Financial reporting quality and investment decisions for family firms

This study investigates the association between investment decisions and financial reporting quality in the context of family firms versus non‐family firms. Building on the classic agency theory and the behavioral agency theory, we argue that financial reporting quality may play a different role on investment decisions for family and non‐family firms. We address our research question by using a sample of listed firms in Taiwan from 1996 to 2011. Consistent with the behavioral agency theory, our findings suggest that family firms are more likely to under‐invest than non‐family firms in order to protect their socioemotional wealth, and financial reporting quality is more negatively associated with family firms’ under‐investment behavior. The existence of internal financing channels attenuates this negative association. However, this study does not find a significant role on such association when a family member serves as the chief executive officer. These results are robust after controlling for the potential endogeneity issue of financial reporting quality, alternate measures of inefficient investment as well as internal financing channels, family firm subsample, and different industry groups. This study contributes to the literature on the relation between financial reporting quality and investment decisions by highlighting the unique characteristics of family firms.