Family firms face different conflicts of interest, or "agency problems", compared with non-family firms and this can affect their earnings quality and disclosure practices, according to a study by Tai-Yuan Chen of HKUST, Ashiq Ali and Suresh Radhakrishnan.

"Family firms face less severe agency problems that arise from the separation of ownership and management, but they are characterized by more severe problems that arise between controlling and non-controlling shareholders, and these differences influence corporate disclosures," they say.

The authors find that these differences result in family firms providing better quality financial disclosures, but poorer information about their corporate governance.

On the one hand, family firms are able to keep in check opportunistic behavior by managers (a "Type 1" agency problem) because their large holdings mean they are more likely to monitor managers, they have good knowledge of the firm and they tend to have longer investment horizons.

On the other hand, their controlling stake may lead them to seek private benefits at the expense of other shareholders (a "Type 2" agency problem).

The authors compare these problems among S&P 500 firms from 1998-2002, of which 177 were family-owned, using various measurements, to conclude that the closer relationship between ownership and management in family firms is the more dominant force.

"Family firms exhibit less positive discretionary accruals, greater ability of earnings components to predict cash flows, and larger earnings response coefficients. The results are consistent with the notion that differences in agency costs across family and non-family firms due to Type 1 agency problems dominate the difference due to Type 2 problems," they say.

They also find family firms are more likely to give warning of bad news, indicating less opportunistic behavior by managers who might otherwise withhold bad news to maximize their equity-based compensation or facilitate their entrenchment in the organization.

They also show better disclosure of financial performance brings family firms benefits in terms of greater analyst following, lower dispersion in analysts' forecasts, smaller forecast errors, less volatile forecast revisions and smaller bid-ask spreads.

But one area where family firms fall short is in corporate governance disclosures.

"Family firms make less voluntary disclosure about corporate governance practices in their regulatory filings, consistent with the notion that they have an incentive to reduce the transparency of these practices in order to facilitate getting family members on boards without interference from non-family shareholders," the authors say.

Overall, while they are able to show family firms provide better financial disclosures as a result of less severe managerial opportunism, and while this situation dominates the potential conflict between controlling and non-controlling shareholders, there is a caveat. The authors caution that their findings are based on the situation in the U.S., which has different institutions and regulatory requirements from other countries. This may limit their general applicability beyond U.S. borders.