voluntarily issue sustainability reports is of paramount
importance to sustainability focused investors in deciding where to invest their money,
sustainability concerned employees in deciding which company to commit their services
to, to environmental and social performance-oriented customers in deciding which
products or services to buy, and to society at large in deciding what policies and
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the GRI reporting framework was utilized. Finally, a report is leveled as third-party
checked, if the reporting company has obtained external assurance from a third party,
such as an auditor.
Application levels (A, B, or C) are intended to show incrementally expanding
approaches to reporting using the GRI reporting framework. According to GRI, to
qualify for level C, a report should include some elements of the GRI required profile
disclosures and report fully on a minimum of ten performance indicators, including at
least one from each of social, economic and environment. A level C report is not required
to include any disclosures on management approach. To quality for level B, a report
should include all the GRI required profile disclosures (all those required for a level C
report plus some more), disclosures on management approach and report fully on a
minimum of any 20 performance indicators, at least one from each of economic,
environment, human rights, labor, society, product responsibility. Lastly, to qualify for
level A, a report should meet all the requirements for a level B report and respond on
each core and sector supplement indicator with due regard to the materiality principle by
either: (a) reporting on the indicator or (b) explaining the reason for its omission.
In summary, level A reports are the most complete (i.e. the company has either reported
or explained the omission of all of GRIs 79 performance indicators) and Level C reports
are the least complete. Level B reports are less complete than level A reports but more
complete than level C reports.
Corporate sustainability reporting requires organizations to measure their
performance on various indicators related to sustainable development outcomes.
When reports are made publicly available, investors and other stakeholders will use
them to assess, for themselves, the level of efforts undertaken by the companies to
promote sustainability. The benefits of voluntarily reporting on sustainability include:
.
the enhancement of corporate image and brand;
.
the inclusion in the socially responsible investment portfolio;
.
better compliance with government rules and regulations and avoidance of
litigation;
.
improved employee morale and customer satisfaction; and
.
greater sales increases and cost reductions (Bras, 2009).
Prior research Family status
Disclosure practices of family firms
Ali et al. (2007) examined both the earnings quality and the disclosure practices of family
firms in the USA. They posit that family firms are less affected by Type 1 agency
problems (the type that results from the separation of ownership from management)
because of the close involvement and monitoring of operations by family members. This
prevents, to a large extent, earnings manipulation in family firms compared to 169
non-family firms. Active family owners have better knowledge of the firms business
and therefore are in a position to detect manipulation of accounting numbers. Family
firms, however, suffer more from Type 2 agency problems (that result from controlling
vs non-controlling owner conflicts). The family owners, as controlling shareholders,
have the opportunity to expropriate wealth from the non-controlling shareholders
because the boards tend to be less independent and dominated by family members. In
this context there may be incentives not to disclose-related party transactions and family
members hold on top management positions.
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Based on the BusinessWeek (2003) classification of S&Ps 500 firms into family and
non-family firms, Ali et al. (2007) find that reported earnings are of better quality for
family firms as compared to non-family firms. With respect to disclosure practices, they
find that family firms are more likely to warn for a given magnitude of bad news than
non-family firms. This, they contend, is due to family firms being subject to less
opportunistic behavior as a result of difference in agency costs across family and
non-family firms because of Type 1 agency problems. They also find that family firms
tend to disclose less information about their corporate governance practices in their
proxy statements consistent with Type 2 agency argument.
In a related study, Chen et al. (2008) examine if family firms provide more or less
voluntary disclosure compared to non-family firms. They argue that family owners have
longer investment horizons than other shareholders and there is less information
asymmetry between family members and management. This is because of the family
members concentrated ownership and active involvement in the business. Because of
this, they posit that family owners may prefer less public voluntary disclosure. On the
other hand, voluntary disclosure can reduce the cost of capital (Botosan, 1997) and
reduce potential litigation risk and reputation costs (Field et al., 2005).
Using the sample of S&P 1500 firms, Chen et al. (2008) find that relative to non-family
firms, family firms are more likely to provide bad news earnings warnings due to litigation
and reputation costs but are less likely to provide earnings forecasts because of the lower
information asymmetry between owners and managers in family firms. These findings
are consistent with the view that family owners play more active role in influencing firms
voluntary disclosure practices than other investors with concentrated ownership.
