Accounting Choices in Family Firms

276 Pages·2018·4.575 MB·English

by  Silvia Ferramosca, Alessandro Ghio

Contributions to Management Science
Silvia Ferramosca
Alessandro Ghio
Accounting
Choices in
Family Firms
An Analysis of Influences and
Implications
Contributions to Management Science
More information about this series at http://www.springer.com/series/1505
Silvia Ferramosca Alessandro Ghio
(cid:129)
Accounting Choices
in Family Firms
fl
An Analysis of In uences and Implications
123
Silvia Ferramosca Alessandro Ghio
Department ofEconomics Department ofAccounting
andManagement MonashUniversity
University of Pisa Caulfield East,Melbourne, VIC
Pisa Australia
Italy
ISSN 1431-1941 ISSN 2197-716X (electronic)
Contributions toManagement Science
ISBN978-3-319-73587-0 ISBN978-3-319-73588-7 (eBook)
https://doi.org/10.1007/978-3-319-73588-7
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Preface
Familybusinessesareofhighimportanceworldwideandtherehasbeenincreasing
attentiongiven towards theirbusinessdecisions. Thefamilyownershipcontributes
tothedevelopmentandsharingofideasandthemobilisationoffinancialresources
ensuring the ‘emotional and cognitive’ cohesion amongst the stakeholders. In
addition, thepresenceoffamilymembersintheownershipandinthemanagement
mitigates certain agency conflicts, but it potentially increases the tensions with
non-family investors. Finally, family firms are characterised by a system of values
which combine strong family entrepreneurship with a developed culture, and
experience.
The intrinsic characteristics of family firms support the conjecture that their
accounting choices differ from non-family firms. Family ownership has potential
effects on a wide range of accounting choices, e.g. earnings management, conser-
vatism and financial disclosure. We argue that family firms’ attention towards
long-term sustainability is also reflected by accounting choices and disclosure
behaviour. In addition, family firms’ strong ties to the context in which they
operate, and the potential social, economic, cultural and political consequences
of their decisions lead to question the impact of the cultural environment on their
accountingchoices.Atthesametime,accountingresearchonfamilyfirmsisstillin
its adolescence. Studies have started to investigate the relationship between
accounting decisions and the family nature of a business only over the last two
decades.
This book sheds light,both from a theoretical and empiricalperspective, on the
accounting decisions in family firms. In Chap. 2, we introduce figures and facts
related to the familybusiness phenomenon and then, we deal with the issues asso-
ciated with the definition of a family firm. From the beginning, the reader can
understand how the family nature of a business affects the firms’ decision-making
process, in particular with regards to accounting decisions. Chapter 3 focuses on
earningsmanagementstrategiesinfamilyfirms.Specifically,welookatthebenefits
andcostsofaccrual-basedandrealactivities-basedearningsmanagementstrategies.
We rely on different theories, primarily agency theory and socio-emotional wealth
theory, to explain the differences between family firms and non-family firms
v
vi Preface
concerning earnings management decisions. In Chap. 4, we examine the notion of
conservatism in family businesses, defined as the greater aggressiveness in the
recognitionofbadnewsasopposedtogoodnews.Chapters3and4documentthat
familyfirmsexhibitahigherqualityofearningsthannon-familyfirms.Nonetheless,
we still observe heterogeneity in the results, mainly due to the influence of the
governance structure or the institutional context. Chapter 5 studies the principal
characteristics of financial reporting disclosure of family firms. On the one hand,
families are interested in increasing their reputation and credibility. To this end,
disclosure,especiallyvoluntarydisclosure,contributestoadecreaseininformation
asymmetry, with positive consequences in terms of trust and capital market costs.
However, the family control may prefer to hide—or not disclose—private propri-
etaryinformation,tothedetrimentofminorityinvestorstherebycloudingthefirm’s
future profitability. We then discuss the main effects of external monitoring per-
formed by auditors and analysts on family firms’ financial disclosure. Lastly, con-
sideringthatfamilybusinessesarestronglyrootedintheenvironmentinwhichthey
operate, their choices often reflect the related culture and the societal values.
Considering that accounting shapes the environment, but is also shaped by it, we
furthertheoreticallyanalyseinChap.6theimpactofnationalandfamilycultureson
accounting choices. In fact, despite the harmonisation and standardisation of
accountingpracticesaroundtheworld,differencesinfinancialreportingstillpersist.
Itemergesthatlocalvaluesandaccountingculturesinfluenceaccountingchoicesin
family firms.
Overall, this study provides several contributions. First, it contributes to the
studies on accounting decisions. We theoretically discuss how family ownership
shapes accounting choices and disclosure behaviour and how this impact is exac-
erbated or moderated in diverse accounting settings. Second, it adds to the family
businessliterature.Priorstudiesfindthatinfamilyfirmstheagencyproblemofthe
separation of ownership and control islessened,leading tomore accurate financial
results. However, asfar as we know,there arenopast studies focusing on therole
of accounting choices by providing a comprehensive representation and several
