Impact of family ownership on discretionary segment disclosure practices of Indian listed companies

Abstract

The present study relates to the discretionary segment financial disclosure practices of the Indian listed companies. The modern corporations are characterised by separation of management and ownership. This is an agency relationship where the principals or shareholders delegate the decision-making authority to their agents who are the managers of the corporation. Owing to this separation, and information asymmetry is created between the managers and the shareholders, which gives rise to agency cost. The agency cost is basically the reduction in the wealth of the shareholders which is caused by self-motivated actions of the managers. The disclosure of financial information is an effective way to monitor the managers by reducing information asymmetry between the managers and the outside shareholders. The prior literature has suggested that reducing information asymmetry would result in the decreasing the cost of capital and thereby enhance the firm performance. The better firm performance would potentially reflect in higher stock prices and thereby increase the shareholders’ wealth. Considering the importance of transparency, most of the countries have mandated disclosure of financial information though the extent of this disclosure may vary across the countries. Apart from the mandatory requirements, many listed corporations disclose additional financial information at their discretion. Prior research suggests that with better information, the lenders are prepared to accept slightly less returns which results in reduced cost of capital for the business. However, the aggregated or consolidated financial information has limited use in forecasting the earnings of a corporation which is operating in many industries. Therefore, it has been a long-standing demand of the analysts and investors that the corporations provide detailed financial information on the basis of their business and where applicable, on the basis of geographical segments. As a response to this demand, the regulatory authorities across the countries have made it mandatory for the listed companies to disclose detailed financial information for each of their segment. However, the situation is somewhat different for a corporation where majority of the shares are held by the management. In such situations, as the outside shareholders are in minority, the pressure for disclosure of financial information is weak. This is applicable to corporations where majority of the shareholding is in the hands of a single family. Concentrated corporate family-ownership is a common phenomenon in Asian countries, including India. In this situation, the managements has both an incentive and disincentive for the disclosure of detailed financial information, for example, segment-based financial information. There is an incentive because the disclosures would potentially help to reduce the cost of capital. At the same time, there is disincentive because the controlling family might not be prepared to share the private information about the corporation to which it has an exclusive access. The aim of the research is to explore the discretionary segment disclosure practices of listed family-owned firms in India with a view to find out if there is any association between family ownership and discretionary segment disclosures. The present study would help enhance our understanding of the agency cost theory which posits that firms make discretionary disclosures as it helps reduce agency costs and in turn the cost of capital. The present study examines the applicability of the theory in the context of firms that have predominant family ownership to test whether such firms follow the conventional behaviour of firms as postulated by the agency costs theory or otherwise. The research problem the present study poses can be stated in the following general form: How does family ownership impact the discretionary segment disclosures by listed corporations? In addressing this research problem, two main research issues, ten research questions and associated hypotheses were identified after a careful review of literature. The first research issue related to gaining an understanding of the association, if any, that exists between the principal constructs, family ownership and discretionary (voluntary) segment disclosures. The study also examined the link between discretionary segment disclosures and several other dimensions of family ownership such as concentration of family ownership, level of family ownership, the probability of low disclosures when family ownership is high, and the marginal impact of family ownership. Hypotheses 1 to 6 were proposed and tested to address this research issue. The second research issue examined the influence of size, leverage, overseas listing and proportion of assets-in-place on discretionary segment disclosures. Four research questions and associated hypotheses were proposed and tested. The study focused on family-owned firms that are listed on India’s largest stock exchange, the Bombay Stock Exchange. The Exchange published a directory of top 500 listed firms by market capitalisation. From this sampling frame, firms were classified into two categories, that is, family-owned firms (324) and other firms (176) and from each group,15 per cent of the firms were chosen at random to yield a sample of 50 family-owned firms and 22 other firms. Hypotheses were tested using the logistic regression model, multinomial model and ordered choice model. The main finding of the study is that family ownership has an inverse relationship with voluntary disclosure of segment financial information in listed firms in India. The conclusion is important from the perspective of refinement of the extant theory of agency cost. The theory posits that the firms have an incentive to voluntarily disclose segment information as it helps to reduce agency costs and in turn the cost of capital. The present study finds that in family-owned firms the relationship between family ownership and discretionary disclosure of segment financial information is inverse which suggests that the incentive to retain control dominates the incentive to reduce agency costs. The study also finds that as the proportion of family ownership reaches to 25 per cent and above, there is significant decrease in discretionary segment disclosure. It means the desire to retain control dominates in such firms rather than the consideration of reducing agency costs.

Date of Award	2010
Original language	English
Supervisor	Monir Mir (Supervisor) & Ali Quazi (Supervisor)