In summary, given the potentially greater conflict between owners (principals) and
managers (agents) in companies with widely-disbursed ownership (Fama and Jensen,
1983) and the lower information asymmetry in closely-held companies, voluntary
disclosures are likely to be greater in companies with widely-disbursed ownership.
Family firms and companies with few big shareholders have little motivation to
voluntarily disclose information. Greater public accountability demand provides
another reason why disclosure may be greater in non-family companies.
While agency theory has been the most prominent theory used in this area of
research, legitimacy theory and stakeholder theory have also been proposed to explain
SAMPJ the incentives of organizations to disclose their sustainability practices. According to
4,2 Deegan and Blomquist (2006, pp. 349-350), the main difference between the two theories
is that whilst legitimacy theory discusses the expectations of society in general,
stakeholder theory provides a more refined resolution by referring to particular groups
within society. Legitimacy theory posits that organizations try to ensure that there is
congruence between their value systems and the value system which is generally shared
170 by the wider community (Mathews, 1993). Organizations try to project an image which
has a strong base of social legitimacy. In this vein, companies try to gain legitimacy by
social and environmental disclosures (Deegan, 2007).
Disclosures are meant to signal that companies are cognizant of the expectations of the
stakeholders and are trying their best to meet them. Thus, one of the goals of corporate
disclosures is to legitimize the companys activities to stakeholders. Corporate
sustainability disclosures can be used by companies as a strategy to respond to their
stakeholders expectations (Gray et al., 1995). According to Suchman (1995), management
faces the challenge of maintaining legitimacy by constantly changing their actions in
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consonance with changes in publics needs and at the same time protecting their past
accomplishments. Thus, the concept of legitimacy is relative to value system of the
audience or the stakeholder group which is interested in the companys actions and
accomplishments. According to Dowling and Pfeffer (1975, p. 125), legitimacy is:
[. . .] the outcome of, on the one hand, the process of legitimation enacted by the focal
organization, and on the other, the actions affecting relevant norms and values taken by other
groups and organizations.
To our knowledge, no study has examined the implications of legitimacy on disclosure
practices in the context of family firms. The close alignment between the firms and the
familys reputation in family firms suggests that family firms are likely to be more
sensitive to the expectations of their stakeholders than are non-family firms. Carney
(2005) observes that family firms tend to enjoy long-term relationships with internal and
external stakeholders and through them develop and accumulate social capital.
practices in family firms are mixed. Corporate sustainability report is a tool companies
use to communicate performance to stakeholders and shareholders alike. Companies
deal with different types of stakeholders and face different levels of political and societal
costs. Voluntary disclosure of sustainability practices can help preempt potential
governmental regulations and/or reduce regulatory and compliance costs. In addition, in
family firms, sustainability disclosure may help protect the reputation of the family and
the family business. Hence, voluntary disclosure of sustainability practices is
determined by firm-specific characteristics including whether the company is a
family or a non-family organization. However, ex ante, it is unclear, whether family firms
will voluntarily report on their sustainability practices more (or less) than non-family
firms. Thus, we have the following research questions:
RQ1. Is the propensity to voluntarily issue sustainability reports systematically
different between family and non-family firms?
RQ2. Are there systematic differences in the levels of sustainability reports issued
by family and non-family firms?
Empirical analysis
Data sources and sample selection
Since our principal objective is to empirically investigate if the propensity to voluntarily
disclose sustainability performance (sustainability reporting) is significantly different
between family and non-family firms, we had to initially identify an otherwise homogenous
sample of family and non-family firms. BusinessWeek (2003) offers such a sample: a list
of 177 family firms from among the firms on the S&P 500 (large public US companies) index
as of July, 2003. As in Anderson and Reeb (2003a), Business Week classified a firm as a
family firm if the founder and/or her/his descendants hold top management positions or are
on the board, or are among the companies largest shareholders. There are significant
advantages to using this sample. First, the firms are somewhat homogenous in size (Ali et al.,
2007). Second, as the same sample has been used in many studies before us (Wang, 2006;
Dyer and Whetten, 2006; Ali et al., 2007), it allows comparison of the results from our study
to those found in prior research. Third, as argued by Ali et al. (2007), it is free of any
subjective assessment of family influence, thus making the results more reliable.
