Abstract

This study is to test the difference of discretionary accruals between family and non－family firms and then compare the usefulness of accounting information of those two types of firms, measured by the ability of earning components to predict future cash flow and earnings response coefficient to abnormal returns after controlling the effect of discretionary accruals. The results of this study can be summarized as follows：First, a degree of income management measured by absolute value of discretionary accruals for family firms are significantly lower than those for non－family firms. This implies that compared to non－family firms, family firms moderately manage accounting income upward or downward. Second, forecasting error of earning components in predicting future cash flow is significantly lower for family firms. This result is consistent with the notion that earnings of family firms are likely to be of higher quality than those of non－family firms. Third, earnings response coefficient to abnormal returns for family firms is significantly higher than that of non－family firms. These results verify that investors more positively valuate accounting information of family firms relatively to non－family firms to their investment decision making. Findings of this study suggest important practical implications on corporate disclosure to investors and corporate managers. First, prior studies on income management of firms do not consider characteristics of family firms on their studies as a independent variable, but they only use shares of controling shareholder and/or major shareholder. Thus this study provides a significant evidence that research on income management should reflect characteristics of family firms because there exists the difference in quality of disclosures between those two types of firms. Second, this study also provides an evidence that if financial and credit rating institutions reflect the difference of accounting information between family and non－family firms in rating firms' credit grade, they will project firm's credit ratings more accurately. Third, empirical evidence of this study shows that accounting information of family firms is more useful to predict future cash flow and to forecast earnings response coefficient to abnormal returns. This evidence suggests that investors in stock market consider characteristics of family firms and non－family firms in their investment decision making. Finally, on the circumstance that various interest groups in Korean society have a negative insight on accounting information of family firms, findings of this study help them to have a new insight for family firms by showing that accounting information of family firms is higher quality than one of non－family.

Keywords

• family firm
• discretionary accruals
• cash flow forecasting error
• earnings response coefficient

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