THE EARNINGS–RETURN ASSOCIATION OF FAMILY AND NON-FAMILY INDONESIAN FIRMS: AN EMPIRICAL STUDY
THE EARNINGS–RETURN ASSOCIATION OF FAMILY AND NON-FAMILY INDONESIAN FIRMS: AN EMPIRICAL STUDY

Summary/Abstract: This study examines the association between reported earnings and stock returns in a sample of corporations listed in Indonesia Stock Exchange (IDX) during the 2009–2014 period. The sample of 476 firm-year observations are divided between family firms and non-family firms for comparative analysis, as the agency problem conflict Type II, “family controlling shareholders vs. non-family minority shareholders,” may become strong enough to impair the informative role of reported earnings in the corresponding stock return. By using the appropriate regression approaches on the panel data corresponding to each group of firms, we find that in our sample of IDX-listed firms, family ownership by itself does not seem to significantly affect the informative creditability of earnings, with both family firms and non-family firms having a variety of key valuation determinants in common. However, with an interaction term being used, the earnings informativeness of family firms decreases when the divergence between cash flow rights and voting rights increases, e.g., when family shareholders own out-of-proportion control of voting rights. Non-family firms, by comparison, are statistically insensitive to the valuation impact of the ratio of cash flow rights relative to voting rights. Our findings also support the small firm effect theorem for Indonesian corporations.

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