SAMPJ However, there are some disadvantages too. First, to the extent that family ownership
4,2 and control in companies evolves over time, the BusinessWeek (2003) family and
non-family classification may not hold in 2010 thus introducing error in the
measurement of the variable of interest, FAMILY. This concern is, however, mitigated
by the fact that:
.
family ownership and control is sticky over time (Ali et al., 2007; Hutton, 2007);
172 and
.
any slight changes in family ownership and control that do not move a company
beyond the family-nonfamily classification threshold do not cause measurement
error in the family indicator variable we use in this study.
Second, the small number of firms in the S&P 500 and the limited influence of families
in such large firms weaken the power of our tests. Moreover, our findings in the S&P
500 may not readily generalize to smaller firms that may be characterized with higher
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family influence.
We identify companies that issue 2010 sustainability reports from the GRI
disclosure database, the most comprehensive online global database of sustainability
reports. According to GRI, the Database catalogues all GRI-based reports that GRI is
aware of (emphasis ours). As long as reports follow GRI reporting guidelines, have
been published online and are available to the public, they will be included in the GRI
database whether the company requested for its report to be included in the GRI
Sustainability Disclosure Database by filling in the Report Registration form or not.
A well-constructed index, GRI argues, enables readers to access, understand and
communicate about GRI reports more readily.
Table I presents the sample selection process. After eliminating companies
with missing data for one or more of the control variables on Compustat, we have
397 companies, 261 non-family and 136 family, in our final sample. Of these, 95 companies
(65, non-family and 30, family) have issued 2010 sustainability reports and are
included the GRI Sustainability Disclosure Database.
Statistical analyses
We use both univariate and multivariate statistical analyses to examine if the
propensity to voluntarily issue sustainability reports and the level of the sustainability
reports (A, B, C as per the GRI guidelines) is different between family and non-family
firms. We use t-tests (the Wilcoxon sign and sign rank tests) of differences in the means
Control variables
1. Size of the company
According to the political costs hypothesis (Watts and Zimmermann, 1978),
corporations engage in sustainability efforts or social responsibility activities to
reduce the risk of governmental regulation that may adversely affect firm value. Hence,
companies must be cognizant of the interest of government as a stakeholder in the
corporation. Prior research shows that large firms are more sensitive to their image and
reputation and are also more prone to political pressures due to their greater visibility
(Roberts, 1992; Watts and Zimmermann, 1986). Company size has been used as a proxy
for the impact of political costs on corporate strategy. Hence large corporations are more
likely to report on their sustainability efforts to boost their image and to ward off any
political interference (Brammer and Pavelin, 2006). Firm size has also been shown to be
related to the level of disclosures of sustainability efforts (Holder-Webb et al., 2008;
Roberts, 1992) and corporate social performance (Dyer and Whetten, 2006). In a study
involving family firms, Niehm et al. (2008) find that there is a significant positive
relationship between firm size and the sustainability orientation of a company. We use
log of sales at the beginning of the period as our size proxy. As a sensitivity check,
we also use the log of total assets and the log of market value of equity as alternative
proxies for size.
SAMPJ 2. Profitability
4,2 Accounting performance differs between family and non-family firms (Anderson and
Reeb, 2003a, b; BusinessWeek, 2003) and can affect voluntary disclosure (Roberts, 1992;
MIiller, 2002). Research shows that highly profitable firms could face higher public
scrutiny and exposure compared to less profitable firms (Watts and Zimmermann, 1978,
1990) and are more affected by potential political costs (Fields et al., 2001). Hence,
174 profitable companies have greater incentive to voluntarily engage in sustainability
practices and to disclose their efforts by means of sustainability reports (Bewley and Li,
2000). Therefore, we use profitability as a control variable in our analyses.
and capital intensity (Gray et al., 1995). Capital intensive firms are more likely to have
higher carbon emission and may want to initiate disclosures of sustainability efforts in
order to avoid excessive scrutiny (Stanny and Ely, 2008). Growth is related to family
ownership and control (Chrisman et al., 2004; Gallo et al., 2000) and CSR disclosures
(Chen et al., 2008).
