In recent years, in an effort to protect investors and improve capital market efficiency, regulators have focused on enhancing corporate disclosure quality and transparency as the central piece of corporate governance reforms such as the Sarbanes-Oxley Act of 2002. Prior studies suggest many benefits of increased corporate disclosure. Increased disclosure reduces cost of equity capital (Botosan 1997, Botosan and Plumlee 2002), lowers the cost of debt (Sengupta 1998), increases stock liquidity and institutional ownership (Healy et al. 1999), increases analyst following (Lang and Lundholm 1996) and decreases bid-ask spreads (Welker 1995). Better disclosure presumably also reduces the incidences of outright fraud and theft by insiders.
Healy and Palepu (2001) discuss six forces that affect managers' disclosure decisions (voluntary disclosure) for capital market reasons: 1. capital market transactions (Managers have incentives to provide voluntary disclosure to reduce the information asymmetry problem, thereby reducing the firm's cost of external financing), 2. Corporate control contests, 3. Stock compensation, 4. Litigation, 5. Proprietary costs, 6. Management talent signaling, 7. Reputation. Graham et al. (2005) survey and interview more than 400 CFOs to identify the factors that motivate managers to provide voluntary disclosure and 92 percent of the executives claim that promoting a reputation for transparent reporting is a key driver.
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Forecasts related to the firm's anticipated earnings per share are one of the primary voluntary disclosure mechanisms through which managers can provide additional information and signals to outside stakeholders about the expected future performance of their firm.
Healy and Palepu (2001) stated that there are some significant advantages to using management forecasts as a voluntary disclosure proxy. First, they can be precisely measured. Managers' estimates are typically either point or range estimates for earnings or revenues. Second, the timing of the disclosure is typically known. As a result it is possible to assess whether the forecast preceded or lagged particular changes in variables of interest using daily or weekly data. This enables researchers to conduct more powerful tests of motivations for and consequences of voluntary disclosure. Third, Management forecasts as a proxy is that their accuracy can be easily verified by outside investors through actual earnings realizations that in contrast; it is more difficult to ex post verify the accuracy of many other types of voluntary disclosures. Finally, Research using management forecasts as the metric for voluntary disclosure is likely to increase the power of the tests, but these findings may not generalize to other forms of voluntary disclosure.
The survey of senior managers performed by Graham, Harvey and Rajgopal (2005) found that these managers believe disclosing reliable and precise information can reduce information risk about a company's stock. Consequently, the consistent disclosure of management earnings forecasts should have tangible effects on both the apparent riskiness of a stock to investors as well as on firm value. In addition, Beyer et al. (2010) believe that Management forecasts are an important form of corporate voluntary disclosures. They indicate that for the average firm, management forecasts account for 15.67% of the quarterly return variance. In additional, Rogers et al. (2009) find that the forecasts themselves are associated with increased short-run volatility in stock price when bad news is released, while there is a modest decline in volatility when news is good and especially when released on a more regular basis.
On other hand, typical form of family management is to have a family member act as the CEO. In fact, family firms often appoint family members, rather than outside professional managers, as CEOs. For example, Fama and Jensen (1983) argue that firms that are controlled by management are less likely to survive in competition. Perhaps this is the explanation for the insignificant relationship between management's ownership interest and the firm's performance found by Demsetz and Lehn (1985).
In this study, we plan to investigate the management forecast to firm performance and analyzes whether the management forecast and firm performance depends on the family CEO ownership.