avenuesforfutureresearch.Thepresentstudyhasalsopracticalimplicationsforthe
management of family firms, and investors. Furthermore, there are policy impli-
cationsforregulatorsandstandardsetters,suggestingthattheownershiptypes,the
culture and/or the country diversely affect accounting choices.
Pisa, Italy Silvia Ferramosca
Melbourne, Australia Alessandro Ghio
November 2017
Acknowledgements
The authors would like to thank all the professors who built and developed our
knowledge in such interesting studies. In particular, we thank all the professors
of the International Ph.D. in Economia Aziendale and Management, University of
Pisa, University of Florence and University of Siena. Their devotion and com-
mitment to our educations have always created a friendly and seriously formative
research environment. A special thanks goes to our Ph.D. supervisors Prof. Marco
Allegrini and Prof. Roberto Verona. We are extremely grateful to our copy editor
for providing excellent proofreading of this book.
Of course, we fully undertake the responsibility for what is written. This
monographistheresultofacontinuousdiscussionandathoughtfuljointworkfrom
both the authors.
vii
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 An Overview of the Book. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Theoretical Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Methodological Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.4 Target Audience. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.5 Structure of the Manuscript. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2 The Family Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.2 Family Businesses Around the World . . . . . . . . . . . . . . . . . . . . . 18
2.3 The Definition of the Family Business: An Open Discussion . . . . 24
2.3.1 The Definition of the Family Business: The Essence
Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.3.2 The Definition of the Family Business: The Component
Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.3.3 The Definition of the Family Business: The Public and
Policy Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.3.4 Brief Summary of the Family Business Definition: A
Discussion Still Wide Open . . . . . . . . . . . . . . . . . . . . . . . 39
2.4 The Family Business and Accounting . . . . . . . . . . . . . . . . . . . . . 42
2.4.1 The Family Business, Accounting and Theoretical
Frameworks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.4.2 The Family Business, Accounting and the Transition
from Agency to Socioemotional Wealth Theory . . . . . . . . 47
2.5 Conclusion: The Family Business and Accounting . . . . . . . . . . . . 51
2.6 The Ensuing Chapters and Contributions . . . . . . . . . . . . . . . . . . . 55
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
ix
x Contents
3 Earnings Management in Family Firms . . . . . . . . . . . . . . . . . . . . . . 103
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
3.2 Theoretical Reasons for Earnings Management
in Family Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
3.2.1 Agency Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
3.2.2 Socioemotional Wealth Theory. . . . . . . . . . . . . . . . . . . . . 111
3.3 Measures and Empirical Evidence of Earnings Management . . . . . 113
3.3.1 Accruals-Based Earnings Management . . . . . . . . . . . . . . . 113
3.3.2 Real Activities-Based Earnings Management. . . . . . . . . . . 120
3.3.3 Additional Earnings Management Techniques . . . . . . . . . . 124
3.4 Challenges and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
3.4.1 Extending and Developing the Theoretical
Frameworks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
3.4.2 Development of the Research Design . . . . . . . . . . . . . . . . 127
3.4.3 Family Firm Characteristics . . . . . . . . . . . . . . . . . . . . . . . 129
3.4.4 Analysis of the Institutional Environment . . . . . . . . . . . . . 130
3.4.5 Analysis of the Extent of Discretionary Choices . . . . . . . . 131
3.4.6 Insider Trading and Fraudulent Activities . . . . . . . . . . . . . 132
3.4.7 Empirical Consequences of Earnings Management in
Family Firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
3.4.8 Roadmap for Future Studies. . . . . . . . . . . . . . . . . . . . . . . 133
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
4 Accounting Conservatism in Family Firms. . . . . . . . . . . . . . . . . . . . 139
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
4.2 The Notion of Conservatism . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
4.3 Accounting Conservatism in Today’s Accounting Principles . . . . . 144
4.4 Explanations for Accounting Conservatism . . . . . . . . . . . . . . . . . 146
4.4.1 Contracting Theory and Accounting Conservatism. . . . . . . 146
4.4.2 Other Sources of Accounting Conservatism. . . . . . . . . . . . 148
4.5 Measures and Empirical Evidence for Conservatism. . . . . . . . . . . 150
4.5.1 Models to Measure Accounting Conservatism . . . . . . . . . . 150
4.6 Empirical Evidence on Accounting Conservatism. . . . . . . . . . . . . 153
4.6.1 The State of the Art in a Nutshell. . . . . . . . . . . . . . . . . . . 153
4.6.2 The Role of Corporate Governance in Accounting
Conservatism: Evidence from Family Firms . . . . . . . . . . . 154
4.7 An Extension to the Notion of Conservatism: Tax
Aggressiveness in Family Firms . . . . . . . . . . . . . . . . . . . . . . . . . 156
4.8 Challenges and Opportunities of Accounting Conservatism in
Family Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161