4. Industry
Family firms may have more (or less) competitive advantages than non-family firms in
some industries compared to others (Chrisman et al., 2012). Companies operating in
industrial sectors with significant reputation exposures are typically more willing to
provide information on environmental issues (KPMG International, 2005). A companys
impact on the environment, society, and other stakeholders and the resulting political
costs depend on the industry to which a company belongs (Brammer and Millington, 2006;
Verrecchia, 1983). For example, companies in industries such as the oil and gas industry
have high environmental impact and attract greater attention from environmental lobby
groups and politicians. Therefore, companies in such industries have more incentives to
report on sustainability efforts in order to preempt regulation or litigation (Deegan and
Gordon, 1996). In general, industry membership has been shown to be associated with
corporate disclosures (Deegan and Gordon, 1996; Holder-Webb et al., 2008). Consequently,
we use industry membership as a control variable.
In summary, the control variables in the model are SIZE (log of sales), LEVERAGE
(total debt over total assets), GROWTH (percentage change in sales), RETURN (annual
buy and hold stock return from the beginning to the end of the fiscal period), ROA (return
on assets), and CAP_INTENS (capital intensity), defined as total assets divided by
number of employees.
Thus, our empirical model is:
SUS_REPORT b0 b1 FAMILY b2 SIZE b3 LEVERAGE b4 GROWTH
b5 RETURN b6 ROA b7 CAP_INTENS
X
11
bj INDUSTRY 1;
j8
INDUSTRY is proxied by four industry indicator variables: OILCHEM, UTILITIES, MFG Family status
and FIN. OILCHEM is set to 1 for companies in the oil and gas and chemical industries, and
0, otherwise; UTILITIES is set to 1 for companies in the utilities industry, and 0, otherwise;
MFG is set to 1 for companies in the manufacturing industry, and 0, otherwise; and FIN
is set to 1 for companies in the banking and insurance industries, and 0, otherwise. In an
alternative estimation, we replace the four industry dummy variables by two indicator
variables that broadly capture the regulatory state (REG) and the litigation environment 175
(LITIGATION) of the industries the companies are engaged in.
financial and regulated industries and more likely to operate in the high litigation
industries than are non-family companies. As discussed in a prior section of the paper,
disclosure in general and sustainability reporting in particular is correlated with
firm level characteristics such as size, leverage and capital intensity. Disclosure
(or sustainability reporting) practices also vary across industries. It is thus important to
control for firm level characteristics and industry in analyzing the association between
sustainability reporting and the family status of companies.
Multivariate analysis
In this section we present the results from the logistic regression model that relates the
likelihood of issuing a sustainability report to the variable of interest, FAMILY, and
firm-specific and industry characteristics control variables.
In Table IV, we report the Pearson product-moment correlations and Spearman
sign-rank correlations among the dependent and independent variables. The likelihood
of issuing a sustainability report is significantly positively correlated with size,
operating performance (ROA), and membership in the oil and gas and chemical, utilities,
and regulated industries; it is also negatively associated with membership in the
financial industry. Of the correlations among the control variables, the significant
positive association between size and growth, growth and operating performance
(ROA), and the negative association between capital intensity and operating
performance (ROA) are noteworthy. Most of the correlations among the control
variables are less than 0.1. The highest correlation among the firm level control variables
is 0.4 (Spearman), between growth and ROA and 2 0.36 (Pearson), between capital
intensity and ROA. Over all, the correlation results suggest that multicollinearity will
not be a major problem in our multivariate model. A variance inflation factor (VIF) test of
multicollinearity (discussed below) also confirms that multicollinearity is not a problem
in our models.
Table V reports the results of the logistic regression model that relates the likelihood
of issuing sustainability reports to the family status of companies and firm level and
industry indicator control variables. We present the results in four panels. First, we
present, in column 2, the results from a base model that includes only the firm level
control variables but not the variable of interest, FAMILY, and the industry indicator
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4,2
178
Table III.