Family CEO Ownership
Incentives to Distort the Owners' Information by CEO
The present study can contribute to firm performance literature in three main aspects:
Firstly, Disclosure provides many benefits, but not without costs. Disclosure also entails costs, both direct costs from producing and disseminating information, and indirect costs when the disclosure reveals proprietary information to rival firms and thus reduces the disclosing firms' competitive position (Darrough and Stoughton (1990), Hayes and Lundholm (1996)). In this relation, Botosan (1997) believe that firms benefit from increased disclosure remains a controversial issue in asset pricing theory. More recently, Hermalin and Weisbach (2012) shows that increased disclosure is a two-edged sword: More information permits principals to make better decisions; but it can, itself, generate additional agency problems and other costs for shareholders, including increased executive compensation. Managerial compensation rising with increased disclosure is a characteristic of many models of governance. If management has any bargaining power, then it will capture some of the increased benefit via greater compensation. Even absent any bargaining power, managerial compensation will rise as a compensating differential because better monitoring tends to affect managers adversely. In addition, increased monitoring can give management incentives to engage in value-reducing activities intended to make them appear more able. As a consequence, at some level of disclosure, these costs could outweigh the benefits at the margin, so increasing disclosure beyond that level would reduce firm value.
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Secondly, there are two theories related to whether family CEOs enhance or hinder firm performance: principal-agent perspective, resource- based view and principal-principal perspective.
From the principal-agent perspective of agency theory, inherent conflicts of interests occur between shareholders and outside professional CEOs because ownership and control are separated (Anderson & Reeb(2003), Jensen & Meckling(1976)). Family CEOs, on the other hand, can mitigate such conflicts and enhance performance because the interests between family owners and family CEOs are highly aligned. The institution - based view, through social relationships with managers and employees, family CEOs may help to obtain intangible resources such as goal congruence, trust, and social interactions, providing valuable, unique, and hard-to-imitate competitive advantages (Chu (2011), Liu et al. (2012)). In contrast, from the principal-principal perspective of agency theory, family CEOs may be detrimental to firm performance. The principal-principal perspective refers to principal-principal conflicts between large and minority shareholders in firms with concentrated ownership. In brief, from agency theory's principal-agent or principal-principal perspective, Cai et al. (2009) draw different answers as to whether family CEOs benefit or damage firm performance. The empirical evidence is also mixed. Some studies find that family CEOs benefit performance (Jiang and Peng (2011), Sraer and Thesmar (2007), Villalonga and Amit (2006)), while others find the opposite effects (Jiang ad Peng (2011), Peng and Jiang (2010), Westhead and Howorth (2006)). Each side of the debate has valid theoretical logic and empirical evidence. Given its complexity, the debate should go beyond whether family CEOs absolutely enhance or damage performance (Peng and Jiang (2010)).
Finally, from previous literature it is apparent that most of the studies are conducted in developed markets such as United States (U.S.) and European. Since findings for developed countries might not be directly transferable to emerging market, therefore, more work is necessary to obtain a clearer picture of role of the management forecast on firm performance that it depends on the family CEO ownership in emerging market. Loukill and Yousfi (2010) believe that emerging markets are poorly regulated in addition to the low market liquidity and the high concentration of ownership and then, they predicted that these characteristics affect the results of their study.
In East Asian companies, family members hold as high as 83 % of CEO positions in large family controlled firms (Peng and Jiang (2010)). In additional, Anilowski, Feng and Skinner (2007) document that the number of firms releasing voluntary earnings guidance has increased as a percentage of all sample forecasts from 11% in 1997 to 62% in 2003 (the percent of annual forecasts at the earnings announcement date increasing from 31% in 2000 to 55% in 2001. The percent of quarterly forecasts at the earnings announcement date increases from 15% in 2000 to 34% in 2001). They find a continuation in this trend.
On other hand, in contrast with prior research, Francis et al. (2005) believe that management is more likely to use a management forecast to achieve such a goal to, for example, adjust the market's expectations of earnings; rather, it is unlikely that management would use voluntary disclosure in annual filings. By comparison, it has more harmful affect on firm performance.
The objectives of this study are:
To investigate the effect of management forecast on firm performance
To investigate the effect of family CEO ownership on firm performance
To examine whether family CEO ownership play a mediating role between management forecast and firm performance
The objectives of the present study lead to the following research questions:
How management forecast affect firm performance.
How family CEO ownership affect firm performance
How family CEO ownership mediates the relationship between management forecast and firm performance