SAMPJ
family firms
dependent and
independent variable
Univariate analysis
difference of mean and
medians tests of all the
SUS_REPORT 0.25 0.22 0.03 (0.53) 0.00 0.00 0.00 (0.53) 0.00 (0.53)
SIZE 9.14 8.92 0.22 (0.09) 9.14 8.88 0.26 (0.02) 0.26 (0.05)
LEVERAGE 0.27 0.21 0.06 (, 0.01) 0.25 0.20 0.05 (,0.01) 0.05 (,0.01)
GROWTH 28.99 2 8.43 20.56 (0.79) 2 8.69 26.41 2 2.28 (0.08) 22.28 (0.18)
RETURN 0.26 0.18 0.08 (0.25) 0.13 0.14 2 0.01 (0.80) 20.01 (0.40)
ROA 0.07 0.09 20.02 (0.09) 0.07 0.08 2 0.01 (0.27) 20.01 (0.14)
CAP_INTENS 6.67 6.13 0.54 (, 0.01) 6.46 6.19 0.27 (0.01) 0.27 (,0.01)
OILCHEM 0.13 0.10 0.03 (0.77) 0.00 0.00 0.00 (0.36) 0.00 (0.36)
UTILITIES 0.11 0.03 0.08 (, 0.01) 0.00 0.00 0.00 (,0.01) 0.00 (,0.01)
MFG 0.35 0.41 20.06 (0.22) 0.00 0.00 0.00 (0.22) 0.00 (0.22)
FIN 0.18 0.11 0.07 (0.08) 0.00 0.00 0.00 (0.08) 0.00 (0.09)
REG 0.14 0.04 0.10 (, 0.01) 0.00 0.00 0.00 (,0.01) 0.00 (,0.01)
LITIGATION 0.13 0.26 20.13 (, 0.01) 0.00 0.00 0.00 (,0.01) 0.00 (,0.01)
Notes: Coefficients and two tail p-values ( p-values are in parenthesis); SUS_REPORT is set to 1 when a company has issued sustainability report in 2010
and early 2011, or 0, otherwise; SIZE is log of sales at the beginning of the fiscal period; LEVERAGE is total debt (the sum of long term debt and short-
term debt in current liabilities) divided by total assets; GROWTH is the rate of change in sales (change in sales during the fiscal period divided by
beginning sales); RETURN is the annual holding return for the fiscal period; ROA is income before interest and taxes divided by total assets at the
beginning of the fiscal period; CAP_INTENS is a measure of capital intensity and is computed as log of total assets per employee; OILCHEM is an
indicator variable set to 1 for companies in the oil and gas and chemical industries (two-digit SIC codes 13, 28 and 29), and 0, otherwise; UTILITIES is an
indicator variable set to 1 for companies in the utilities industry (two-digit SIC code 49) and 0, otherwise; MFG is an indicator variable set to 1 for
companies in the manufacturing industries (two-digit SIC codes 20-27 and 30-39) and 0, otherwise; FIN is an indicator variable set to 1 for companies in the
banking and insurance industries (two-digit SIC codes 60-64 and 67) and 0, otherwise; REG is an indicator variable set to 1 for companies in two-regulated
industries (two-digit SIC codes 48 and 49) and 0, otherwise; LITIGATION is a dummy variable set to 1 for companies in industries characterized with high
litigation (four-digit SIC codes 2833-2836; 3570-3577; 3600-3674; 5700-5961 and 7370)
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SUS_ CAP_
Variables REPORT FAMILY SIZE LEVERAGE GROWTH RETURN ROA INTENS OILCHEM UTILITIES MFG FIN REG LITIGATION
SUS_REPORT 1.00 2 0.03 0.30 0.06 20.04 0.00 0.11 0.09 0.17 0.17 0.00 20.11 0.13 0.0
(0.53) (,0.01) (0.25) (0.41) (0.99) (0.03) (0.08) (,0.01) (,0.01) (0.97) (0.03) (0.01) (0.19)
FAMILY 20.03 1.00 20.10 20.18 0.07 20.04 0.07 20.16 20.05 20.15 0.06 20.09 2 0.15 0.17
(0.53) (0.05) (,0.01) (0.18) (0.40) (0.14) (,0.01) (0.36) (,0.01) (0.22) (0.08) (, 0.01) (, 0.01)
SIZE 0.28 20.09 1.00 20.01 0.27 20.11 0.10 0.04 0.08 0.02 20.19 0.06 0.07 2 0.05
(,0.01) (0.09) (0.88) (,0.01) (0.02) (0.05) (0.47) (0.12) (0.75) (,0.01) (0.25) (0.16) (0.29)
LEVERAGE 0.02 20.16 20.03 1.00 20.15 0.08 20.04 20.01 20.05 0.27 0.01 20.18 0.28 2 0.19
(0.71) (,0.01) (0.54) (,0.01) (0.11) (0.49) (0.78) (0.33) (,0.01) (0.87) (,0.01) (, 0.01) (, 0.01)
GROWTH 20.06 0.01 0.26 20.12 1.00 20.24 0.40 20.12 20.08 20.09 20.15 0.09 2 0.05 0.08
(0.21) (0.79) (,0.01) (0.01) (,0.01) (,0.01) (0.02) (0.10) (0.07) (,0.01) (0.09) (0.35) (0.10)
RETURN 20.05 20.06 20.12 0.09 20.09 1.00 20.10 0.05 0.07 20.03 0.16 20.01 2 0.01 2 0.01
(0.32) (0.25) (0.02) (0.08) (0.07) (0.05) (0.28) (0.17) (0.58) (,0.01) (0.81) (0.81) (0.91)
ROA 0.11 0.09 0.10 20.07 0.28 20.11 1.00 20.38 0.15 20.08 0.06 20.35 2 0.08 0.11
(0.03) (0.09) (0.04) (0.16) (,0.01) (0.02) (,0.01) (,0.01) (0.13) (0.26) (,0.01) (0.12) (0.03)
CAP_INTENS 0.07 20.18 0.05 0.03 20.08 0.01 20.36 1.00 0.15 0.29 20.33 0.51 0.31 2 0.15
(0.15) (,0.01) (0.33) (0.55) (0.10) (0.86) (,0.01) (,0.01) (,0.01) (,0.01) (,0.01) (, 0.01) (, 0.01)
OILCHEM 0.17 20.05 0.09 20.07 20.11 0.00 0.14 0.13 1.00 20.11 20.28 20.15 2 0.13 0.12
(,0.01) (0.36) (0.08) (0.15) (0.03) (0.97) (0.01) (0.01) (0.03) (,0.01) (,0.01) (0.01) (0.02)
UTILITIES 0.17 20.15 20.01 0.23 20.07 20.07 20.06 0.26 20.11 1.00 20.23 20.13 0.88 2 0.14
(,0.01) (,0.01) (0.90) (,0.01) (0.17) (0.18) (0.21) (,0.01) (0.03) (,0.01) (0.01) (, 0.01) (, 0.01)
MFG 0.00 0.06 20.21 0.00 20.14 0.16 0.02 20.31 20.28 20.23 1.00 20.33 2 0.27 0.17
(0.97) (0.22) (,0.01) (0.95) (0.01) (,0.01) (0.62) (,0.01) (,0.01) (,0.01) (,0.01) (, 0.01) (, 0.01)
FIN 20.11 20.09 0.06 20.12 0.17 20.01 20.28 0.56 20.15 20.13 20.33 1.00 2 0.15 2 0.20
(0.03) (0.08) (0.21) (0.01) (,0.01) (0.87) (,0.01) (,0.01) (,0.01) (0.01) (,0.01) (, 0.01) (, 0.01)
REG 0.13 20.15 0.05 0.24 20.01 20.04 20.07 0.26 20.13 0.88 20.27 20.15 1.00 2 0.16
(0.01) (,0.01) (0.28) (,0.01) (0.77) (0.43) (0.17) (,0.01) (0.01) (,0.01) (,0.01) (,0.01) (, 0.01)
LITIGATION 0.07 0.17 20.07 20.18 0.06 20.03 0.09 20.18 0.12 20.14 0.17 20.20 2 0.16 1.00
(0.19) (,0.01) (0.18) (,0.01) (0.26) (0.58) (0.07) (,0.01) (0.02) (,0.01) (,0.01) (,0.01) (, 0.01)
Notes: Spearman correlation coefficients are above and Pearson Correlations are below the diagonal; p-values are in parenthesis; n 397; SUS_REPORT is set to 1 when a company has
issued sustainability report in 2010 and early 2011, or 0, otherwise; FAMILY is an indicator variable set to 1 if the company is a family company (i.e. owned or controlled by a family) as
reported in BusinessWeek, 2003, or 0, otherwise; SIZE is log of sales at the beginning of the fiscal period; LEVERAGE is total debt (the sum of long term debt and short-term debt in
current liabilities) divided by total assets; GROWTH is the rate of change in sales (change in sales during the fiscal period divided by beginning sales); RETURN is the annual holding
return for the fiscal period; ROA is income before interest and taxes divided by total assets at the beginning of the fiscal period; CAP_INTENS is a measure of capital intensity and is
computed as log of total assets per employee; OILCHEM is an indicator variable set to 1 for companies in the oil and gas and chemical industries (two-digit SIC codes 13, 28 and 29), and 0,
otherwise; UTILITIES is an indicator variable set to 1 for companies in the utilities industry (two-digit SIC code 49) and 0, otherwise; MFG is an indicator variable set to 1 for companies in
the manufacturing industries (two-digit SIC codes 20-27 and 30-39) and 0, otherwise; FIN is an indicator variable set to 1 for companies in the banking and insurance industries (two-digit
SIC codes 60-64 and 67) and 0, otherwise; REG is an indicator variable set to 1 for companies in two-regulated industries (two-digit SIC codes 48 and 49) and 0, otherwise; LITIGATION is a
dummy variable set to 1 for companies in industries characterized with high litigation (four-digit SIC codes 2833-2836; 3570-3577; 3600-3674; 5700-5961 and 7370)
Correlation analysis
Family status
179
Table IV.
SAMPJ
With regulation and
4,2 Base model with no litigation indicator
family ownership With no industry With industry variable in lieu of
Variables indicator variable dummies dummies industry dummies
When we add the four industry control variables to the model, the signs and
significances of FAMILY and all the control variables except capital intensity stay the
same; capital intensity is no more statistically significant. The high (low) concentration of
capital intensive firms in the financial (manufacturing) industries, as reflected in the
0.51 (20.31) Pearson correlation coefficient between capital intensity and membership in
the financial sector (manufacturing sector), may partially explain this loss of significance
in capital intensity. Of the four industry indicator variables, OILCHEM, UTILITIES and
MFG are significantly positive, indicating that firms in the oil and gas, chemical, utilities
and manufacturing industries are more likely to issue sustainability reports.
Finally, when we substitute the four industry indicator variables by the regulation
and litigation dummy variables, the sign and significances of FAMILY and all the
control variables remain unchanged. Interestingly, both the regulation and litigation
indicator variables are significantly positively associated with the likelihood of issuing
sustainability reports by the S&P 500 firms. As predicted, the regulatory and litigation
environments of the industry in which firms operate significantly affect the likelihood of
firms issuing sustainability reports. Our finding that companies in the regulated and
high litigation industries are more likely to issue sustainability reports is consistent
with the view that companies use voluntary disclosure in general and sustainability
reporting in particular as a way of mitigating regulatory, political and litigation costs.
182 SUS_REP_QUL 2.69 2.53 0.16 (0.45) 3 3 0.00 (0.89) 0.00 (0.89)
Level A 0.22 0.10 0.12 (0.13) 0.00 0.00 0.00 (0.17) 0.00 (0.18)
Level B 0.40 0.50 20.10 (0.37) 0.00 0.00 0.00 (0.36) 0.00 (0.37)
Level C 0.25 0.23 0.02 (0.89) 0.00 0.00 0.00 (0.89) 0.00 (0.90)
Below C 0.14 0.17 20.03 (0.72) 0 0 0 (0.72) 0 (0.72)
Level_AB 0.62 0.60 0.02 (0.89) 1 1 0 (0.64) 0 (064)
Table VI. Self-declared 0.37 0.53 20.16 (0.13) 0.00 1.00 21.00 (0.13) 21.00 (0.14)
Univariate analysis GRI checked 0.14 0.07 0.07 (0.26) 0.00 0.00 0.00 (0.31) 0.00 (0.32)
univariate tests of
differences of means and Notes: Coefficients and two tail p-values ( p-values are in parenthesis); based on GRI guidelines on the
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medians in the levels of level of reports, companies opt not declare the level of their reports or declare their sustainability
details of the reports as level A, B or C; Type A reports are the most detailed and complete type C reports are the
sustainability reports and least detailed and complete; we examine the sustainability reports of 38 companies that did not declare
whether they are checked their sustainability report levels and classify them as level A, B, or C; we classify 12 companies that
by GRI or are did not meet the minimum requirement to for a level C report as Below C; Sus_Rep_Qul is set to 4, 3, 2,
self-declared between 1 when a company has issued its 2010 sustainability (GRI) and the report is rated A, B, C and
non-family and family Below C, respectively; Level_AB is set to 1, when the report level is A or B and 0, otherwise; companies
firms for companies that may get their sustainability reports checked (verified) by GRI or other third-parties; reports checked
issued sustainability (verified) by GRI are reported as GRI checked; self-declared reports are not verified by GRI or other
reports third-parties
Multivariate analysis
In Table VII, we report the results, in two columns, from the ordinal probit regression
model. The results from a model that relates the level of sustainability reports,
SUS_REP_QUL to the variable of interest, FAMILY, and firm-specific characteristics
and industry indicator variables as control variables are in column 2 and the results
from a model that substitutes regulation (REG) and litigation (LITIGATION) indicator
variables in lieu of the industry indicator variables are in column 3. Both models are
well specified with log likelihood ratios of 2 303.27 and 2 309.066.
In both models, the variable of interest, FAMILY, is insignificant. We do not find
any statistically discernible association between the level of sustainability reports and
the family status of companies. Most of the control variables in the model have their
expected signs and are statistically significant. Larger firms, low growth firms, better
performing firms (those with higher ROA), firms with higher capital intensity, firms
in the oil and gas, chemical, utilities, and manufacturing industries and firms in
the regulated and high litigations industries tend to issue higher level sustainability
reports.
Discussion
In this paper, we examine if there are any differences between family and non-family
firms with respect to their voluntary reporting of sustainability practices and the level
of details of the sustainability reports they issue. Prior research on voluntary disclosure
by family firms provide mixed results. Family firms, presumably less affected by Type 1
agency problems, have longer investment horizons and the family owners have better
Family status
GRI data updated
With regulation and litigation
indicator variable in lieu of industry
Variables With industry dummies dummies
access to information and monitor management better. This suggests that there is less
demand for voluntary disclosure in family firms. On the other hand, the substantial
benefits of voluntary disclosure, including reduction in the cost of capital and prevention
of regulation or litigation, give family firms as much incentive to voluntary disclose as
non-family firms. In fact, family firms may have more incentives to disclose than
non-family firms because:
SAMPJ .
a lions share of the benefits of voluntary disclosure accrues to the family
4,2 members; and
.
they tend to be more sensitive to the expectations of their stakeholders than are
non-family firms due to the close tie between the firms and the familys reputation.
Thus, ex ante, it is unclear, whether family firms will voluntarily report on their
184 sustainability practices more or less than non-family firms.
We use the classification of family firms by BusinessWeek (2003) to analyze the 2010
sustainability reports that are included in the GRI Sustainability Disclosure Database.
177 of the companies in S&Ps 500-stock index as of July, 2003 are classified as family
firms by BusinessWeek (2003). The final sample includes 397 companies that have the
necessary Compustat data for all the variables of interest. 95 of these companies
(30, family and 65, non-family) have issued their 2010 sustainability reports and appear
in the GRI Sustainability Disclosure Database. In both the univariate and multivariate
analysis, we do not find any significant association between:
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.
the propensity to issue sustainability reports and the family status of firms; and
.
the level of details of sustainability reports and the family status of firms.
Notes
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1. We refer to family owned and/or managed firms as family firms throughout the paper.
2. Only 30 of the family and 65 of the non-family firms with no missing data on the control
variables are used in the empirical analysis.
3. As indicated in the sample selection section, family owned or controlled companies are those
that are identified as such by BusinessWeek(2003). BusinessWeek(2003) classified 35 percent
(177) of the companies in the S&P 500 index in July, 2003 as family companies. Thus, the
percentage of family firms (34 percent) in our final sample (397 S&P 500 companies) is very
similar to that in the population of S&P 500 companies.
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1. Mishari M. Alfraih The Public Authority for Applied Education and Training Kuwait Kuwait JohnKevin
Ashton Bangor University Bangor United Kingdom of Great Britain and Northern Ireland . 2016. The
effectiveness of board of directors characteristics in mandatory disclosure compliance. Journal of Financial
Regulation and Compliance 24:2. . [Abstract] [PDF]
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